-----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, KzTr7bOYxG9pHyXLsCmGGxUj9LyaL/ZKMEWJBH9zTkkPvcfgHWhKBGNY4lE6rS+P rwPtW8NAqzrhvZ7mCQaLFQ== 0000893220-02-001027.txt : 20020814 0000893220-02-001027.hdr.sgml : 20020814 20020814153352 ACCESSION NUMBER: 0000893220-02-001027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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: 1934 Act SEC FILE NUMBER: 000-25328 FILM NUMBER: 02735928 BUSINESS ADDRESS: STREET 1: 22 WEST STATE ST CITY: MEDIA STATE: PA ZIP: 19063 BUSINESS PHONE: 6105656210 10-Q 1 w63249e10vq.txt FIRST KEYSTONE FINANCIAL FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .......... to .......... Commission File Number: 000-25328 FIRST KEYSTONE FINANCIAL, INC . -------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-2576479 - ----------------------------------------- ---------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 22 West State Street Media, Pennsylvania 19063 - ---------------------------------------------- ----------------------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (610) 565-6210 Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------- Number of shares of Common Stock outstanding as of August 9, 2002: 2,002,050 Transitional Small Business Disclosure Format Yes No X ------ ------- FIRST KEYSTONE FINANCIAL, INC. CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Condensed Consolidated Statements of Financial Condition as of June 30, 2002 and September 30, 2001................................... 1 Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended June 30, 2002 and 2001.......................... 2 Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended June 30, 2002 ........................ 3 Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2002 ............................................ 4 Notes to Unaudited Condensed Consolidated Financial Statements ........ 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 14 PART II OTHER INFORMATION Item 1. Legal Proceedings..................................................... 15 Item 2. Changes in Securities and Use of Proceeds............................. 15 Item 3. Defaults Upon Senior Securities....................................... 15 Item 4. Submission of Matters to a Vote of Security Holders................... 15 Item 5. Other Information..................................................... 15 Item 6. Exhibits and Reports on Form 8-K...................................... 15
i ITEM 1. FINANCIAL STATEMENTS FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES - ----------------------------------------------- UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - ------------------------------------------------------------------ (dollars in thousands)
June 30 September 30 ASSETS 2002 2001 - ------ ----------- ---------- Cash and amounts due from depository institutions $ 9,528 $ 3,753 Interest-bearing deposits with depository institutions 20,229 15,378 ----------- ---------- Total cash and cash equivalents 29,757 19,131 Investment securities available for sale 71,597 62,564 Mortgage-related securities available for sale 92,380 117,608 Loans held for sale 225 Mortgage-related securities held to maturity - at amortized cost (approximate fair value of $9,840 at June 30, 2002 and $11,550 at September 30, 2001) 9,698 11,454 Loans receivable (net of allowance for loan losses of $2,227 at June 30, 2002 and $2,019 at September 30, 2001) 282,708 247,664 Accrued interest receivable 3,190 3,353 Real estate owned 280 887 Federal Home Loan Bank stock - at cost 6,821 6,917 Office properties and equipment - net 3,596 3,690 Cash surrender value of life insurance 14,761 14,021 Prepaid expenses and other assets 1,803 1,536 ----------- ---------- TOTAL ASSETS $516,591 $489,050 =========== ========== LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------- Liabilities: Deposits $325,598 $311,601 Advances from Federal Home Loan Bank 131,195 126,070 Accrued interest payable 1,044 1,804 Advances from borrowers for taxes and insurance 3,089 696 Deferred income taxes 349 282 Accounts payable and accrued expenses 2,515 1,776 ---------- ----------- Total liabilities 463,790 442,229 ---------- ----------- Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of the Company 20,889 16,200 Stockholders' Equity: Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued Common stock, $.01 par value, 20,000,000 shares authorized; issued and outstanding: 2,013,631 shares at June 30, 2002 and 2,033,707 shares at September 30, 2001 14 14 Additional paid-in capital 13,513 13,536 Common stock acquired by stock benefit plans (1,034) (1,147) Treasury stock at cost: 698,925 at June 30, 2002 and 686,293 at September 30, 2001 (9,037) (8,583) Accumulated other comprehensive income 2,792 2,664 Retained earnings - partially restricted 25,664 24,137 ---------- ---------- Total stockholders' equity 31,912 30,621 ---------- ---------- TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY $516,591 $489,050 ======== ========
See notes to unaudited condensed consolidated financial statements. 1 FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES - ----------------------------------------------- UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME - ----------------------------------------------------- (dollars in thousands, except per share data)
Three months ended Nine months ended June 30 June 30 ---------------- ------------------ 2002 2001 2002 2001 -------- ------- -------- --------- INTEREST INCOME: Interest on: Loans $4,920 $4,679 $14,326 $13,984 Mortgage-related securities 1,523 2,267 5,136 6,622 Investment securities: Taxable 647 578 1,850 1,732 Tax-Exempt 301 257 839 782 Dividends 113 176 405 448 Interest-bearing deposits 43 86 163 445 ------- ------- -------- --------- Total interest income 7,547 8,043 22,719 24,013 ------- ------- -------- --------- INTEREST EXPENSE: Interest on: Deposits 2,159 3,314 7,507 9,761 Federal Home Loan Bank advances 1,737 1,774 5,181 5,566 Other borrowings 2 ------- ------- -------- --------- Total interest expense 3,896 5,088 12,688 15,329 ------- ------- -------- --------- NET INTEREST INCOME 3,651 2,955 10,031 8,684 PROVISION FOR LOAN LOSSES 135 135 405 405 ------- ------- -------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,516 2,820 9,626 8,279 ------- ------- -------- --------- NON-INTEREST INCOME (LOSS): Service charges and other fees 261 248 789 712 Net gain (loss) on sale of: Loans 34 15 103 Investment securities 3 63 (17) 63 Real estate owned 24 83 20 Real estate operations (55) (13) (116) (47) Increase in cash surrender value 171 163 509 497 Other 21 34 68 89 ------- ------- -------- --------- Total non-interest income 425 529 1,331 1,437 ------- ------- -------- --------- NON-INTEREST EXPENSE: Salaries and employee benefits 1,250 1,015 3,431 3,047 Occupancy and equipment expenses 313 297 939 890 Professional fees 217 191 660 580 Federal deposit insurance premium 14 13 43 41 Data processing 100 100 316 301 Advertising 123 99 346 267 Minority interest in expense of subsidiaries 420 393 1,232 1,179 Other 588 451 1,478 1,153 ------- ------- -------- --------- Total non-interest expense 3,025 2,559 8,445 7,458 ------- ------- -------- --------- INCOME BEFORE INCOME TAX EXPENSE 916 790 2,512 2,258 INCOME TAX EXPENSE 173 129 431 372 ------- ------- -------- --------- NET INCOME $ 743 $ 661 $ 2,081 $ 1,886 ======= ======= ======== ========= BASIC EARNINGS PER COMMON SHARE $ 0.39 $ 0.33 $ 1.08 $ 0.91 ======= ======= ======== ========= DILUTED EARNINGS PER COMMON SHARE $ 0.36 $ 0.31 $ 1.02 $ 0.88 ======= ======= ======== =========
See notes to unaudited condensed consolidated financial statements. FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES - ----------------------------------------------- UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------- (dollars in thousands)
Common stock Accumulated Retained Additional acquired by other earnings- Total Common paid-in stock benefit Treasury comprehensive partially stockholders' stock capital plans stock income restricted equity ----- ------- ----- ----- ------ ---------- ------ BALANCE AT OCTOBER 1, 2001 $14 $13,536 $(1,147) $(8,583) $2,664 $24,137 $30,621 Net income 2,081 2,081 Other comprehensive income, net of tax: Net unrealized gain on securities net of reclassification adjustment 128 128 ----- ------ Comprehensive income 2,209 ESOP stock committed to be released 113 113 Excess of fair value above cost of ESOP shares committed to be released 120 120 Purchase of treasury stock (818) (818) Exercise of stock options (143) 364 221 Dividends - $.27 per share (554) (554) ---- ------- -------- -------- ------ ------- ------- BALANCE AT JUNE 30, 2002 $14 $13,513 $(1,034) $(9,037) $2,792 $25,664 $31,912 ==== ======= ======== ======== ====== ======= =======
See notes to unaudited condensed consolidated financial statements. FIRST KEYSTONE FINANCIAL, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------- (dollars in thousands)
Nine months ended June 30 --------------------- 2002 2001 ---------- -------- OPERATING ACTIVITIES: Net income $ 2,081 $ 1,886 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 345 328 Amortization of premiums and discounts (61) (65) (Gain) loss on sales of: Loans (15) (103) Investments available for sale 17 (25) Mortgage-related securities available for sale (38) Real estate owned (83) (20) Provision for loan losses 405 405 Provision for real estate losses 18 Amortization of stock benefit plans 233 199 Changes in assets and liabilities which provided (used) cash: Origination of loans held for sale (275) (19,329) Loans sold in the secondary market 500 22,328 Accrued interest receivable 163 187 Prepaid expenses and other assets (1,007) 4,116 Accrued interest payable (760) (276) Accrued expenses 739 317 -------- -------- Net cash provided by operating activities 2,300 9,910 -------- -------- INVESTING ACTIVITIES: Loans originated (130,643) (46,060) Purchases of: Investment securities available for sale (19,694) (15,613) Mortgage-related securities available for sale (9,284) (48,879) Redemption (purchase) of FHLB stock 96 (245) Proceeds from sales of real estate owned 871 578 Proceeds from sales of: Investment securities available for sale 3,983 1,025 Mortgage-related securities available for sale 6,926 Principal collected on loans 95,298 32,696 Proceeds from maturities, calls, or repayments of: Investment securities available for sale 7,180 Mortgage-related securities available for sale 33,971 22,984 Mortgage-related securities held to maturity 1,751 1,228 Purchase of property and equipment (251) (411) Net expenditures on real estate acquired through foreclosure (5) (159) -------- -------- Net cash used in investing activities (16,727) (45,930) -------- -------- FINANCING ACTIVITIES: Net increase in deposit accounts 13,997 41,080 Net increase (decrease) in FHLB advances 5,125 (18,974) Net increase in advances from borrowers for taxes and insurance 2,393 2,149 Exercise of stock options 221 Issuance of preferred trust securities 8,000 Purchase of preferred trust securities (3,311) Purchase of treasury stock (818) (3,045) Cash dividend (554) (531) -------- -------- Net cash provided by financing activities 25,053 20,679 -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,626 (15,341) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,131 40,114 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,757 $ 24,773 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments for interest on deposits and borrowings $ 13,488 $ 19,641 Transfers of loans receivable into real estate owned 308 589 Cash payments of income taxes 550 125
See notes to unaudited condensed consolidated financial statements. FIRST KEYSTONE FINANCIAL, INC. - ------------------------------ NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------- (dollars in thousands, except per share amounts) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the unaudited interim periods. The results of operations of the three and nine month periods ended June 30, 2002 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2002 or any other period. The unaudited condensed consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company's Annual Report to Stockholders for the year ended September 30, 2001. 2. INVESTMENT SECURITIES The amortized cost and approximate fair value of investment securities are as follows:
June 30, 2002 ------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ======== ====== ====== ========= Available for Sale: U.S. Treasury securities and securities of U.S. Government agencies: 1 to 5 years $ 9,880 $ 134 $10,014 5 to 10 years 1,856 195 2,051 Municipal obligations 21,712 413 $ 1 22,124 Corporate bonds 16,287 359 532 16,114 Mutual funds 5,009 8 5,001 Asset-backed securities 3,000 14 3,014 Preferred stocks 8,586 233 18 8,801 Other equity investments 3,476 1,032 30 4,478 -------- ------ ------ ------- Total $69,806 $2,380 $ 589 $71,597 ======== ====== ====== =======
September 30, 2001 ------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ------------------------------------------------- U.S. Treasury securities and securities of U.S. Government agencies: 1 to 5 years $ 2,961 $ 172 $ 3,133 5 to 10 years 1,843 207 2,050 Municipal obligations 21,890 739 $ 3 22,626 Corporate bonds 14,333 277 523 14,087 Mutual funds 5,009 3 8 5,004 Asset-backed securities 2,986 16 2,970 Preferred stocks 9,474 5 282 9,197 Other equity investments 2,778 719 3,497 ------- ------ ---- ------- Total $61,274 $2,122 $832 $62,564 ======= ====== ==== =======
3. MORTGAGE-RELATED SECURITIES Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:
June 30, 2002 ------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ------------------------------------------------ Available for Sale: FHLMC pass-through certificates $ 5,633 $ 269 $ 5,902 FNMA pass-through certificates 11,141 409 11,550 GNMA pass-through certificates 36,480 1,047 37,527 Collateralized mortgage obligations 36,683 718 37,401 ------- ------- -------- Total $89,937 $2,443 $92,380 ======= ====== ======= Held to Maturity: FHLMC pass-through certificates $1,548 $ 62 $1,610 FNMA pass-through certificates 3,815 69 $4 3,880 Collateralized mortgage obligations 4,335 16 1 4,350 ------ ------ --- ------- Total $9,698 $147 $5 $9,840 ====== ==== == ======
September 30, 2001 --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------------------------------------------------- Available for Sale: FHLMC pass-through certificates $ 8,832 $ 343 $ 9,175 FNMA pass-through certificates 14,570 486 15,056 GNMA pass-through certificates 42,804 1,103 43,907 Collateralized mortgage obligations 48,658 814 $2 49,470 -------- ------ -- -------- Total $114,864 $2,746 $2 $117,608 ======== ====== == ======== Held to Maturity: FHLMC pass-through certificates $ 2,285 $ 68 $ 3 $ 2,350 FNMA pass-through certificates 4,684 70 54 4,700 Collateralized mortgage obligations 4,485 49 34 4,500 ------- ---- --- ------- Total $11,454 $187 $91 $11,550 ======= ==== === =======
4. LOANS RECEIVABLE
June 30 September 30 2002 2001 -------- --------- Real estate loans: Single-family $176,120 $160,289 Construction and land 28,408 29,117 Multi-family and commercial 57,093 43,472 Home equity and lines of credit 26,607 25,847 Consumer loans 1,154 1,125 Commercial loans 10,276 8,158 -------- -------- Total loans 299,658 268,008 Loans in process (13,992) (17,016) Allowance for loan losses (2,227) (2,181) Deferred loan fees (731) (1,147) -------- -------- Loans receivable - net $282,708 $247,664 ======== ========
The following is an analysis of the allowance for loan losses:
Nine Months Ended June 30 ----------------- 2002 2001 ------ ------ Balance beginning of period $2,181 $2,019 Provisions charged to income 405 405 Charge-offs (368) (366) Recoveries 9 154 ------ ------ Total $2,227 $2,212 ====== ======
At June 30, 2002 and September 30, 2001, non-performing loans (which consist of loans in excess of 90 days delinquent) amounted to approximately $3,873 million and $2,302 million, respectively. At June 30, 2002, non-performing loans primarily consisted of single-family residential mortgage loans aggregating $1.4 million and three commercial real estate loans totaling $2.4 million. At September 30, 2001, non-performing loans consisted primarily of single-family properties. Assets classified as substandard (which includes real estate owned) amounted to $4.2 million and $3.5 million at June 30, 2002 and September 30, 2001, respectively. The increase in classified assets was due to the classification of three loans to borrowers whose financial condition have weakened increasing the possibility that they will be unable to comply with the terms of their loan agreements. The Company is aggressively pursuing the repayment of the amounts borrowed and will continue monitoring the adequacy of the collateral. Although management believes the Bank's reserves for loan losses are adequate at June 30, 2002, recovery of the carrying value of the loans is dependent to a great extent on economic, operating and other conditions that are beyond the control of the Company. 5. DEPOSITS Deposits consist of the following major classifications:
June 30 September 30 2002 2001 ------------------------------------ Amount Percent Amount Percent ------ ------- ------ ------- Non-interest bearing $ 10,426 3.2% $ 5,698 1.8% NOW 52,515 16.1 45,161 14.5 Passbook 42,408 13.0 37,806 12.1 Money market demand 49,699 15.3 40,781 13.1 Certificates of deposit 170,550 52.4 182,155 58.5 ------- ----- -------- ----- Total $325,598 100.0% $311,601 100.0% ======== ===== ======== =====
6. EARNINGS PER SHARE Basic net income per share is based upon the weighted average number of common shares outstanding, while diluted net income per share is based upon the weighted average number of common shares outstanding and common share equivalents that would arise from the exercise of dilutive securities. All dilutive shares consist of options which the exercise price of the options is lower than the market price for the dates presented. The calculated basic and diluted earnings per share ("EPS") is as follows:
For the Three Months Ended For the Nine Months Ended June 30, June 30, ------------------------ --------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Numerator $743 $661 $2,081 $1,886 Denominators: Basic shares outstanding 1,924,740 2,025,074 1,920,563 2,064,461 Effect of dilutive securities 137,248 95,483 115,952 67,421 --------- --------- --------- --------- Diluted shares outstanding 2,061,988 2,120,557 2,036,515 2,131,882 ========= ========= ========= ========= EPS: Basic $0.39 $0.33 $1.08 $0.91 Diluted $0.36 $0.31 $1.02 $0.88
7. RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The provisions of this statement related to the rescission of SFAS No. 4 are effective for fiscal years beginning after May 15, 2002. Management has not determined the impact of applying these provisions. Certain provisions of the statement relating to SFAS No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of the statement are effective for financial statements issued on or after May 15, 2002. These provisions had no impact on the Company's financial statements. In July 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to historical information, this Quarterly Report on Form 10-Q includes certain "forward-looking statements" based on current management expectations. The Company's actual results could differ materially, as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, from management's expectations. Such forward-looking statements include statements regarding management's current intentions, beliefs or expectations as well as the assumptions on which such statements are based. These forward-looking statements are subject to significant business, economic and competitive uncertainties and contingencies, many of which are not subject to the Company's control. Stockholders and potential stockholders are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company's loan and investment portfolios, changes in accounting principles, policies or guidelines, availability and cost of energy resources and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and fees. The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results that occur subsequent to the date such forward-looking statements are made. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2002 AND SEPTEMBER 30, 2001 Total assets of the Company increased $27.5 million, or 5.6%, from $489.1 million at September 30, 2001 to $516.6 million at June 30, 2002. The growth was due mainly to increases in loans receivable of $35.0 million, or 14.1%, cash and cash equivalents of $10.6 million, or 55.5%, and investment securities available for sale of $9.0 million, or 14.4%, partially offset by a decrease in mortgage-related securities available for sale of $25.2 million, or 21.4%. The increase in loans receivable was mainly attributed to a $15.7 million, or 30.5%, increase in commercial real estate and business loans as well as a $15.8 million, or 9.9%, increase in residential loans compared to September 30, 2001. The Company continues to emphasize on originating higher yielding loans in accordance with the Company's strategic plan. The asset growth was primarily funded by increased deposits and the reinvestment of cash flows from mortgage-related securities. Deposits increased $14.0 million, or 4.5%, from $311.6 million at September 30, 2001 to $325.6 million at June 30, 2002 due to increases of $25.6 million, or 19.8%, in core deposits (which consist of passbook, money market, NOW and non-interest-bearing accounts) partially offset by a $11.6 million, or 6.4%, decrease in certificates of deposit. The increase in core deposits reflects the Bank's continued emphasis on developing corporate deposit relationships. In addition, the Company increased the amount of trust preferred securities from $16.2 million at September 30, 2001 to $20.9 million at June 30, 2002 by the issuance of $8.0 million of trust preferred securities offset, in part, by a $3.5 million purchase from a prior issuance of the Company's trust preferred securities. Stockholders' equity increased $1.3 million due to an increase in net income and accumulated comprehensive income partially offset by quarterly dividends paid and the repurchase of shares of common stock pursuant to the Company's on-going stock repurchase program. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2002 AND 2001 NET INCOME. Net income was $743,000, or $.36 per diluted share, for the three months ended June 30, 2002 as compared to $661,000, or $.31 per diluted share, for the same period in 2001. Net income for the nine months ended June 30, 2002 was $2.1 million, or $1.02 per diluted share, as compared to $1.9 million, or $.88 per diluted share, for the same period in 2001. The $82,000, or 12.4%, increase in net income for the three months ended June 30, 2002 was due to a $696,000 increase in net interest income partially offset by a $104,000 decrease in non-interest income combined with a $466,000 increase in non-interest expense. The $195,000, or 10.3%, increase in net income for the nine months ended June 30, 2002 compared to the same period in 2001 was primarily due to $1.3 million increase in net interest income partially offset by a$106,000 decrease in non-interest income combined with a $987,000 increase in non-interest expense. NET INTEREST INCOME. Net interest income increased $696,000, or 23.6%, to $3.7 million and $1.3 million, or 15.5%, to $10.0 million for the three and nine months ended June 30, 2002, respectively. Such increases were primarily due to $1.2 million, or 23.4%, and $2.6 million, or 17.2%, decreases in interest expense for the three and nine months ended June 30, 2002, respectively, which were partially offset by $496,000, or 6.2%, and $1.3 million, or 5.4%, decreases in interest income during such periods. The average balance of interest-earning assets increased $22.5 million and $31.4 million for the three and nine months ended June 30, 2002, respectively, as compared to the same periods in 2001. Calculated on a fully taxable equivalent basis, the weighted average yield earned on interest-earning assets for the three and nine months ended June 30, 2002 decreased 74 basis points to 6.41% and 85 basis points to 6.49%, respectively, compared to the 2001 period. In addition, net interest expense was affected by an increase in the average balance of interest-bearing liabilities of $19.1 million and $27.9 million for the three and nine months ended June 30, 2002, respectively, as compared to the same periods in 2001. For the three months ended June 30, 2002, the weighted average rate paid on such liabilities decreased 127 basis points to 3.48% from 4.75% for the same period in the prior fiscal year and 110 basis points to 3.80% for the nine months ended June 30, 2002 as compared to 4.90% for the nine months ended June 30, 2001. Due to the declining interest rate environment during 2001 and into the first quarter of 2002, the rates paid on interest-bearing liabilities, consisting of deposits and borrowings, adjusted downward at a faster pace than the Company's interest-earning assets, consisting primarily of loans and investment securities. The interest rate spread and net interest margin, on a fully tax equivalent basis, increased to 2.93% and 3.15%, respectively, for the three months ended June 30, 2002 as compared to 2.41% and 2.69%, respectively, for the same period in 2001. The interest rate spread and net interest margin, on a fully tax equivalent basis, were 2.69% and 2.92%, respectively, for the nine months ended June 30, 2002 as compared to 2.44% and 2.71%, respectively, for the same period in 2001. PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level considered appropriate by management based on historical experience, the volume and type of lending conducted by the Company, the amount of the Company's classified assets, the status of past due principal and interest payments, general economic conditions, particularly as they relate to the Company's primary market area, and other factors related to the collectibility of the Company's loan and loans held for sale portfolios. For the three and nine months ended June 30, 2002, the provision for loan losses remain unchanged at $135,000 and $405,000, respectively compared to the same periods in 2001. At June 30, 2002, non-performing assets totaled $4.2 million, or .80% of total assets, as compared to $3.2 million, or ..65% of total assets, at September 30, 2001. The Company's coverage ratio, which is the ratio of the allowance for loan losses to non-performing assets, was 53.6% and 68.4% at June 30, 2002 and September 30, 2001, respectively. The coverage ratio was adversely affected by the inclusion of three commercial real estate loans totaling $2.4 million on non-performing status during the second quarter of fiscal 2002. The Bank owns a 25% participation interest in two loans totaling $1.9 million which consist of loans secured by an 18-hole golf course and golf house, located in Avondale, Pennsylvania. The golf facility is fully operational and continues to generate revenues. However, The Company has incurred a represented share of expenses of approximately $110,000 for fiscal 2002. Management believes the expense of real estate operations will continue in the upcoming quarters in connection to the operation of the golf facility. The other participating loan of $495,000, which represents a 25% participating interest, is secured by a partially completed storage facility in Clifton Heights, Pennsylvania. The lead lender on all three loans is in the process of foreclosing on the loans. Based on recent appraisals and other factors, management presently believes the Bank has provided appropriate reserves for these properties. However, there can be no assurances that additions to such reserves will not be necessary in future periods. Management will continue to review its loan portfolio to determine the extent, if any, to which additional loss provisions may be deemed necessary. There can be no assurance that the allowance for loan losses will be adequate to cover losses which may in fact be realized in the future and that additional provisions for losses will not be required. NON-INTEREST INCOME. Non-interest income decreased $104,000, or 19.7%, to $425,000 for the three months ended June 30, 2002 as compared to the same period in 2001. The decrease for the three months ended June 30, 2002 was primarily due to a $70,000 decrease on the sale of assets and $42,000 increase in the cost of real estate operations. For the nine months ended June 30, 2002, non-interest income decreased $106,000 or 7.4% to $1.3 million as compared to the same period during the prior year. The decrease during the nine months ended June 30, 2002 was primarily a result of declines in the net gain on sale of loans and investment securities and increased expenses related to real estate operations partially offset by increases in service charges and other fees. NON-INTEREST EXPENSE. Non-interest expense increased $466,000, or 18.2%, during the three months ended June 30, 2002 as compared to the same period in 2001. Increases of $235,000, $26,000, $24,000 and $137,000 were incurred in salaries and employee benefits, professional fees, advertising and other non-interest expense, respectively. The increase in salaries and employee benefit expenses was related to both the effect of increased fair market value of the Company's common stock related to the ESOP expense as well as declines in asset values with respect to certain supplemental benefit plans which required additional accruals. In addition, compensation increased due to general salary increases and the hiring of additional personnel. Other non-interest expense increased primarily due to expenses relating to the workout of non-performing commercial real estate loans aggregating $2.4 million. For the nine months ended June 30, 2002, non-interest expense increased $987,000, or 13.2%, primarily due to increases of $384,000, $80,000, $79,000 and $325,000 in salaries and employee benefits, professional fees, advertising and other non-interest expense, respectively. The increase in salaries and employee benefits during the 2002 periods reflected normal salary and benefit expense increases as well as additional costs associated with branch expansion. The increase in other non-interest expense was primarily due to increases in workout expenses, bank service charges, and cash losses. INCOME TAX EXPENSE. Income tax expense increased $44,000 to $173,000 and $59,000 to $431,000 for the three and nine months ended June 30, 2002, respectively. The increases were the result of increases in income before income taxes as compared to the same periods in 2001. CRITICAL ACCOUNTING POLICIES In management's opinion, the most critical accounting policy impacting the Company's financial statements is the evaluation of the allowance for loan losses. Management carefully monitors the credit quality of the loan portfolio and makes estimates about the amount of credit losses that have been incurred at each financial statement date. Management evaluates the fair value of collateral supporting the impaired loans using independent appraisals and other measures of fair value. This process involves subjective judgments and assumptions and is subject to change based on factors that may be outside the control of the Company. LIQUIDITY AND CAPITAL RESOURCES. The Company's liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. The Company's primary sources of funds are deposits, amortization, prepayment and maturities of outstanding loans and mortgage-related securities, sales of loans, maturities of investment securities and other short-term investments, borrowing and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-related securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, the Company invests excess funds in overnight deposits and other short-term interest-earning assets that provide liquidity to meet lending requirements. The Company has been able to generate sufficient cash through its deposits as well as borrowings to satisfy its funding commitments. At June 30, 2002, the Company had short-term borrowings (due within one year or currently callable by the Federal Home Loan Bank of Pittsburgh ("FHLB") outstanding of $86.0 million, all of which consisted of advances from the FHLB. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a long-term basis, the Company maintains a strategy of investing in various lending products, mortgage-related securities and investment securities. The Company uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, fund loan commitments. At June 30, 2002, commitments outstanding for investment securities and approved loans amounted to $3.1 and $31.0 million, respectively. At the same date, commitments under unused lines of credit amounted to $16.4 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2002 totaled $98.9 million. Based upon its historical experience, management believes that a significant portion of maturing deposits will remain with the Company. The Company has not used, and has no intention to use, any significant off-balance sheet financing arrangements for liquidity purposes. The Company's financial instruments with off-balance sheet risk are limited to its obligations to fund loans to customers pursuant to existing commitments. In addition, the Company has not had, and has no intention to have, any significant transactions, arrangements or other relationships with any unconsolidated, limited purpose entities that could materially affect its liquidity or capital resources. The Company has not, and does not intend to, trade in commodity contracts. As of June 30, 2002, the Bank had regulatory capital that was in excess of applicable limits. The Bank is required under applicable federal banking regulations to maintain tangible capital equal to at least 1.5% of its adjusted total assets, core capital equal to at least 4.0% of its adjusted total assets and total capital to at least 8.0% of its risk-weighted assets. At June 30, 2002, the Bank had tangible capital and core capital equal to 7.9% of adjusted total assets and total capital equal to 16.2% of risk-weighted assets. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of the Company's asset and liability management policies, see "Management's Discussion and Analysis of Financial Condition and Results of Operation" in the Company's Annual Report on Form 10-K for the year ended September 30, 2001. The Company utilizes reports prepared by the Office of Thrift Supervision ("OTS") to measure interest rate risk. Using data from the Bank's quarterly thrift financial reports, the OTS models the net portfolio value ("NPV") of the Bank over a variety of interest rate scenarios. The NPV is defined as the present value of expected cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing off-balance sheet contracts. The model assumes instantaneous, parallel shifts in the U.S. Treasury Securities yield curve of 100 to 300 basis points, either up or down, and in 100 basis point increments. The interest rate risk analysis used by the OTS include an "Exposure Measure" or "Post-Shock" NPV ratio and a "Sensitivity Measure". The "Post-Shock" NPV ratio is the net present value as a percentage of assets over the various yield curve shifts. A low "Post-Shock" NPV ratio indicates greater exposure to interest rate risk and can result from a low initial NPV ratio or high sensitivity to changes in interest rates. The "Sensitivity Measure" is the decline in the NPV ratio, in basis points, caused by an increase or decrease in rates, whichever produces a larger decline. The following table sets forth the Bank's NPV as of June 30, 2002.
Net Portfolio Value Changes in Net Portfolio Rates in Dollar Percentage Value As a % Change in Basis Points Amount Change Change of Assets Percentage (1) ------------- ---------- ---------- ------------- ---------------- ----------------- (dollars in thousands) 300 $27,477 $(23,938) (46.56)% 5.60% (42.45)% 200 36,471 (14,945) (29.07) 7.25 (25.49) 100 44,982 (6,433) (12.51) 8.71 (10.48) 0 51,416 9.73 (100) 51,364 (51) (0.10) 9.60 (1.35)
(1) Based on the portfolio value of the Bank's assets in the base case scenario As of June 30, 2002, the Company's NPV was $51.4 million or 9.73% of the market value of assets. Following a 200 basis point increase in interest rates, the Company's "post shock" NPV was $36.4 million or 7.25% of the market value of assets. The change in the NPV ratio or the Company's sensitivity measure was (2.48)%. PART II Item 1. Legal Proceedings Not applicable Item 2. Changes in Securities and Use of Proceeds Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K Exhibit Description 99.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) EX-99.1 3 w63249exv99w1.txt CERTIFICATION OF CEO & CFO Exhibit 99-1 CERTIFICATION OF CHIEF EXECUTIVE AND CHIEF FINANCIAL OFFICERS Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), each of the undersigned hereby certifies in his respective capacity as an officer of First Keystone Financial, Inc. (the "Company") hereby that the Quarterly Report of the Company on Form 10-Q for the period ending June 30, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Company. FIRST KEYSTONE FINANCIAL, INC. Date: August 14, 2002 By: /s/ Donald S. Guthrie ---------------------- Donald S. Guthrie Chairman and Chief Executive Officer Date: August 14, 2002 By: /s/ Thomas M. Kelly -------------------- Thomas M. Kelly President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----