-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Aen4jy/IwvakvFJExpFGPSpRqu8nzVN6l7VCzT4r2v00U+DfhZmChGnsYgTEFSLB SNbdPzpzUzvvpaGSdWHY9Q== 0000893220-00-000683.txt : 20000516 0000893220-00-000683.hdr.sgml : 20000516 ACCESSION NUMBER: 0000893220-00-000683 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST KEYSTONE FINANCIAL INC CENTRAL INDEX KEY: 0000856751 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 232576479 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25328 FILM NUMBER: 634548 BUSINESS ADDRESS: STREET 1: 22 WEST STATE ST CITY: MEDIA STATE: PA ZIP: 19063 BUSINESS PHONE: 6105656210 10-Q 1 FORM 10-Q 1 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .......... to .......... Commission File Number: 000-25328 FIRST KEYSTONE FINANCIAL, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-0469351 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 22 West State Street Media, Pennsylvania 19063 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (610) 565-6210 Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] Number of shares of Common Stock outstanding as of May 8, 2000: 2,251,716 Transitional Small Business Disclosure Format Yes [ ] No [X] 2 FIRST KEYSTONE FINANCIAL, INC. CONTENTS
PAGE PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition as of March 31, 2000 (Unaudited) and September 30, 1999 .............................. 1 Consolidated Statements of Income for the Three and Six Months Ended March 31, 2000 and 1999 (Unaudited)................................ 2 Consolidated Statement of Changes in Stockholders' Equity for the Six Months Ended March 31, 1999 (Unaudited)......................................... 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 (Unaudited)......................................... 4 Notes to Consolidated Financial Statements (Unaudited).......................... 5 Item 2. Managements's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 14 PART II OTHER INFORMATION Item 1. Legal Proceedings............................................................... 15 Item 2. Changes in Securities and Use of Proceeds....................................... 15 Item 3. Defaults Upon Senior Securities................................................. 15 Item 4. Submission of Matters to a Vote of Security Holders............................. 15 Item 5. Other Information............................................................... 15 Item 6. Exhibits and Reports on Form 8-K................................................ 15 SIGNATURES...................................................................................... 16
i 3 ITEM 1. FINANCIAL STATEMENTS FIRST KEYSTONE FINANCIAL, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands)
March 31 September 30 ASSETS 2000 1999 -------- ------------ (Unaudited) Cash and amounts due from depository institutions $ 2,792 $ 3,010 Interest-bearing deposits with depository institutions 16,635 17,005 --------- --------- Total cash and cash equivalents 19,427 20,015 Investment securities available for sale 43,612 44,315 Mortgage-related securities available for sale 115,096 113,046 Loans held for sale 2,653 1,792 Mortgage-related securities held to maturity - at amortized cost (approximate fair value of $13,130 at March 31, 2000 and $14,100 at September 30, 1999) 13,741 14,497 Loans receivable - net 234,104 226,375 Accrued interest receivable 3,065 3,096 Real estate owned 935 297 Federal Home Loan Bank stock - at cost 6,157 6,157 Office properties and equipment - net 3,654 3,076 Deferred income taxes 3,642 2,749 Prepaid expenses and other assets 14,659 14,711 --------- --------- TOTAL ASSETS $ 460,745 $ 450,126 ========= ========= LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 275,973 $ 260,826 Advances from Federal Home Loan Bank 119,317 123,137 Securities sold under agreements to repurchase 19,300 19,300 Accrued interest payable 2,440 2,321 Advances from borrowers for taxes and insurance 2,104 946 Accounts payable and accrued expenses 1,974 3,492 --------- --------- Total liabilities 421,108 410,022 --------- --------- Company-obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debentures of the Company 16,200 16,200 Stockholders' Equity: Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued Common stock, $.01 par value, 20,000,000 shares authorized; issued and outstanding: 2,251,716 shares at March 31, 2000 and September 30, 1999 14 14 Additional paid-in capital 13,450 13,408 Common stock acquired by stock benefit plans (1,398) (1,531) Treasury stock at cost: 468,284 shares (5,622) (5,622) Accumulated other comprehensive loss (4,760) (2,992) Retained earnings - partially restricted 21,753 20,627 --------- --------- Total stockholders' equity 23,437 23,904 --------- --------- TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY .. $ 460,745 $ 450,126 ========= =========
See notes to consolidated financial statements. 1 4 FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except per share data)
Three months ended Six months ended March 31 March 31 ------------------ ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- INTEREST INCOME: Interest on: Loans $ 4,546 $ 4,394 $ 8,988 $ 8,619 Mortgage-related securities 2,155 1,849 4,258 3,961 Investments 801 732 1,604 1,465 Interest-bearing deposits 118 108 239 204 -------- -------- -------- -------- Total interest income 7,620 7,083 15,089 14,249 -------- -------- -------- -------- INTEREST EXPENSE: Interest on: Deposits 2,761 2,551 5,444 5,165 Federal Home Loan Bank advances 1,585 1,320 3,150 2,679 Other borrowings 294 291 591 589 -------- -------- -------- -------- Total interest expense 4,640 4,162 9,185 8,433 -------- -------- -------- -------- NET INTEREST INCOME 2,980 2,921 5,904 5,816 PROVISION FOR LOAN LOSSES 105 75 210 100 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,875 2,846 5,694 5,716 -------- -------- -------- -------- NON-INTEREST INCOME (LOSS): Service charges and other fees 234 248 452 475 Net gain (loss) on sale of: Loans 59 99 113 200 Investment and mortgage-related securities 249 249 Real estate owned 2 (8) Real estate operations (18) (12) (46) (24) Other income 165 103 348 109 -------- -------- -------- -------- Total non-interest income 442 687 859 1,009 -------- -------- -------- -------- NON-INTEREST EXPENSE: Salaries and employee benefits 896 920 1,768 1,786 Occupancy and equipment expenses 288 259 546 514 Professional fees 240 140 484 293 Federal deposit insurance premium 14 37 52 73 Bank service charges 127 100 248 203 Data processing 100 96 200 192 Advertising 105 80 194 157 Provision for real estate owned losses 300 350 Minority interest in expense of subsidiary 393 393 786 786 Other 229 269 468 576 -------- -------- -------- -------- Total non-interest expense 2,392 2,594 4,746 4,930 -------- -------- -------- -------- INCOME BEFORE INCOME TAX EXPENSE 925 939 1,807 1,795 INCOME TAX EXPENSE 187 228 366 424 -------- -------- -------- -------- NET INCOME $ 738 $ 711 $ 1,441 $ 1,371 ======== ======== ======== ======== BASIC EARNINGS PER COMMON SHARE $ 0.36 $ 0.35 $ 0.70 $ 0.67 ======== ======== ======== ======== DILUTED EARNINGS PER COMMON SHARE $ 0.35 $ 0.33 $ 0.67 $ 0.64 ======== ======== ======== ========
See notes to consolidated financial statements 2 5 FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (dollars in thousands)
Common stock Accumulated Retained Additional acquired by other earnings- Total Common paid-in stock benefit Treasury comprehensive partially stockholders' stock capital plans stock loss restricted equity -------- -------- -------- -------- -------- -------- -------- BALANCE AT SEPTEMBER 30, 1999 $ 14 $ 13,408 $ (1,531) $ (5,622) $ (2,992) $ 20,627 $ 23,904 Net income 1,441 1,441 Other comprehensive loss, net of tax (1,768) (1,768) ESOP stock committed to be released 63 63 Excess of fair value above cost of ESOP and RRP shares committed to be released 42 42 RRP amortization 70 70 Dividends - $.14 per share (315) (315) -------- -------- -------- -------- -------- -------- -------- BALANCE AT MARCH 31, 2000 $ 14 $ 13,450 $ (1,398) $ (5,622) $ (4,760) $ 21,753 $ 23,437 ======== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements. 3 6 FIRST KEYSTONE FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
Six months ended March 31 -------- 2000 1999 -------- -------- OPERATING ACTIVITIES: Net income $ 1,441 $ 1,371 Adjustments to reconcile net income to net cash used in operating activities: Provision for depreciation and amortization 214 220 Amortization of premiums and discounts (75) 110 Gain on sales of: Loans (113) (200) Investment securities available for sale (249) Real estate owned 8 Provision for loan losses 210 100 Provision for real estate owned losses 350 Amortization of stock benefit plans 175 229 Changes in assets and liabilities which provided (used) cash: Origination of loans held for sale (18,906) (33,996) Loans sold in the secondary market 18,045 32,470 Deferred income taxes 1 Accrued interest receivable 31 113 Prepaid expenses and other assets 52 (7,676) Accrued interest payable 119 134 Accrued expenses (1,518) 758 -------- -------- Net cash used in operating activities (317) (6,265) -------- -------- INVESTING ACTIVITIES: Loans originated (34,307) (50,586) Purchases of: Investment securities available for sale (109) (13,750) Mortgage-related securities available for sale (10,826) (19,135) Purchase of FHLB stock (987) Proceeds from sales of real estate owned 188 2,044 Proceeds from sales of investment securities 7,749 Principal collected on loans 25,862 29,623 Proceeds from maturities, calls, or repayments of: Investment securities available for sale 75 Mortgage-related securities available for sale 6,872 30,531 Mortgage-related securities held to maturity 751 2,228 Purchase of property and equipment (792) (282) Net expenditures on real estate acquired through foreclosure and in development (80) (44) -------- -------- Net cash used in investing activities (12,441) (12,534) -------- -------- FINANCING ACTIVITIES: Net increase in deposit accounts 15,147 12,927 Net (decrease) increase proceeds from FHLB advances and other borrowings (3,820) 8,743 Net increase in advances from borrowers for taxes and insurance 1,158 1,016 Purchase of treasury stock (831) Cash dividend (315) (272) -------- -------- Net cash provided by financing activities 12,170 21,583 -------- -------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (588) 2,784 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,015 24,126 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,427 $ 26,910 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments for interest on deposits and borrowings $ 4,521 $ 8,299 Transfers of loans receivable into real estate owned 872 1,297 Cash payments of income taxes 100 465
See notes to consolidated financial statements 4 7 FIRST KEYSTONE FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2000 (UNAUDITED) AND SEPTEMBER 30, 1999 AND (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999 (dollars in thousands, except per share amounts) 1. BASIS OF PRESENTATION The accompanying 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 generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the unaudited interim periods. The results of operations of the three and six month periods ended March 31, 2000 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2000. 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, 1999. Certain information in this quarterly statement may constitute forward-looking information (within the meaning of the Private Securities Litigation Reform Act of 1995) that involves risks and uncertainties that could cause actual results to differ materially from those estimated. Persons are cautioned that such forward-looking statements are not guarantees of future performance and are subject to various factors which could cause actual results to differ materially from those estimated. These factors include changes in general economic and market conditions; changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines; and the development of an interest rate environment that adversely affects the interest rate spread or other income from the Company's investments and operations. 2. INVESTMENT SECURITIES The amortized cost and approximate fair value of investment securities are as follows:
March 31, 2000 ----------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ---- ---- ---- ---------- Available for Sale: U.S. Treasury securities and securities of U.S. Government agencies: 1 to 5 years $ 5,747 $ 170 $ 5,577 5 to 10 years 6,996 $ 7 330 6,673 Municipal obligations 18,927 2 1,374 17,555 Corporate bonds 4,910 207 4,703 Mutual funds 2,000 30 1,970 Preferred stocks 5,531 714 4,817 Other equity investments 2,500 77 260 2,317 ------- ------- ------- ------- Total $46,611 $ 86 $ 3,085 $43,612 ======= ======= ======= =======
5 8
September 30, 1999 ------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------- ---------- ---------- ----------- Available for Sale: U.S. Treasury securities and securities of U.S. Government agencies: 1 to 5 years $ 5,746 $ 94 $ 5,652 5 to 10 years 6,994 214 6,780 Municipal obligations 18,924 $ 1 1,052 17,873 Corporate bonds 4,909 270 4,639 Mutual funds 2,000 28 1,972 Preferred stocks 5,534 286 5,248 Other equity investments 2,390 239 2,151 ------- ------- ------- ------- Total $46,497 $ 1 $ 2,183 $44,315 ======= ======= ======= =======
3. MORTGAGE-RELATED SECURITIES Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:
March 31, 2000 --------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------- ---------- ---------- ----------- Available for Sale: FHLMC pass-through certificates $ 10,892 $ 8 $ 331 $ 10,569 FNMA pass-through certificates 31,584 6 1,266 30,324 GNMA pass-through certificates 39,300 1,190 38,110 Collateralized mortgage obligations 37,532 115 1,554 36,093 -------- -------- -------- -------- Total $119,308 $ 129 $ 4,341 $115,096 ======== ======== ======== ======== Held to Maturity: FHLMC pass-through certificates $ 3,015 $ 125 $ 2,890 FNMA pass-through certificates 6,242 312 5,930 Collateralized mortgage obligations 4,484 174 4,310 -------- -------- -------- Total $ 13,741 $ 611 $ 13,130 ======== ======== ========
6 9
September 30, 1999 ---------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ---- ---- ---- ---------- Available for Sale: FHLMC pass-through certificates $ 11,927 $ 81 $ 174 $ 11,834 FNMA pass-through certificates 32,795 37 877 31,955 GNMA pass-through certificates 34,639 75 755 33,959 Collateralized mortgage obligations 36,054 111 867 35,298 -------- -------- -------- -------- Total $115,415 $ 304 $ 2,673 $113,046 ======== ======== ======== ======== Held to Maturity: FHLMC pass-through certificates $ 3,156 $ 11 $ 67 $ 3,100 FNMA pass-through certificates 6,832 232 6,600 Collateralized mortgage obligations 4,509 109 4,400 -------- -------- -------- -------- Total $ 14,497 $ 11 $ 408 $ 14,100 ======== ======== ======== ========
The collateralized mortgage obligations contain both fixed and adjustable classes of bonds which are repaid in accordance with a predetermined priority. The underlying collateral of the bonds primarily consist of loans which are insured or guaranteed by FHLMC, FNMA, or the GNMA. The mortgage-related securities designated as available for sale, by definition, could be sold in response to changes in interest rates and cash flows or for restructuring purposes. 7 10 5. LOANS RECEIVABLE Loans receivable consist of the following:
March 31 September 30 2000 1999 -------- ------------ Real estate loans: Single-family $ 164,804 $ 166,802 Construction and land 22,164 18,426 Multi-family and commercial 34,508 31,188 Consumer loans: Home equity and lines of credit 19,981 18,624 Deposit 218 243 Education 326 365 Other 898 1,080 Commercial loans 5,402 2,190 --------- --------- Total loans 248,301 238,918 Loans in process (10,779) (9,005) Allowance for loan losses (1,949) (1,928) Deferred loan fees (1,469) (1,610) --------- --------- Loans receivable - net $ 234,104 $ 226,375 ========= =========
The following is an analysis of the allowance for loan losses:
Six Months Ended March 31 ---------------------- 2000 1999 ------- ------- Balance beginning of period $ 1,928 $ 1,738 Provisions charged to income 210 100 Charge-offs (189) (56) Recoveries ------- ------- Total $ 1,949 $ 1,782 ======= =======
At March 31, 2000 and September 30, 1999, non-performing loans (which consist of loans in excess of 90 days delinquent) amounted to approximately $2,085 and $3,180, respectively. 6. DEPOSITS Deposits consist of the following major classifications:
March 31 September 30 2000 1999 -------- --------- Amount Percent Amount Percent -------- -------- -------- ------- Non-interest bearing accounts $ 7,602 2.8% $ 7,912 3.0% NOW accounts 40,855 14.8 33,412 12.8 Passbook accounts 40,151 14.5 40,324 15.5 Money market demand accounts 19,955 7.2 19,417 7.4 Certificate accounts 167,410 60.7 159,761 61.3 -------- ----- -------- ----- Total $275,973 100.0% $260,826 100.0% ======== ===== ======== =====
8 11 7. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, effective October 1, 1999. The statement requires disclosure of amounts from transactions and other events which are currently excluded from the statement of operations and are recorded directly to stockholders' equity. These transactions and other events represent foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. Only the last of these items, however, is currently applicable to the Company. For the three and six months ended March 31, 2000 and 1999, the Company's comprehensive income was as follows:
Three Months Ended Six Months Ended March 31 March 31 ---------- --------- 2000 1999 2000 1999 ------- ------- ------- ------- Net income $ 738 $ 711 $ 1,441 $ 1,371 Net SFAS 115 adjustment 100 (557) (1,768) (1,196) ------- ------- ------- ------- Total comprehensive income (loss) $ 838 $ 154 $ (327) $ 175 ======= ======= ======= =======
8. 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. 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, ----------------------------- ----------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Numerator $ 738 $ 711 $ 1,441 $ 1,371 Denominators: Basic shares outstanding 2,054,313 2,040,333 2,059,531 2,037,551 Effect of dilutive securities 39,143 100,673 80,715 106,611 ---------- ---------- ---------- ---------- Diluted shares outstanding 2,093,456 2,141,006 2,140,246 2,144,162 ========== ========== ========== ========== hares outstanding EPS: Basic $ 0.36 $ 0.35 $ 0.70 $ 0.67 Diluted $ 0.35 $ 0.33 $ 0.67 $ 0.64
9 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND SEPTEMBER 30, 1999 Total assets of the Company increased $10.6 million or 2.4% from $450.1 million at September 30, 1999 to $460.7 million at March 31, 2000 primarily due to a $7.7 million increase in loans receivable - net and a $2.0 million increase in mortgage-related securities available for sale. The increased loan growth was concentrated primarily in construction, commercial real estate and commercial loans and funded through deposits and cash flows and reflected the Company's continued emphasis on originating higher yielding loans. Deposits increased $15.1 million or 5.8% from $260.8 million at September 30, 1999 to $276.0 million at March 31, 2000. The increase resulted primarily from the growth in NOW accounts and certificates of deposit. Stockholders' equity decreased $467,000 due to the combined effects of dividends paid and a decrease in the market valuation, net of taxes, of securities available for sale partially offset by the Company's net income for the six months ended March 31, 2000. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999 Net Income. Net income was $738,000 for the three months ended March 31, 2000 as compared to $711,000 for the same period in 1999. Net income for the six month periods ended March 31, 2000 and 1999 remained relatively the same at $1.4 million. The $27,000 or 3.8% increase in net income for the three months ended March 31, 2000 was due to a $29,000 increase in net interest income after provision for loan losses combined with a $202,000 decrease in non-interest expense partially offset by a $245,000 decrease in non-interest income. The $70,000 or 5.1% increase in net income for the six months ended March 31, 2000 compared to the same period in 1999 was primarily due to $184,000 and $58,000 decreases in non-interest expense and $58,000 decrease in income tax expense, respectively, partially offset by a $150,000 decrease in non-interest income together with a $22,000 decrease in net interest income after provision for loan losses. 10 13 Net Interest Income. Net interest income increased $59,000 to $3.0 million and $88,000 to $5.9 million for the three and six months ended March 31, 2000, respectively. Such increases were primarily due to $537,000 or 7.6% and $800,000 or 8.9% increases in interest income for the three and six months ended March 31, 2000, respectively, which were partially offset by $478,000 or 11.5% and $752,000 or 8.9% increases in interest expense during such periods. The average balance of interest-earning assets increased $7.8 million and $4.6 million for the three and six months ended March 31, 2000, respectively, as compared to the same period in 1999. Calculated on a fully taxable equivalent basis, the weighted average yield earned on interest-earning assets for the three and six months ended March 31, 2000 increased 39 basis points to 7.52% and 33 basis points to 7.48%, respectively, compared to the 1999 periods. In addition, net interest income was affected by an increase in the average balance of interest-bearing liabilities of $23.6 million and $24.2 million for the three and six months ended March 31, 2000, respectively, as compared to the same period in 1999. The weighted average rate paid on such liabilities increased 21 basis points to 4.66% and 10 basis points to 4.63% during the three and six months ended March 31, 2000, respectively, as compared to 4.45% and to 4.53%, respectively, during the three and six months ended March 31, 1999. The interest rate spread amounted to 2.86% and 2.69% for the three months ended March 31, 2000 and 1999, respectively, while the net interest margin remained at 3.00%. The interest rate spread and net interest margin were 2.85% and 2.99%, respectively, for the six months ended March 31, 2000 as compared to 2.62% and 2.98% for the same periods in 1999. The increase in the net interest rate spread is primarily due to improvement in the yield on Company's investment and mortgage-related securities portfolio during fiscal 2000. Provision for Loan Losses. Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, the volume and type of lending conducted by the Company, the amount of the Company's classified assets, the status of past due principal and interest payments, general economic conditions, particularly as they relate to the Company's primary market area, and other factors related to the collectibility of the Company's loan and loans held for sale portfolios. For the three months ended March 31, 2000, the provision for loan losses amounted to $105,000 as compared to $75,000 for the same period in 1999. For the six months ended March 31, 2000 and 1999, the provision for loan losses was $184,000 and $172,000, respectively. The provision in the interim period of fiscal 1999 reflected a $50,000 allocation of expense to real estate owned. The increase in fiscal 2000 periods is due to allocations for the current loan portfolio in reflection of its increased investment in construction, multi-family and commercial real estate loans which are generally deemed to entail greater risk of loss. At March 31, 2000, non-performing assets totaled $3.0 million or .65% of total assets, a decrease of $452,000 from September 30, 1999. The Company's coverage ratio, which is the ratio of the loan loss reserve to non-performing assets, was 64.4% and 55.1% at March 31, 2000 and September 30, 1999, respectively. Management will continue to review its loan portfolio to determine the extent, if any, to which additional loss provisions may be deemed necessary. There can be no assurance that the allowance for 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. 11 14 Non-interest income. Non-interest income decreased $245,000 or 35.7% to $442,000 and $150,000 or 14.9% to $859,000 for the three and six months ended March 31, 2000, respectively, as compared to the same periods in 1999. The decrease was primarily a result of decreases in service charges and other fees and the net gain on sales of loans, mortgage-related securities and investment securities offset by an increase in other income due to income earned from bank owned life insurance policies. Non-interest Expense. Non-interest expenses decreased $202,000 or 7.8% during the three months ended March 31, 2000 as compared to the same period in 1999. The decrease was primarily due to a decrease of $300,000 in the provision for real estate owned losses partially offset by a $100,000 increase in professional fees. For the six months ended, March 31, 2000, operating expenses decreased $184,000 or 3.7% due to an decrease of $350,000 in the provision relating to a real estate owned property and a $108,000 decrease in other non-interest expense offset by increases of $191,000, $45,000 and $37,000 in professional fees, bank service changes, and advertising, respectively. Income Tax Expense. Income tax expense decreased $41,000 to $187,000 for the three months ended March 31, 2000 compared to March 31, 1999, while decreasing $58,000 to $366,000 for the six months ended March 31, 2000. The decreases were primarily a result of the implementation of various tax planning strategies including investment in tax-exempt securities. 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, 2000, the Company had short-term borrowings outstanding of $54.0 million, all of which consisted of advances from the Federal Home Loan Bank of Pittsburgh. 12 15 Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer term basis, the Company maintains a strategy of investing in various lending products, mortgage-related securities and investment securities. The Company uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, fund loan commitments At March 31, 2000, the 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 $16.0 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2000 totaled $110.4 million. Based upon its historical experience, management believes that a significant portion of maturing deposits will remain with the Company. First Keystone Federal Savings Bank (the "Bank"), the Company's wholly owned subsidiary, is required by the Office of Thrift Supervision ("OTS") to maintain average daily balances of liquid assets and short-term liquid assets (as defined) in amounts equal to 4% of net withdrawable deposits and borrowings payable in one year or less to assure its ability to meet demand from withdrawals and repayments of short-term borrowings. The liquidity requirements may vary from time to time at the direction of the OTS depending upon economic conditions and deposit flows. The Bank's average monthly liquidity ratio for March 2000 was 7.42%. As of March 31, 2000, the Bank had regulatory capital in excess of applicable limits. The Bank is required under certain federal 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 equal to at least 8.0% of its total risk-weighted assets. At March 31, 2000, the Bank had tangible and core capital equal to 8.1% of adjusted total assets and total capital equal to 18.0% of risk-weighted assets. 13 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of the Company's asset and liability management policies, see "Management's Discussion and Analysis of Financial Condition and Results of Operation" in the Company's Annual Report on Form 10-K for the year ended September 30, 1999. The Company utilizes reports prepared by the OTS to measure interest rate risk. Using data from the Bank's quarterly thrift financial reports, the OTS models the net portfolio value ("NPV") of the Bank over a variety of interest rate scenarios. The NPV is defined as the present value of expected cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing off-balance sheet contracts. The model assumes instantaneous, parallel shifts in the U.S. Treasury Securities yield curve of 100 to 300 basis points, either up or down, and in 100 basis point increments. The interest rate risk analysis used by the OTS include an "Exposure Measure" or "Post-Shock" NPV ratio and a "Sensitivity Measure". The "Post-Shock" NPV ratio is the net present value as a percentage of assets over the various yield curve shifts. A low "Post-Shock" NPV ratio indicates greater exposure to interest rate risk and can result from a low initial NPV ratio or high sensitivity to changes in interest rates. The "Sensitivity Measure" is the decline in the NPV ratio, in basis points, caused by a 2% increase or decrease in rates, whichever produces a larger decline. The following table sets forth the Bank's NPV as of March 31, 2000.
Net Portfolio Value Changes in Rates in Dollar Percentage Net Portfolio Value Change in Basis Points Amount Change Change As a % of Assets Percentage (1) - ------------------------------------------------------------------------------------------------------------ (dollars in thousands) 300 $15,420 (27,250) (63.86) 3.62 (60.95) 200 24,442 (18,228) (42.72) 5.59 (39.70) 100 33,693 (8,976) (21.04) 7.51 (18.99) 0 42,669 9.27 (100) 51,287 8,618 20.20 10.87 17.26 (200) 56,393 13,724 32.16 11.76 26.86 (300) 59,166 16,497 38.66 12.20 31.61
(1) Based on the portfolio value of the Bank's assets in the base case scenario As of March 31, 2000, the Company's NPV was $42.7 million or 9.27% of the market value of assets. Following a 200 basis point increase in interest rates, the Company's "post shock" NPV was $24.4 million or 5.59% of the market value of assets. The change in the NPV ratio or the Company's sensitivity measure was (3.68)%. 14 17 PART II Item 1. Legal Proceedings Not applicable Item 2. Changes in Securities and Use of Proceeds Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. No. 27 Financial Data Schedule (b) Reports filed on Form 8-K. None. 15 18 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, 2000 By: /s/ Donald S. Guthrie ---------------------------- Donald S. Guthrie President and Chief Executive Officer Date: May 15, 2000 By: /s/ Thomas M. Kelly ---------------------------- Thomas M. Kelly Executive Vice-President and Chief Financial Officer 16 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS SEP-30-2000 OCT-01-1999 MAR-31-2000 2,792 16,635 0 0 158,708 13,741 13,130 234,104 1,949 460,745 275,973 54,000 22,718 84,617 6,444 0 0 16,993 460,745 4,546 2,956 118 7,620 2,761 4,640 2,980 105 0 2392 925 925 0 0 738 .36 .35 7.52 2,075 10 5 2,090 1,858 14 0 1,949 913 0 685
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