<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 0-25328
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
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK (PAR VALUE $.01 PER SHARE)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
As of December 16, 1996, the aggregate value of the 1,083,038 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
209,462 shares held by all directors and officers of the Registrant as a group,
was approximately $21.7 million. This figure is based on the last known trade
price of $20.00 per share of the Registrant's Common stock on December 16, 1996.
Number of shares of Common Stock outstanding as of December 16, 1996: 1,292,500
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part of
the Form 10-KSB into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
September 30, 1996 are incorporated into Parts II and III.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
<PAGE> 2
PART I.
Item 1. BUSINESS
GENERAL
First Keystone Financial, Inc. (the "Company") is a Pennsylvania
corporation and sole shareholder of First Keystone Federal Savings Bank (the
"Bank") which converted to the stock form of organization in January 1995. The
only significant assets of the Company are the capital stock of the Bank, the
Company's loans to its employee stock ownership plan, and the net conversion
proceeds retained by the Company. The business of the Company primarily consists
of the business of the Bank.
The Bank is a traditional, community oriented federal savings bank
emphasizing customer service and convenience. The Bank's primary business is to
attract deposits from the general public and investing those funds together with
other available sources of funds, such as borrowings, to originate loans. A
substantial portion of the Bank's deposits are comprised of core deposits which
amounted to $90.5 million or 41.3% of the Bank's total deposits at September 30,
1996. The Bank's primary lending emphasis has been, and continues to be, loans
secured by first and second liens on single-family (one-to-four units)
residences located in Delaware and Chester Counties, Pennsylvania and to a
lesser degree, Montgomery County, Pennsylvania and New Castle County, Delaware.
The Bank also lends on single family residences secured by first mortgages for
non-conforming jumbo loans and loans to credit impaired borrowers for sale in
the secondary market. To a lesser extent, the Bank also originates consumer
loans (consisting almost entirely of home equity loans and lines of credit),
loans secured by commercial real estate and multi-family (over four units)
residential properties, construction and land loans, commercial business and
other mortgage loans. The Bank originates mortgage loans for resale into the
secondary market while retaining for its portfolio adjustable-rate mortgage
loans and fixed-rate loans that complement the Bank's asset/liability
strategies. The Bank also sells, servicing released, originations of
non-conforming loans. Although the Bank has not purchased either whole loans or
loan participation interests in the past, depending on market conditions and
portfolio needs, the Bank may consider purchasing loans and participation
interests in the future. The Bank also originates, due to their shorter terms,
adjustable or variable interest rates, higher yields and the Bank's analysis
that the markets have become more stable, loans secured by commercial real
estate properties as well as residential construction loans in the Bank's market
area.
The Bank's originations of consumer loans has continued to increase as a
direct result of the Bank's emphasis on developing home equity type loan
products. Consumer loans, which consist primarily of home equity loans and home
equity lines of credit, amounted to $24.0 million or 13.5% of the total loan
portfolio at September 30, 1996 as compared to $21.1 million or 12.6% at
September 30, 1995.
In addition to its deposit gathering and lending activities, the Bank
invests in mortgage-backed and mortgage-related securities, substantially all of
which are issued or guaranteed by U.S. Government agencies and government
sponsored enterprises, as well as U.S. Treasury and federal government agency
obligations and other investment securities. At September 30, 1996, the Bank's
mortgage-related securities (including mortgage-related securities available for
sale) amounted to $83.4 million, or 28.4% of the Company's total assets, and
investment securities amounted to $16.5 million, or 5.6% of total assets.
<PAGE> 3
MARKET AREA
The Bank's primary market area consists of Delaware County and to a lesser
extent the contiguous counties of Chester and Montgomery Counties, Pennsylvania
and New Castle County, Delaware. Delaware County is part of the Philadelphia
Metropolitan Statistical Area ("MSA") which includes, besides Delaware County,
Bucks, Chester, Montgomery and Philadelphia Counties (as well as three counties
in New Jersey). The Philadelphia area economy is typical of many large northeast
and midwest cities where the traditional manufacturing based economy has
declined to a certain degree and has been replaced with service sector growth.
As a result of such growth, the Philadelphia MSA's economic diversity has
broadened and employment in the area is derived from a number of different
employment sectors. In particular, Delaware County has experienced the
development of companies providing products and services for the health care
market such as Crozer/Keystone Health System, Wyeth-Ayerst Labs, Inc. and Mercy
Health Corp.
Philadelphia's central location in the northeast corridor, its well
educated and skilled population base, infrastructure and other factors has made
the Bank's market area attractive to many large corporate employers. Such
employers include Boeing, UNISYS, CIGNA, Bell Atlantic, ALCO, Sun Company and
many others. There are also a number of Fortune 500 companies headquartered in
the region surrounding the Philadelphia MSA including E.I. DuPont, Bethlehem
Steel, Union Pacific, Hercules and others.
Delaware County has experienced somewhat slower population growth than the
Philadelphia MSA, although the growth rates in the outlying areas of Delaware
County have been growing at a rate above that of the Philadelphia MSA. The
annual population growth rate in Delaware County has averaged approximately .2%
since 1990 and is not expected to increase materially during the rest of the
decade. By comparison, median household income in Delaware County is above that
for the Philadelphia MSA (approximately $40,000 as compared to approximately
$32,600 in the 1990 census). Likewise, median home values in Delaware County
were approximately $113,200 as compared to approximately $100,800 for the
Philadelphia MSA. Unemployment rates in the Delaware County have been below
those experienced by the Philadelphia MSA but higher than some of the other
counties comprising the MSA. The average annual unemployment rate for 1996 in
Delaware County was 4.6% as compared to 5.2% for the Philadelphia MSA.
2
<PAGE> 4
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Company's asset and liability management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given the Company's business
focus, operating environment, capital and liquidity requirements and performance
objectives, establish prudent asset concentration guidelines and manage the risk
consistent with Board approved guidelines. Through such management, the Company
seeks to reduce both the vulnerability of its operations to changes in interest
rates and to manage the ratio of interest-rate sensitive assets to interest-rate
sensitive liabilities within specified maturities or repricing dates. The
Company's actions in this regard are taken under the guidance of the
Asset/Liability Committee ("ALCO"), which is chaired by the Chief Financial
Officer and comprised of members of the Company's senior and middle management.
The ALCO meets quarterly to review, among other things, the sensitivity of the
Company's assets and liabilities to interest rate changes, the book and market
values of assets and liabilities, unrealized gains and losses, purchase and sale
activity and maturities of investments and borrowings. In connection therewith,
the ALCO generally reviews the Company's liquidity, cash flow needs, maturities
of investments, deposits and borrowings, current market conditions and interest
rates. In addition, the pricing of the Company's residential loans and deposits
is reviewed at least weekly while the pricing of loans originated for sale in
the secondary market is reviewed daily. The ALCO reports to the Company's Board
of Directors on a quarterly basis.
The Company's primary ALCO monitoring tool is asset/liability simulation
models, which are prepared on a quarterly basis and are designed to capture the
dynamics of balance sheet, rate and spread movements and to quantify variations
in net interest income under different interest rate environments. The Company
also utilizes market value analysis, which addresses the change in equity value
arising from movements in interest rates. The market value of equity is
estimated by valuing the Company's assets and liabilities. The extent to which
assets have gained or lost value in relation to the gains or losses of
liabilities determines the appreciation or depreciation in equity on a market
value basis. Market value analysis is intended to evaluate the impact of
immediate and sustained shifts of the current yield curve upon the market value
of the current balance sheet.
A more conventional but limited ALCO monitoring tool involves an analysis
of the extent to which assets and liabilities are "interest rate sensitive" and
measures an institution's interest rate sensitivity "gap." An asset or liability
is said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity "gap"
is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds interest
rate sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, while a positive gap would
tend to result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to affect net interest income
adversely. While a conventional gap measure may be useful, it is limited in its
ability to predict trends in future earnings. It makes no presumptions about
changes in prepayment tendencies, deposit or loan maturity preferences or
repricing time lags that may occur in response to a change in the interest rate
environment.
3
<PAGE> 5
The following table summarizes the anticipated maturities or repricing of
the Bank's interest-earning assets and interest-bearing liabilities as of
September 30, 1996, based on the information and assumptions set forth in the
notes.
<TABLE>
<CAPTION>
More Than More Than
Within Six to One Year Three
Six Twelve to Three Years to
Months Months Years Five Years
------ ------ ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable(2):
Mortgage loans:
Residential $ 28,589 $ 19,098 $ 29,759 $ 14,192
Commercial and multi-family 4,040 3,604 1,256 1,197
Construction and land 11,314
Consumer and commercial
business loans 6,326 2,177 7,091 5,272
-------- -------- -------- --------
Total loans receivable 50,269 24,879 38,106 20,661
Mortgage-related securities(3) 31,732 7,205 23,945 18,621
Assets held for sale 2,447
Investment securities(4) 1,000 1,492 1,125
Interest-earning deposits 9,824
-------- -------- -------- --------
Total interest-earning assets $ 95,272 $ 33,576 $ 63,176 $ 39,282
======== ======== ======== ========
Interest-bearing liabilities:
Deposits(5) $ 66,688 $ 55,590 $ 71,528 $ 25,399
FHLB advances 30,900 10,000 5,000 350
-------- -------- -------- --------
Total interest-bearing liabilities $ 97,588 $ 65,590 $ 76,528 $ 25,749
======== ======== ======== ========
Excess (deficiency) of interest-
earning assets over interest-bearing
liabilities $ (2,316) $(32,014) $(13,352) $ 13,533
======== ======== ======== ========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities $ (2,316) $(34,330) $(47,682) $(34,149)
======== ======== ======== ========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percentage of
total assets (.79)% (11.67)% (16.21)% (11.61)%
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Over
Five
Years Total
----- -----
<C> <C>
Interest-earning assets(1):
Loans receivable(2):
Mortgage loans:
Residential $ 29,166 $120,804
Commercial and multi-family 977 11,074
Construction and land 11,314
Consumer and commercial
business loans 2,256 23,122
-------- --------
Total loans receivable 32,399 166,314
Mortgage-related securities(3) 1,929 83,432
Assets held for sale 2,447
Investment securities(4) 15,151 18,768
Interest-earning deposits 9,824
-------- --------
Total interest-earning assets $ 49,479 $280,785
======== ========
Interest-bearing liabilities:
Deposits(5) $ $219,205
FHLB advances 490 46,740
-------- --------
Total interest-bearing liabilities $ 490 $265,945
======== ========
Excess (deficiency) of interest-
earning assets over interest-bearing
liabilities $ 48,989 $ 14,840
======== ========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities $ 14,840
========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percentage of
total assets 5.04%
========
</TABLE>
(footnotes on following page)
4
<PAGE> 6
(1) Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
due, and fixed-rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization, in each case as
adjusted to take into account estimated prepayments based on assumptions
estimating the prepayments in the expected interest rate environment.
Annual prepayment speeds for loans range from 5% to 15%. Annual prepayment
speeds for mortgage-related securities and investment securities range from
9% to 15%.
(2) Balances have been reduced for non-accruing loans, which amounted to $5.4
million at September 30, 1996 and, with respect to construction loans, the
amount of loans in process.
(3) Includes mortgage-related securities available for sale.
(4) Includes $2.3 million of stock in the FHLB of Pittsburgh.
(5) Management believes that the assumptions used by it to evaluate the
vulnerability of the Bank's operations to changes in interest rates are
conservative and consider them reasonable. However, the interest rate
sensitivity of the Bank's assets and liabilities as portrayed in the table
above could vary substantially if different assumptions were used or actual
experience differs from the assumptions used in the table. Passbook and
statement savings accounts are assumed to decay at a rate of 30.0%, 30.0%,
and 40.0% in the first three years, respectively. MMDA and NOW accounts are
assumed to decay at a rate of 75% and 25%, in one year or less and over one
year, respectively. The percentages used in the first year are equally
divided over the two six month periods. First Keystone's passbook,
statement savings, MMDA and NOW accounts are generally subject to immediate
withdrawal. However, management considers a portion of these deposits to be
core deposits having significantly longer effective maturities based upon
the Bank's retention of such deposits in changing interest rate
environments.
5
<PAGE> 7
Lending Activities
Loan Portfolio Composition. The following table sets forth the composition
of the Bank's loan portfolio by type of loan at the dates indicated (excluding
loans held for sale).
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
1996 1995 1994
---------------- ---------------- ---------------------
Amount % Amount % Amount %
-------- ------ ------- ------ -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family $122,270 68.68% $115,225 69.01% $105,728 69.77%
Multi-family and commercial 11,129 6.25 11,789 7.06 12,700 8.38
Construction and land 17,682 9.93 16,343 9.79 13,805 9.11
------- ------- ------- ------ ------- ------
Total real estate loans 151,081 84.86 143,357 85.86 132,233 87.26
------- ------- ------- ------ ------- ------
Consumer:
Home equity loans and lines
of credit 20,444 11.48 18,229 10.92 15,603 10.30
Deposit 457 .26 350 .21 374 .25
Education 917 .52 1,010 .60 697 .46
Other 2,212 1.24 1,491 .89 332 .22
------- ------- ------- ------ ------- -------
Total consumer loans 24,030 13.50 21,080 12.62 17,006 11.23
------- ------- ------- ------ ------- -------
Commercial business loans (1) 2,923 1.64 2,533 1.52 2,288 1.51
------- ------- ------- ------ ------- -------
Total loans receivable 178,034 100.00% 166,970 100.00% 151,527 100.00%
------- ====== ------- ====== ------- ======
Less:
Loans in process (construction 6,368 6,070 6,698
and land)
Deferred loan origination fees
and discounts 1,512 1,411 1,063
Allowance for loan losses 2,624 1,487 1,540
------- ------- -------
10,504 8,968 9,301
------- ------- -------
Total loans receivable, net $167,530 $158,002 $142,226
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------
1993 1992
--------------------- ---------------------
Amount % Amount %
--------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Real estate loans:
Single-family $107,999 74.72% $116,380 74.39%
Multi-family and commercial 13,069 9.04 13,873 8.87
Construction and land 11,675 8.08 17,369 11.10
------ ------ ------- ------
Total real estate loans 132,743 91.84 147,622 94.36
------- ------ ------- ------
Consumer:
Home equity loans and lines
of credit 7,995 5.53 6,824 4.36
Deposit 477 .33 460 .29
Education 669 .46 650 .41
Other 39 .04 27 .02
------- ------- ------- -------
Total consumer loans 9,180 6.36 7,961 5.08
------- ------- ------- -------
Commercial business loans (1) 2,608 1.80 870 .56
------- ------- ------- -------
Total loans receivable 144,531 100.00% 156,453 100.00%
------- ======= -------- =======
Less:
Loans in process (construction 4,984 5,291
and land)
Deferred loan origination fees
and discounts 1,096 1,273
Allowance for loan losses 1,265 2,150
------- -------
7,345 8,714
------- -------
Total loans receivable, net $137,186 $147,739
======= =======
</TABLE>
- -----------------------------
(1) Consists as of September 30, 1996 of $1.6 million and $2.2 million of
consumer and commercial business loans, respectively purchased from the
Bennett Funding Companies. See "-Asset Quality - Non-Performing Assets."
6
<PAGE> 8
Contractual Principal Repayments. The following table sets forth the
scheduled contractual maturities of the Bank's loans held to maturity at
September 30, 1996. Demand loans, loans having no stated schedule of repayments
and no stated maturity and overdraft loans are reported as due in one year or
less. The amounts shown for each period do not take into account loan
prepayments and normal amortization of the Bank's loan portfolio held to
maturity.
<TABLE>
<CAPTION>
Real Estate Loans
---------------------------------------------------------
Multi-family
and Construction
Single-family Commercial and Land Total
------------- ---------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Amounts due in:
One year or less $ 5,618 $ 488 $11,942 $ 18,048
After one year through three years 12,429 1,111 4,922 18,462
After three years through five years 8,897 1,319 818 11,034
After five years through ten years 21,961 3,822 25,783
After ten years through twenty
years 43,198 4,389 47,587
Over twenty years 30,167 30,167
-------- ------- ------- --------
Total(1) $122,270 $11,129 $17,682 $151,081
======== ======= ======= ========
Interest rate terms on amounts due after one year:
Fixed $ 70,113
Adjustable 62,920
--------
Total(1) $133,033
========
</TABLE>
<TABLE>
<CAPTION>
Consumer and
Commercial
Business Loans Total
---------------- ----------------
<S> <C> <C>
Amounts due in:
One year or less $ 8,424 $ 26,472
After one year through three years 6,281 24,743
After three years through five years 5,088 16,122
After five years through ten years 4,936 30,719
After ten years through twenty
years 2,224 49,811
Over twenty years 30,167
-------- --------
Total(1) $ 26,953 $178,034
======== ========
Interest rate terms on amounts due after one year:
Fixed $ 18,529 $ 88,642
Adjustable 62,920
-------- --------
Total(1) $ 18,529 $151,562
======== ========
</TABLE>
- -----------------------------
(1) Does not include adjustments relating to loans in process, allowances for
loan losses and deferred fee income.
7
<PAGE> 9
Scheduled contractual amortization of loans does not reflect the expected
term of the Bank's loan portfolio. The average life of loans is substantially
less than their contractual terms because of prepayments and due-on-sale
clauses, which give the Bank the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase when current mortgage loan
rates are higher than rates on existing mortgage loans and, conversely, decrease
when rates on existing mortgage loans are lower than current mortgage loan rates
(due to refinancings of adjustable-rate and fixed-rate loans at lower rates).
Under the latter circumstances, the weighted average yield on loans decreases as
higher yielding loans are repaid or refinanced at lower rates.
Loan Origination, Purchase and Sales Activity. The following table shows
the loan origination, purchase and sale activity of the Bank during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Gross loans at beginning of period(1) $167,027 $151,695 $145,776
-------- -------- --------
Loan originations for investment:
Real estate:
Residential 23,766 24,562 19,163
Commercial and multi-family 399 925
Construction 15,875 16,523 13,970
------ ------- -------
Total real estate loans originated
for investment 40,040 41,085 34,058
Consumer 9,738 9,063 11,540
Commercial business 875 2,872 426
------ ------- -------
Total loans originated for
investment 50,653 53,020 46,024
Loans originated for resale 30,239 5,501 27,996
------- ------- ------
Total originations 80,892 58,521 74,020
------- ------- -------
Deduct:
Principal loan repayments and
prepayments (37,811) (36,077) (38,745)
Transferred to real estate owned (1,768) (507) (283)
Loans sold in secondary market (27,849) (6,605) (29,073)
------- ------ -------
Subtotal (67,428) (43,189) (68,101)
------- ------- -------
Net increase in loans(1) 13,464 15,332 5,919
-- ------ ------ -----
Gross loans at end of period(1) $180,491 $167,027 $151,695
======= ======= =======
</TABLE>
- ------------------------------
(1) Includes loans held for sale of $2.4 million, $57,000 and $168,000 at
September 30, 1996, 1995 and 1994, respectively.
8
<PAGE> 10
The lending activities of the Bank are subject to written underwriting
standards and loan origination procedures established by the Bank's Board of
Directors and management. Applications for all types of loans are taken at all
of the Bank's branch offices by the branch manager or other designated loan
officers. Applications for single-family residential mortgage loans also are
obtained through loan originators who are employees of the Bank. The Bank's loan
originators will take loan applications outside of the Bank's offices at the
customer's convenience and are compensated on a commission basis. The Mortgage
Lending Department supervises the process of obtaining credit reports,
appraisals and other documentation involved with a loan. The Bank generally
requires that a property appraisal be obtained in connection with all new
mortgage loans. Property appraisals generally are performed by an independent
appraiser from a list approved by the Bank's Board of Directors. The Bank
requires that title insurance (other than with respect to home equity loans) and
hazard insurance be maintained on all security properties and that flood
insurance be maintained if the property is within a designated flood plain.
Residential mortgage loan applications are primarily developed from
referrals from real estate brokers and builders, existing customers and walk-in
customers. Residential mortgage loans also are originated through
correspondents. Commercial and multi-family real estate loan applications are
obtained primarily from previous borrowers, direct solicitations by Bank
personnel, as well as referrals. Consumer loans originated by the Bank are
obtained primarily through existing and walk-in customers who have been made
aware of the Bank's programs by advertising and other means.
Applications for residential mortgage loans which are originated for resale
in the secondary market or loans designated for portfolio retention that conform
to the requirements for resale into the secondary market and do not exceed
Federal National Mortgage Association ("FNMA")/Federal Home Loan Mortgage
Corporation ("FHLMC") limits are approved by the Bank's Chief Lending Officer or
in his absence, by the Senior Loan Underwriter or Loan Committee (a committee
comprised of three directors and the Bank's Chief Lending Officer). All other
first mortgage loans (commercial and multi-family residential real estate and
construction loans) and residential mortgage loans in excess of FNMA/FHLMC
maximum amounts, currently $203,150, but less than $500,000 must be approved by
the Loan Committee. All first mortgage loans in excess of $500,000 must be
approved by the Board or the Executive Committee thereof. All mortgage loans
which do not require approval by the Bank's Board of Directors are submitted to
the Board at its next meeting for review and ratification. Home equity loans and
lines of credit up to $50,000 can be approved by the Chief Lending Officer, the
Vice President of Construction Loans and the Senior Loan Underwriter. Loans in
excess of such amount must be approved by the Loan Committee.
Applications for non-conforming residential real estate loans, submitted by
correspondents and sold servicing released into the secondary market, are
packaged and submitted for pre-approval to the buyer prior to closing. The Bank,
from time to time, also originates non-conforming loans in accordance with the
buyers' underwriting standards and sells them in bulk into the secondary market.
Single-Family Residential Loans. Substantially all of the Bank's
single-family residential mortgage loans consist of conventional loans.
Conventional loans are loans that are neither insured by the Federal Housing
Administration or partially guaranteed by the Department of Veterans Affairs.
The vast majority of the Bank's single-family residential mortgage loans are
secured by properties located in Pennsylvania, primarily in the Delaware and
Chester Counties, and are originated under terms and documentation which permit
their sale to the FHLMC or FNMA. The Bank, consistent with its asset/liability
management strategies, sells some of its newly originated longer term fixed-rate
residential mortgage loans and to a limited degree, existing longer term
fixed-rate residential mortgage loans while retaining adjustable-rate mortgage
loans and shorter term fixed-rate residential mortgage loans. See "-
Mortgage-Banking Activities."
The single-family residential mortgage loans offered by the Bank currently
consist of fixed-rate loans, including bi-weekly and balloon loans, and
adjustable-rate loans. Fixed-rate loans generally have maturities ranging from
15 to 30 years and are fully amortizing with monthly loan payments sufficient to
repay the total amount of the loan with interest by the end of the loan term.
The Bank's fixed-rate loans are originated under terms, conditions and
documentation which permit them to be sold to U.S. Government-sponsored
agencies, such as the FHLMC and the FNMA, and other investors in the secondary
mortgage market. The Bank also offers bi-weekly loans under the terms of which
the borrower makes payments every two weeks. Although such loans have a 30 year
amortization schedule, due to the bi-weekly payment schedule, such loans repay
substantially more rapidly than a standard monthly
9
<PAGE> 11
amortizing 30-year fixed-rate loan. The Bank also offers five and seven year
balloon loans which provide that the borrower can conditionally renew the loan
at a to-be-determined rate for the remaining 25 or 23 years, respectively, of
the amortization period. At September 30, 1996, $69.4 million, or 56.7%, of the
Bank's single-family residential mortgage loans were fixed-rate loans, including
$21.3 million of bi-weekly fixed-rate residential mortgage loans.
The adjustable-rate loans currently offered by the Bank have interest rates
which adjust every one or three years in accordance with a designated index,
such as U.S. Treasury obligations, adjusted to a constant maturity ("CMT"), plus
a stipulated margin. The Bank's adjustable-rate single-family residential real
estate loans generally have a cap of 2% on any increase or decrease in the
interest rate at any adjustment date, and a cap of 6% over the life of the loan.
In order to increase acceptance of adjustable-rate loans, the Bank recently has
been originating loans which are fixed for a period of ten years and then
convert to a one-year adjustable-rate loan. The Bank's adjustable-rate loans
require that any payment adjustment resulting from a change in the interest rate
of an adjustable-rate loan be sufficient to result in full amortization of the
loan by the end of the loan term and, thus, do not permit any of the increased
payment to be added to the principal amount of the loan, or so-called negative
amortization. Although the Bank does offer adjustable-rate loans with initial
rates below the fully indexed rate, such loans are underwritten using methods
approved by FHLMC and FNMA which allow borrowers to be qualified at 2% above the
discounted loan rate. At September 30, 1996, $52.9 million or 43.3% of the
Bank's single-family residential mortgage loans were adjustable-rate loans.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
increase the loan payment by the borrower increases to the extent permitted by
the terms of the loan, thereby increasing the potential for default. Moreover,
as with fixed-rate loans, as interest rates increase, the marketability of the
underlying collateral property may be adversely affected by higher interest
rates. The Bank believes that these risks, which have not had a material adverse
effect on the Bank to date because of the generally stable interest rate
environment in recent years, generally are less than the risks associated with
holding fixed-rate loans in an increasing interest rate environment.
For conventional residential mortgage loans held in the portfolio and also
for those loans originated for sale in the secondary market, the Bank's maximum
loan-to-value ratio is 95%, and is based on the lesser of sales price or
appraised value. On all loans with a loan-to-value ratio of over 80%, private
mortgage insurance is required in an amount which reduces the Bank's exposure to
75%.
Commercial and Multi-Family Residential Real Estate Loans. The Bank has
maintained a relative constant investment in commercial and multi-family lending
for many years. The Bank continues to maintain its involvement in commercial
real estate lending and intends to moderately increase the amount of such loans
in the Bank's portfolio. Such loans are being extended primarily to small and
medium-sized businesses located in the Bank's primary market area, a portion of
the market that the Bank believes has been underserved in recent years. Loans
secured by commercial and multi-family real estate amounted to $11.1 million, or
6.3%, of the Bank's total loan portfolio, at September 30, 1996. The Bank's
commercial multi-family residential real estate loans are secured by
professional office buildings, small retail establishments, warehouses and
apartment buildings (with 36 units or less) located in the Bank's market area.
The Bank's multi-family residential and commercial real estate loans
generally are either one-year or three-year adjustable-rate loans indexed to the
CMT plus a margin. Generally, fees of 1% to 3% of the principal loan balances
are charged to the borrower upon closing. Although terms for multi-family
residential and commercial real estate loans may vary, the Bank's underwriting
standards generally provide for terms of up to 25 years with amortization of
principal over the term of the loan and loan-to-value ratios of not more than
75%. Generally, the Bank obtains personal guarantees of the principals of the
borrower as additional security for any commercial real estate and multi-family
residential loans and requires that the borrower have at least a 25% equity
investment in any such property.
The Bank evaluates various aspects of commercial and multi-family
residential real estate loan transactions in an effort to mitigate risk to the
extent possible. In underwriting these loans, consideration is given to the
stability of the property's cash flow history, future operating projections,
current and projected occupancy, position in the market, location and physical
condition. In recent periods, the Bank has also generally imposed a debt
coverage ratio (the ratio of net cash from operations before payment of debt
service to debt service) of not less than 110%. The
10
<PAGE> 12
underwriting analysis also includes credit checks and a review of the financial
condition of the borrower and guarantor, if applicable. An appraisal report is
prepared by a state-licensed and certified appraiser (generally MAI qualified)
commissioned by the Bank to substantiate property values for every commercial
real estate and multi-family loan transaction. All appraisal reports are
reviewed by the Bank prior to the closing of the loan.
Multi-family and commercial real estate lending entails different and
significant risks when compared to single-family residential lending because
such loans often involve large loan balances to single borrowers and because the
payment experience on such loans is typically dependent on the successful
operation of the project or the borrower's business. These risks can also be
significantly affected by supply and demand conditions in the local market for
apartments, offices, warehouses or other commercial space. The Bank attempts to
minimize its risk exposure by limiting such lending to proven developers/owners,
only considering properties with existing operating performance which can be
analyzed, requiring conservative debt coverage ratios, and periodically
monitoring the operation and physical condition of the collateral.
Construction Loans. Substantially all of the Bank's construction loans have
consisted of loans to construct single-family properties extended either to
individuals or to selected developers with whom the Bank is familiar to build
such properties on a pre-sold or limited speculative basis. With respect to
loans to individuals, such loans have a maximum term of six months, have
variable rates of interest based upon the prime rate published in the Wall
Street Journal ("Prime Rate") plus a margin, have loan-to-value ratios of 80% or
less of the appraised value upon completion and generally do not require the
amortization of principal during the term. Upon completion of construction, the
loans convert to permanent residential mortgage loans.
The Bank also provides construction loans and lines of credit to
developers. The majority of such loans consist of loans to selected local
developers with whom the Bank is familiar to build single-family dwellings on a
pre-sold or, to a significantly lesser extent, on a speculative basis. The Bank
generally limits to two the number of unsold units which a developer may have
under construction in a project. Such loans generally have terms of 24 months or
less, have maximum loan-to-value ratios of 75% of the appraised value upon
completion and generally do not require the amortization of the principal during
the term. The loans are made with floating rates of interest based on the Prime
Rate plus a margin adjusted on a monthly basis. The Bank also receives
origination fees, which generally range from 1.0% to 3.0% of the commitment. The
borrower is required to fund a portion of the project's costs, the exact amount
determined on a case-by-case basis. Loan proceeds are disbursed in stages after
inspections of the project indicate that such disbursements are for costs
already incurred and which have added to the value of the project. Only interest
payments are due during the construction phase and the Bank may provide the
borrower with an interest reserve from which it can pay the stated interest due
thereon. The Bank's construction loans include loans to the developers to
acquire the necessary land, develop the site and construct the residential units
("ADC loans"). At September 30, 1996, construction loans included $851,000 of
ADC loans. At September 30, 1996, Paine Webber Group Inc. residential
construction loans totalled $10.6 million, or 5.9%, of the total loan portfolio,
of which $8.8 million consisted of construction loans to developers.
The Bank also will originate ground or land loans, both to individuals to
purchase a building lot on which he intends to build his primary residence, as
well as to developers to purchase lots to build speculative homes at a later
date. Such loans have terms of 36 months or less with a maximum loan-to-value
ratio of 75% of the lower of appraised value or sale price with respect to loans
to individuals and 65% of the lower of appraised value or sales price with
respect to loans to developers. The loans are made with floating rates based on
the Prime Rate plus a margin. The Bank also receives origination fees, which
generally range between 1.0% and 3.0% of the loan amount. At September 30, 1996,
land loans (including loans to acquire and develop land) totalled $7.1 million
or 4.0% of the total loan portfolio.
Prior to making a commitment to fund a construction loan, the Bank requires
an appraisal of the property by an independent state-licensed and qualified
appraiser approved by the Board of Directors. In addition, during the term of
the construction loan, the project is inspected by an independent inspector.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost
11
<PAGE> 13
(including interest) of construction. During the construction phase, a number of
factors could result in delays and cost overruns. If the estimate of value
proves to be inaccurate, the Bank may be confronted, at or prior to the maturity
of the loan, with a project, when completed, having a value which is
insufficient to assure full repayment. Loans on lots may run the risk of adverse
zoning changes, environmental or other restrictions on future use.
Consumer Lending Activities. The Bank offers consumer loans in order to
provide a full range of retail financial services to its customers. At September
30, 1996, $24.0 million, or 13.5%, of the Bank's total loan portfolio was
comprised of consumer loans. The Bank originates substantially all of such loans
in its primary market area.
The largest component of the Bank's consumer loan portfolio consists of
home equity loans and home equity lines of credit (a form of revolving credit),
both of which are secured by the underlying equity in the borrower's primary
residence. Home equity loans are amortizing loans with fixed interest rates and
maximum terms of 15 years while equity lines of credit have adjustable interest
rates indexed to the Prime Rate. Generally home equity loans or home equity
lines do not exceed $100,000. The Bank's home equity loans and lines of credit
generally require combined loan-to-value ratios of 80% or less. At September 30,
1996, home equity loans amounted to $20.4 million, or 11.5%, of the Bank's total
loan portfolio.
At September 30, 1996, the remaining portion of the Bank's consumer loan
portfolio was comprised of education, deposit and other consumer loans. At
September 30, 1996, the Bank had $917,000 or .52% of education loans, all of
which were underwritten to conform with the standards of the Pennsylvania Higher
Education Agency. Deposit loans and other consumer loans totalled $2.7 million,
or 1.5%, of the Bank's total loan portfolio at September 30, 1996. In April,
1995 the Bank introduced their own credit card program. The credit cards were
offered to only the Bank's most creditworthy customers. At September 30, 1996,
these loans totalled $465,000 or .26% of the total loan portfolio. Consumer
loans also included certain consumer leases purchased from the Bennett Funding
Group of $1.6 million. See "-Asset Quality - Non-Performing Assets" for a
discussion of the Bank's non-performing consumer loans.
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. These risks are not as prevalent in the case of the
Bank's consumer loan portfolio, however, because a high percentage of the
portfolio is comprised of home equity loans and home equity lines of credit
which are secured by real estate and underwritten in a manner such that they
result in a lending risk which is substantially similar to single-family
residential loans.
Commercial Business Loans. At September 30, 1996, lease financing
receivables amounted to $2.2 million or 1.2% of the Bank's total loan portfolio.
The remainder of commercial business loans consist of a limited number of
commercial lines of credit secured by real estate. A majority of such portfolio
consisted of office equipment and other leases purchased from the Bennett
Funding Group, a leasing company located in Syracuse, New York. Such lines
totalled $763,000 or .43% of the Bank's total loan portfolio at September 30,
1996. See "-Asset Quality - Non- Performing Assets" for a discussion of the
Bank's non-performing commercial business loans.
The Bank is in the process of developing a commercial business lending policy
and procedures for small businesses located in the Bank's primary market area.
The Bank is expected to moderately grow this portfolio in the coming year.
Mortgage-Banking Activities. Due to customer preference for fixed-rate
loans, especially during the stable mortgage interest rate environment in 1996
and 1995, the Bank has continued to originate fixed-rate loans. Long term,
generally 30 years, fixed rate loans not taken into portfolio for
asset/liability purposes are sold into the secondary market. In addition, the
Bank has developed a product for sale in the secondary market for non-conforming
jumbo and impaired credit loans. The Bank sold a substantial amount of the
long-term 30 year, fixed-rate conforming and non-conforming mortgage loans
originated during fiscal 1996 and 1994 and, to a lesser extent, during fiscal
1995. The Bank's net gain on sales of mortgage loans amounted to $209,000,
$53,000 and $350,000 during the years ended September 30, 1996, 1995 and 1994,
respectively. Due to the general increases in rates in fiscal 1995, mortgage
originations declined significantly for both the Bank and the mortgage industry.
The development of non-conforming loan products, whose loan rates generally do
not fluctuate during the interest rate
12
<PAGE> 14
cycles, should smooth out originations over various interest rate cycles. The
Bank had $2.4 million and $57,000 of mortgage loans held for sale at September
30, 1996 and 1995, respectively.
The Bank's conforming mortgage loans sold to others are sold, generally
with servicing retained, on a loan-by-loan basis primarily to the FHLMC and the
FNMA. A period of less than five days generally lapses between the closing of
the loan by the Bank and its purchase by the investor. Mortgages with
established interest rates generally will decrease in value during periods of
increasing interest rates. Accordingly, fluctuations in prevailing interest
rates may result in a gain or loss to the Bank as a result of adjustments to the
carrying value of loans held for sale or on sale of loans. The Bank attempts to
protect itself from these market fluctuations through the use of forward
commitments at the time of the rate lock-in by the borrower. These commitments
are mandatory delivery contracts with FHLMC and FNMA within a certain time frame
and within certain dollar amounts and a price determined at the commitment date.
Market risk does exist as non-refundable points paid by the borrower may not be
sufficient to offset fees associated with closing the forward commitment
contract. Non-conforming mortgage loans sold to others are sold, servicing
released, on a loan-by-loan basis and are generally pre-approved by the buyer
prior to closing.
Borrowers are generally charged an origination fee, which is a percentage
of the principal balance of the loan. In accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases," the various fees received by the Bank in
connection with the origination of loans are deferred and amortized as a yield
adjustment over the lives of the related loans using the interest method.
However, when such loans are sold, the remaining unamortized fees (which is all
or substantially all of such fees due to the relatively short period during
which such loans are held) are recognized on the sale of loans held for sale.
The Bank, for conforming loan products, generally retains the servicing on
all loans sold to others. In addition, the Bank services substantially all of
the loans which it retains in portfolio. Loan servicing includes collecting and
remitting loan payments, accounting for principal and interest, making advances
to cover delinquent payments, making inspections as required of mortgaged
premises, contacting delinquent mortgagors, supervising foreclosures and
property dispositions in the event of unremedied defaults and generally
administering the loans. Funds that have been escrowed by borrowers for the
payment of mortgage-related expenses, such as property taxes and hazard and
mortgage insurance premiums, are maintained in noninterest-bearing accounts at
the Bank.
13
<PAGE> 15
The following table presents information regarding the loans serviced by
the Bank for others at the dates indicated. Substantially all the loans were
secured by properties in Pennsylvania. A small percentage of the loans are
secured by properties located in Delaware, Maryland and New Jersey.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loans originated by the Bank
and serviced for:
FNMA $ 5,817 $ 6,513 $ 7,612
FHLMC 121,029 127,831 132,980
Others 383 293 312
-------- -------- --------
Total loans serviced for others $127,229 $134,637 $140,904
======== ======== ========
</TABLE>
The Bank receives fees for servicing mortgage loans, which generally amount
to 0.25% per annum on the declining principal balance of mortgage loans. Such
fees serve to compensate the Bank for the costs of performing the servicing
function. Other sources of loan servicing revenues include late charges. For
years ended September 30, 1996, 1995 and 1994, the Bank earned gross fees of
$331,000, $357,000 and $375,000, respectively, from loan servicing. The Bank
retains a portion of funds received from borrowers on the loans it services for
others in payment of its servicing fees received on loans serviced for others.
In July 1994, the Bank acquired the servicing rights related to $25.0 million of
single-family residential mortgage loans for $337,000. Such loans consist
primarily of long-term, fixed-rate loans secured by owner occupied properties
located in Eastern Pennsylvania.
Loans-to-One Borrower Limitations. Regulations impose limitations on the
aggregate amount of loans that a savings institution could make to any one
borrower, including related entities. Under such regulations, the permissible
amount of loans-to-one borrower follows the national bank standard for all loans
made by savings institutions, which generally does not permit loans-to-one
borrower to exceed 15% of unimpaired capital and surplus. Loans in an amount
equal to an additional 10% of unimpaired capital and surplus also may be made to
a borrower if the loans are fully secured by readily marketable securities. At
September 30, 1996, the Bank's five largest loans or groups of loans-to-one
borrower, including related entities, ranged from an aggregate of $1.1 million
to $3.8 million (loans to Bennett Funding Group - See "-Asset Quality -
Non-Performing Assets") , and the Bank's loans-to-one borrower limit was $3.8
million at such date.
ASSET QUALITY
General. As a part of the Bank's efforts to improve its asset quality, it
has developed and implemented an asset classification system. All of the Bank's
assets are subject to review under the classification system, but particular
emphasis is placed on the review of multi-family and commercial real estate
loans, construction loans and commercial business loans. All assets of the Bank
are periodically reviewed and the classification recommendations submitted to
the Asset Classification Committee at least monthly. The Asset Classification
Committee is composed of the President and Chief Executive Officer, the Chief
Financial Officer, the Chief Lending Officer, the Vice President of Loan
Administration and one outside director. All assets are placed into one of four
categories -Pass, Substandard, Doubtful and Loss. The criteria used to review
and establish each asset's classification are substantially identical to the
asset classification system used by the Office of Thrift Supervision (the "OTS")
in connection with the examination process. As of September 30, 1996, the Bank
did not have any assets which it had classified as doubtful and loss. See "-
Non-Performing Assets" and "- Other Classified Assets" for a discussion of
certain of the Bank's assets which have been classified as substandard and of
the regulatory classification standards generally.
14
<PAGE> 16
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking payment.
Contacts are generally made 30 days after a payment is due. In most cases,
deficiencies are cured promptly. If a delinquency continues, late charges are
assessed and additional efforts are made to collect the loan. While the Bank
generally prefers to work with borrowers to resolve such problems, when the
account becomes 90 days delinquent, the Bank institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. As a matter of
policy, the Bank does not accrue interest on loans past due 90 days or more. See
Note 1 of the Notes to Consolidated Financial Statements included in the
Company's Annual Report to Stockholders' for the year ended September 30, 1996
set forth as Exhibit 13 hereto ( "Annual Report").
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure are classified as real estate owned until sold. Real
estate owned is initially recorded at the lower of fair value minus estimated
costs to sell the property, or cost (generally the balance of the loan on the
property at the date of acquisition). After the date of acquisition, all costs
incurred in maintaining the property are expenses and costs incurred for the
improvement or development of such property are capitalized up to the extent of
their net realizable value.
Under GAAP, the Bank is required to account for certain loan modifications
or restructuring as "troubled debt restructuring." In general, the modification
or restructuring of a debt constitutes a troubled debt restructuring if the Bank
for economic or legal reasons related to the borrower's financial difficulties
grants a concession to the borrower that the Bank would not otherwise consider
under current market conditions. Debt restructuring or loan modifications for a
borrower do not necessarily always constitute troubled debt restructuring,
however, and troubled debt restructuring do not necessarily result in
non-accrual loans.
15
<PAGE> 17
Delinquent Loans. The following table sets forth information concerning
delinquent loans at the dates indicated, in dollar amounts and as a percentage
of each category of the Bank's loan portfolio. The amounts presented represent
the total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due.
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------------------------------
30-59 Days 60-89 Days
----------------------------- -------------------------------
Percent Percent
of of
Loan Loan
Amount Category Amount Category
------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Single-family
residential $928 63.60% $614 99.84%
Commercial and
multi-family
Construction 528 36.19
Consumer loans 2 .14
Commercial business
loans 1 .07 1 .16
----- --------- ---- -------
Total $ 1,459 100.00% $615 100.00%
====== ====== === ======
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
---------------------------------------------------------------
30-59 Days 60-89 Days
---------------------------- ---------------------------
Percent Percent
of of
Loan Loan
Amount Category Amount Category
------------- ------------ ------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Single-family
residential $1,335 75.68% $74 66.07%
Commercial and
multi-family
Construction 429 24.32 37 33.04
Consumer loans
Commercial business
loans 1 .89
------- --------- ---- -------
Total $ 1,764 100.00% $112 100.00%
====== ======= === ======
</TABLE>
16
<PAGE> 18
Non-Performing Assets. The following table sets forth the amounts and
categories of the Bank's non-performing assets at the dates indicated. The Bank
did not have any accruing loans more than 90 days delinquent at any of the
periods presented.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Single-family residential $1,466 $1,986 $1,907 $1,649 $1,973
Commercial and multi-
family(1) 55 22 2,400 2,686 2,800
Construction(2) 888 872 1,027 258
Consumer 1,666 2 1 1 1
Commercial business 2,165 258 196 121
------ ------ ------ ------ ------
Total non-performing loans 5,352 3,156 5,376 5,484 5,032
------ ------ ------ ------ ------
REO 1,557 465 503 971 2,084
Total non-performing assets $6,909 $3,621 $5,879 $6,455 $7,116
====== ====== ====== ====== ======
Troubled debt restructuring (1) $2,348
====== ====== ====== ====== ======
Total non-performing loans and
troubled debt restructuring
as a percentage of gross loans
receivable (3) 3.10% 3.45% 3.73% 3.92% 3.32%
====== ====== ====== ====== ======
Total non-performing assets
as a percentage of total assets 2.35% 1.29% 2.43% 2.76% 3.06%
====== ====== ====== ====== ======
Total non-performing assets and
troubled debt restructuring as
percentage of total assets 2.35% 2.12% 2.43% 2.76% 3.06%
====== ====== ====== ====== ======
</TABLE>
- -------------------------------
(1) Consist of two loans and one loan at September 30, 1996 and 1995,
respectively. For fiscal 1994 and earlier years, consists primarily of
one loan restructured during fiscal 1995. The loan has been performing
in accordance with the terms of the agreement since the restructuring.
(2) Consist of two loans at September 30, 1995 and one loan at September
30, 1994 and 1993.
(3) Includes loans receivable and loans available for sale, less
construction and land loans in process and deferred loan origination
fees and discounts.
17
<PAGE> 19
The Bank's total non-performing assets and troubled debt restructuring
have increased from $6.0 million, or 2.12%, at September 30, 1995 to $6.9
million, or 2.35% at September 30, 1996. The primary reason for the increase was
the addition of certain consumer and commercial lease financings related to the
Bennett Funding Group ("Bennett Funding").
Between September 1992 and March 1996, the Company purchased 16
separate pools of lease financings from Bennett Funding and its affiliates with
a total balance outstanding as of September 30, 1996 of $3.8 million. Included
in the total balance were $890,00 in equipment leases (some of which are insured
by a private insurer), $800,000 in interim contract financings for equipment
leases which have not yet been pooled and sold and $380,00 in consumer
financings. Also included in the Company's total balance were $1.3 million in
consumer receivables issued by Resort Funding, Inc., an affiliate of Bennett
Funding, secured by timeshare financing contracts and $475,000 in equipment
leases from Aloha Capital Corp., another affiliate of Bennett Funding. On March
29, 1996, Bennett Funding filed for Chapter 11 bankruptcy protection. On April
24, 1996, Aloha Capital Corp. and certain other Bennett Funding affiliates,
including affiliates who act as the processor for payments due holders of lease
and loans issued by Bennett Funding and its affiliates, also filed for Chapter
11 bankruptcy protection. Although the Company is continuing to receive payments
on the $1.3 million in consumer receivables (approximately $100,000 in principal
reduction had been received through September 30, 1996) from Resort Funding,
Inc., the Company has chosen to place the entire $3.8 million on non-accrual
status and has classified the credits as substandard. Although the Company has
not established any specific reserves or charged off any portion of the
financings, the Company , in accordance with its policy regarding classified
assets, has provided an additional $1.1 million in reserves and has allocated
approximately $1.4 million of its unallocated general loss allowance. The
Company is actively monitoring the bankruptcy proceedings and is vigorously
pursuing all options available to protect its interest. However, no assurance
can be given that significant additional provisions or charge offs will not be
required or that losses will not be incurred in connection with the resolution
of the situation.
The $1.5 million of non-performing single-family residential loans at
September 30, 1996 consisted of 39 loans, with principal balances ranging from
$3,400 to $216,000 with an average of approximately $38,000. Many of such loans
are involved in bankruptcy proceedings which increases the period of time it
takes the Bank to resolve such assets.
At September 30, 1996, the $1.6 million of REO consisted of four
single-family residential properties with an average carrying value of
approximately $91,100 and one former construction loan project. The loan was for
the acquisition and development of a 107-lot residential townhouse project
located in Pennsylvania.. The project currently has 13 units under varying
stages of development and 23 building lots. The Company has hired a developer to
complete the project and is actively marketing the units.
Other Classified Assets. Federal regulations require that each insured
savings association classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted.
At September 30, 1996, the Bank had $6.9 million of assets classified
as substandard and no assets classified as doubtful or loss. Substantially all
classified assets are also non-performing, except for the Resort Funding
consumer receivable loans discussed above that are performing according to their
contract terms but have been placed on non-accrual status due to the uncertainty
surrounding the bankruptcy.
Allowance for Loan Losses. The Bank's policy is to establish reserves
for estimated losses on delinquent loans when it determines that losses are
expected to be incurred on such loans and leases. The allowance for losses on
loans is maintained at a level believed adequate by management to absorb
potential losses in the portfolio. Management's determination of the adequacy of
the allowance is based on an evaluation of the portfolio, past loss experience,
current
18
<PAGE> 20
economic conditions, volume, growth and composition of the portfolio, and other
relevant factors. The allowance is increased by provisions for loan losses which
are charged against income. The activity in the Bank's allowance for loan losses
has remained relatively stable (other than the charge-off in fiscal 1993 related
to the Bank's largest non-performing construction loan) and the level of
provisions has been relatively small with the exception in fiscal 1996 of an
additional $1.1 million provision related to the Bennett Funding Group. As shown
in the table below, at September 30, 1995, the Bank's allowance for loan losses
amounted to 49.03% and 1.57% of the Bank's non-performing loans and gross loans
receivable, respectively.
Effective December 21, 1993, the OTS, in conjunction with the Office of
the Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued
a joint policy statement ("Policy Statement") regarding an institution's
allowance for loan and lease losses. The Policy Statement, which reflects the
position of the issuing regulatory agencies and does not necessarily constitute
GAAP, includes guidance (i) on the responsibilities of management for the
assessment and establishment of an adequate allowance and (ii) for the agencies'
examiners to use in evaluating the adequacy of such allowance and the policies
utilized to determine such allowance. The Policy Statement also sets forth
quantitative measures for the allowance with respect to assets classified
substandard and doubtful and with respect to the remaining portion of an
institution's loan portfolio. While the Policy Statement sets forth quantitative
measures, such guidance is not intended as a "floor" or "ceiling." The review of
the Policy Statement did not result in a material adjustment to the Bank's
policy for establishing loan losses.
19
<PAGE> 21
The following table summarizes changes in the allowance for loan losses
and other selected statistics for the periods presented.
<TABLE>
<CAPTION>
Year Ending September 30,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Single-family residential $ (113) $ (163) $ (141) $ (121) $ (77)
Construction (1,154)
Commercial and multi-family
residential
Consumer and commercial business (5)
------- ------- ------- ------- ------
Total charged-off loans (113) (168) (141) (1,275) (77)
------- ------- ------- ------- ------
Recoveries on loans previously charged off:
Residential real estate 12
Construction 43 23
Commercial and multi-
family residential 8
Consumer and business
------- ------- ------- ------- ------
Total recoveries 63 23
------- ------- ------- ------- ------
Net loans charged-off (113) (105) (141) (1,275) (54)
Provision for loan losses 1,250 52 416 390 120
------- ------- ------- ------- ------
Allowance for loan losses, end of
period $2,624 $1,487 $1,540 $1,265 $2,150
====== ====== ====== ====== ======
Net loans charged-off to average
interest-earning loans(1) .07% .07% .10% .89% .03%
====== ====== ====== ====== ======
Allowance for loan losses
to gross loans receivable(1) 1.57% .93% 1.07% .91% 1.42%
====== ====== ====== ====== ======
Allowance for loan losses
to non-performing loans 49.03% 47.12% 28.65% 23.07% 42.72%
====== ====== ====== ====== ======
Net loans charged-off to
allowance for loan losses 4.31% 7.06% 9.16% 100.79% 2.51%
====== ====== ====== ====== ======
Recoveries to charge-offs % 37.50% % .87% 29.87%
====== ====== ====== ====== ======
</TABLE>
(1) Gross loans receivable and average interest-earning loans receivable
include loans receivable and loans available for sale, less
construction and land loans in process and deferred loan origination
fees and discounts.
20
<PAGE> 22
The following table presents the Bank's allocation of the allowance for
loan losses to the total amount of loans in each category listed at the dates
indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
% of Loans % of Loans % of Loans
in Each in Each in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
--------- ----------- --------- ----------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential $ 204 68.68% $ 226 69.01% $ 280 69.77%
Commercial and multi-
family residential 3 6.25 12 7.06 243 8.38
Construction 290 9.93 615 9.79 481 9.11
Consumer 370 13.50 100 12.62 79 11.23
Commercial business 1,152 1.64 55 1.52 45 1.51
Unallocated 605 479 412
------ ------- ------ ------- ------ -------
Total allowance for
loan losses $2,624 100.00% $1,487 100.00% $1,540 100.00%
===== ====== ===== ====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------
1993 1992
---- ----
% of Loans % of Loans
in Each in Each
Category to Category to
Amount Total Loans Amount Total Loans
--------- ----------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Single-family residential $ 282 74.72% $ 324 74.39%
Commercial and multi- 243 9.04 231 8.87
family residential 546 8.08 444 11.10
Construction 43 6.36 31 5.08
Consumer 55 1.80 7 .56
Commercial business 96 1,113
Unallocated ------- ------- ------ -------
Total allowance for $1,265 100.00% $2,150 100.00%
loan losses ===== ====== ===== ======
</TABLE>
21
<PAGE> 23
Management of the Bank presently believes that its allowance for loan
losses is adequate to cover any potential losses in the Bank's loan portfolio.
However, future adjustments to this allowance may be necessary, and the Bank's
results of operations could be adversely affected if circumstances differ
substantially from the assumptions used by management in making its
determinations in this regard.
MORTGAGE-RELATED SECURITIES AND INVESTMENT SECURITIES
Mortgage-Related Securities. Federally chartered savings institutions
have authority to invest in various types of liquid assets, including United
States Treasury obligations, securities of various federal agencies and of state
and municipal governments, certificates of deposit at federally-insured banks
and savings and loan associations, certain bankers' acceptances and Federal
funds. Subject to various restrictions, federally chartered savings institutions
may also invest a portion of their assets in commercial paper, corporate debt
securities and mutual funds, the assets of which conform to the investments that
federally chartered savings institutions are otherwise authorized to make
directly.
The Bank maintains a significant portfolio of mortgage-related
securities as a means of investing in housing-related mortgage instruments
without the costs associated with originating mortgage loans for portfolio
retention and with limited credit risk of default which arises in holding a
portfolio of loans to maturity. Mortgage-related securities (which also are
known as mortgage participation certificates or pass-through certificates)
represent a participation interest in a pool of single-family or multi-family
mortgages. The principal and interest payments on mortgage-backed securities are
passed from the mortgage originators, as servicer, through intermediaries
(generally U.S. Government agencies and government-sponsored enterprises) that
pool and repackage the participation interests in the form of securities, to
investors such as the Bank. Such U.S. Government agencies and government
sponsored enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, the FNMA and the Government National
Mortgage Association ("GNMA"). The Bank also invests to a limited degree in
certain privately issued, credit enhanced mortgage-related securities rated AAA
by national securities rating agencies.
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks ("FHLBs") and federally insured savings
institutions. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely payment of interest
and the ultimate return of principal on participation certificates. The FNMA is
a private corporation chartered by the U.S. Congress with a mandate to establish
a secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government-assisted housing
programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and
the timely payment of principal and interest on GNMA securities are guaranteed
by the GNMA and backed by the full faith and credit of the U.S. Government.
Because the FHLMC, the FNMA and the GNMA were established to provide support for
low- and middle-income housing, there are limits to the maximum size of loans
that qualify for these, programs which limit is currently $203,150.
Mortgage-related securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying
pool of mortgages, (i.e., fixed-rate or adjustable rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
The Bank's mortgage-related securities include regular interests in
collateralized mortgage obligations ("CMOs"). CMOs have been developed in
response to investor concerns regarding the uncertainty of cash flows associated
with the prepayment option of the underlying mortgagor and are typically issued
by governmental agencies, governmental sponsored enterprises and special purpose
entities, such as trusts, corporations or partnerships, established by financial
institutions or other similar institutions. A CMO can be collateralized by loans
or securities which are insured or guaranteed by the FNMA, the FHLMC or the
GNMA. In contrast to pass-through mortgage-related securities, in which cash
flow is received
22
<PAGE> 24
pro rata by all security holders, the cash flow from the mortgages underlying a
CMO is segmented and paid in accordance with a predetermined priority to
investors holding various CMO classes. By allocating the principal and interest
cash flows from the underlying collateral among the separate CMO classes,
different classes of bonds are created, each with its own stated maturity,
estimated average life, coupon rate and prepayment characteristics.
The short-term classes of a CMO usually carry a lower coupon rate than
the longer term classes and, therefore, the interest differential cash flow on a
residual interest is greatest in the early years of the CMO. As the early coupon
classes are extinguished, the residual income declines. Thus, the longer the
lower coupon classes remain outstanding, the greater the cash flow accruing to
CMO residuals. As interest rates decline, prepayments accelerate, the interest
differential narrows, and the cash flow from the CMO declines. Conversely, as
interest rates increase, prepayments decrease, generating a larger cash flow to
residuals.
A senior-subordinated structure often is used with CMOs to provide
credit enhancement for securities which are backed by collateral which is not
guaranteed by FNMA, FHLMC or GNMA. These structures divide mortgage pools into
various risk classes: a senior class and one or more subordinated classes. The
subordinated classes provide protection to the senior class. When cash flow is
impaired, debt service goes first to the holders of senior classes. In addition,
incoming cash flows also may go into a reserve fund to meet any future
shortfalls of cash flow to holders of senior classes. The holders of
subordinated classes may not receive any funds until the holders of senior
classes have been paid and, when appropriate, until a specified level of funds
has been contributed to the reserve fund.
Certain CMOs can be classified as "high-risk mortgage securities" under
OTS Thrift Bulletin 52 ("TB 52") and its predecessor. Pursuant to TB 52, a
savings institution such as the Bank generally may only acquire high-risk
mortgage securities, which are defined as any CMO that at the time of purchase,
or at any subsequent date, meets any of the three tests set forth therein, to
reduce its overall interest rate risk, although an institution with strong
capital and earnings and adequate liquidity and that has a closely supervised
trading department may acquire such securities if they are reported as trading
assets or held for sale at market value. The three tests are an average life
test, an average life sensitivity test and a price sensitivity test.
Mortgage-related securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-related
securities are more liquid than individual mortgage loans and may be used to
collateralize certain obligations of the Bank. At September 30, 1996, $6.5
million of the Bank's mortgage-related securities were pledged to secure various
obligations of the Bank, primarily public deposits. Mortgage-related securities
issued or guaranteed by the FNMA or the FHLMC (except interest-only securities
or the residual interests in CMOs) are weighted at no more than 20.0% for
risk-based capital purposes, compared to a weight of 50.0% to 100.0% for
residential loans. See "Regulation - The Bank - Capital Requirements."
The Bank's mortgage-related securities are classified as either "held
to maturity" or "available for sale" based upon the Bank's intent and ability to
hold such securities to maturity at the time of purchase, in accordance with
GAAP. As of September 30, 1996, the Bank had an aggregate of $83.4 million, or
28.4%, of total assets invested in mortgage-related securities, net, of which
$23.2 million was held to maturity and $60.2 million was available for sale. The
tables below present the Bank's mortgage-related securities on the basis of
these classifications, which were included in the Bank's Consolidated Financial
Statements beginning in fiscal 1995. The mortgage-related securities of the Bank
which are held to maturity are carried at cost, adjusted for the amortization of
premiums and the accretion of discounts using a method which approximates a
level yield, while mortgage-related securities available for sale are carried at
the current market value. See Notes 1 and 4 of the Notes to Consolidated
Financial Statements in the Annual Report.
In November 1995, the Financial Accounting Standards Board
(the "FASB") issued a special report, "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities", (the
"Guide"), which discussed through a question and answer format many of the
implementation questions that have arisen since the adoption of SFAS 115.
Concurrent with the initial adoption of this implementation guidance but no
later than December 31, 1995, an enterprise was permitted to reassess the
appropriateness of the classifications of all securities held at that time and
account and disclose resulting reclassifications in accordance with SFAS 115.
The Guide further states that
23
<PAGE> 25
reclassifications from the held-to-maturity category that result from this
one-time assessment will not call into question the intent of an enterprise to
hold other debt securities to maturity in the future. In December 1995, in
accordance with the Guide, the Company reclassified certain securities with an
aggregated amortized cost of $50.5 million from held to maturity to available
for sale.
The following table sets forth the composition of the Bank's mortgage-related
securities portfolio, both held to maturity and available for sale, at the dates
indicated.
<TABLE>
<CAPTION>
September 30,
-------------
1996 1995 1994
---- ---- ----
Held to maturity:
(In thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
FHLMC $ 3,631 $ 8,743 $10,073
FNMA 11,383 26,014 28,836
------ ------ ------
Total mortgage-backed securities 15,014 34,757 38,909
------ ------ ------
Collateralized mortgage obligations:
FHLMC 2,238 8,337 10,959
FNMA 5,789 16,968 18,184
Other 180 232 317
------ ------ ------
Total collateralized mortgage obligations 8,207 25,537 29,460
------ ------ ------
Total mortgage-related securities, amortized cost $23,221 $60,294 $68,369
====== ====== ======
Total market value(1) $22,060 $59,010 $64,880
====== ====== ======
Available for sale:
Mortgage-backed securities:
FHLMC $ 12,852 $ 3,935
FNMA 11,079 2,913
GNMA 8,355 1,136
------ -----
Total mortgage-backed securities 32,286 7,984
------ -----
Collateralized mortgage obligations:
FHLMC 7,298 $251
FNMA 18,594 9,682
GNMA 1,593
Other 1,131 1,640
------ ------
Total collateralized mortgage obligations 28,616 11,322 251
------ ------ ---
Total mortgage-related securities, amortized cost $60,902 $19,306 $251
====== ====== ===
Total market value(1) $60,211 $19,538 $252
====== ====== ===
</TABLE>
- ---------------------------
(1) See Note 4 of the Notes to Consolidated Financial Statements in the Annual
Report.
24
<PAGE> 26
The following table sets forth the purchases, sales and principal
repayments of the Bank's mortgage-related securities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Mortgage-related securities, beginning of period(1) $79,832 $68,620 $65,159
------- ------- -------
Purchases:
Mortgage-backed securities - held to maturity 1,938 20,237
CMO-held to maturity 2,000 11,825
Mortgage-backed securities - available for sale 15,471 8,094
CMO - available for sale 9,997 13,824
Sales:
Mortgage-backed securities - available for sale (6,422) (2,250)
CMO -available for sale (6,374)
Repayments and prepayments:
Mortgage-backed securities (6,467) (4,241) (8,538)
CMO (5,788) (4,216) (19,909)
Increase (decrease) in net premium 169 (231) (154)
Change in net unrealized gain (loss) on mortgage-related securities
available for sale (924) 232
------- ------- --------
Net increase in mortgage-related securities 3,600 11,212 3,461
------- ------- --------
Mortgage-related securities, end of period(1) $83,432 $79,832 $68,620
======= ======= =======
</TABLE>
- --------------------------
(1) Includes mortgage-related securities available for sale.
At September 30, 1996, the weighted average contractual maturity of the
Bank's fixed-rate mortgage-backed securities was approximately 15.0 years. The
actual maturity of a mortgage-backed security is less than its stated maturity
due to prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and adversely affect its yield
to maturity. The yield is based upon the interest income and the amortization of
any premium or discount related to the mortgage-backed security. In accordance
with GAAP, premiums and discounts are amortized over the estimated lives of the
loans, which decrease and increase interest income, respectively. The prepayment
assumptions used to determine the amortization period for premiums and discounts
can significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect actual prepayments. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
rising mortgage interest rates, if the coupon rates of the underlying mortgages
are less than the prevailing market interest rates offered for mortgage loans,
refinancings generally decrease and slow the prepayment of the underlying
mortgages and the related securities. Conversely, during periods of falling
mortgage interest rates, if the coupon rates of the underlying mortgages exceed
the prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related securities. Under such circumstances, the Bank may be subject to
reinvestment risk because to the extent that the Bank's mortgage-related
securities amortize or prepay faster than anticipated, the Bank may not be able
to reinvest the proceeds of such repayments and prepayments at a comparable
yield. At September 30, 1996, of the $23.2 million of mortgage-related
securities held to maturity, an aggregate of $12.4 million were secured by
fixed-rate securities and an aggregate of $10.8 million were secured by
adjustable-rate securities.
25
<PAGE> 27
Investment Securities. The following table sets forth information regarding
the carrying and market value of the Bank's investment securities at the dates
indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB stock $ 2,337 $ 2,337 $ 1,492 $ 1,492 $ 1,370 $ 1,370
U.S. Government and agency
obligations 16,500 16,388 10,565 10,505 12,000 11,725
Municipal securities 145 144 145 145 145 140
------- ------- ------- ------- ------- -------
Total $18,982 $18,869 $12,202 $12,142 $13,515 $13,235
======= ======= ======= ======= ======= =======
</TABLE>
At September 30, 1996, all of the Bank's investment securities had a
contractual maturity of between one and ten years and such portfolio had a
weighted average yield of 6.62%.
SOURCES OF FUNDS
General. The Bank's principal source of funds for use in lending and for
other general business purposes has traditionally come from deposits obtained
through the Bank's branch offices. The Bank also derives funds from contracted
payments and prepayments of outstanding loans and mortgage-related securities,
from sales of loans, from maturing investment securities and from advances from
the FHLB of Pittsburgh and other borrowings. Loan repayments are a relatively
stable source of funds, while deposits inflows and outflows are significantly
influenced by general interest rates and money market conditions. The Bank uses
borrowings to supplement its deposits as a source of funds.
Deposits. The Bank's current deposit products include passbook accounts,
NOW accounts, MMDA, certificates of deposit ranging in terms from 30 days to
five years and noninterest-bearing personal and business checking accounts. The
Bank's deposit products also include Individual Retirement Account ("IRA")
certificates and Keogh accounts.
The Bank's deposits are obtained primarily from residents in Delaware and
Chester Counties in southeastern Pennsylvania. The Bank attracts local deposit
accounts by offering a wide variety of accounts, competitive interest rates, and
convenient branch office locations and service hours. The Bank utilizes
traditional marketing methods to attract new customers and savings deposits,
including print media and radio advertising and direct mailings. However, the
Bank does not solicit funds through deposit brokers nor does it pay any
brokerage fees if it accepts such deposits. The Bank participates in the
regional ATM network known as MAC(R).
The Bank has been competitive in the types of accounts and in interest
rates it has offered on its deposit products but does not necessarily seek to
match the highest rates paid by competing institutions. With the significant
decline in interest rates paid on deposit products, the Bank in recent years has
experienced disintermediation of deposits into competing investment products.
26
<PAGE> 28
The following table shows the distribution of, and certain information
relating to, the Bank's deposits by type of deposit as of the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------------------
1996 1995
---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement
savings accounts $ 41,504 18.93% $ 43,088 19.25% $ 53,124 24.59%
MMDA 16,159 7.37 17,892 8.00 24,818 11.49
NOW accounts 28,085 12.81 26,621 11.90 24,685 11.42
Certificates of deposit 128,747 58.73 126,985 56.75 110,696 51.23
Noninterest-bearing
deposits 4,710 2.16 9,167 4.10 2,742 1.27%
-------- ------ -------- ------ -------- ------
Total deposits at end of
period $219,205 100.00% $223,753 100.00% $216,065 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The following table sets forth the net savings flows of the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
(In thousands)
Decrease before interest credited $(13,152) $ (1,040) $(12,170)
Interest credited 8,604 8,728 9,874
-------- -------- --------
Net savings increase (decrease) $ (4,548) $ 7,688 $ (2,296)
======== ======== ========
</TABLE>
- ---------------------
The following table sets forth maturities of the Bank's certificates of
deposit of $100,000 or more at September 30, 1996 by time remaining to maturity.
<TABLE>
<CAPTION>
Amounts in
Thousands
---------
<S> <C>
Three months or less $2,915
Over three months through six months 842
Over six months through twelve months 3,669
Over twelve months 2,400
------
$9,826
======
</TABLE>
27
<PAGE> 29
The following table presents, by various interest rate categories, the
amount of certificates of deposit at September 30, 1996 and 1995, and the
amounts at September 30, 1996 which mature during the periods indicated.
<TABLE>
<CAPTION>
Amounts at September 30, 1996
September 30, Maturing Within
----------------------- ---------------------------------------------------
Certificates of
Deposit 1996 1995 One Year Two Years Three Years Thereafter
-------- -------- -------- --------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
4.0% or less $ 1,740 $ 6,094 $ 1,740
4.01% to 6.0% 103,038 67,685 63,588 $19,856 $4,024 $15,570
6.01% to 8.0% 21,092 30,430 7,815 1,618 1,863 9,796
8.01% to 10.0% 2,877 22,776 1,986 891
-------- -------- ------- ------- ------ -------
Total certificate
accounts $128,747 $126,985 $73,143 $23,460 $6,778 $25,366
======== ======== ======= ======= ====== =======
</TABLE>
The following table presents the average balance of each deposit type and the
average rate paid on each deposit type for the periods indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------------
1996 1995 1994
------------------------ ----------------------- -----------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement
savings accounts $ 42,270 2.44% $ 47,058 2.48% $ 53,607 2.58%
Money market accounts 18,358 2.65 19,997 2.68 25,490 2.55
Certificates of deposit 128,384 5.82 120,106 6.32 111,596 5.97
NOW accounts 27,098 .37 25,904 1.68 24,232 1.72
Noninterest-bearing
deposits 4,193 3,446 3,413
-------- -------- -------- -------- -------- --------
Total deposits $220,303 4.25% $216,511 4.49% $218,338 4.17%
======== ======== ======== ======== ======== ========
</TABLE>
28
<PAGE> 30
Borrowings. The Bank may obtain advances from the FHLB of Pittsburgh upon the
security of the common stock it owns in that bank and certain of its residential
mortgage loans and securities held to maturity, provided certain standards
related to creditworthiness have been met. Such advances are made pursuant to
several credit programs, each of which has its own interest rate and range of
maturities. The Bank, during fiscal 1996 and 1995 increased its FHLB borrowings
to fund asset growth thereby leveraging some of the capital raised during the
year ended September 30, 1995. At September 30, 1996, the Bank had $46.7 million
in outstanding FHLB advances. See Note 10 of the Notes to Consolidated Financial
Statements in the Annual Report.
The Bank has in the past occasionally entered into agreements to sell
securities under terms which require it to repurchase the same or substantially
similar securities by a specified date. Repurchase agreements are considered
borrowings which are secured by the sold securities and generally are short-term
(90 days or less) in nature. At September 30, 1996, the Bank did not have any
repurchase agreements outstanding.
SUBSIDIARIES
The Bank is permitted to invest up to 2% of its assets in the capital stock
of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of September 30, 1996, the Bank was authorized to invest up to approximately
$8.8 million in the stock of, or loans to, service corporations. As of September
30, 1996, the net book value of the Bank's investment in stock, unsecured loans,
and conforming loans to its service corporations was $1.2 million.
The Bank only has one active, wholly owned subsidiary, First Pointe, Inc.
("First Pointe"), which was formed for the purpose of developing a real estate
parcel received in a deed-in-lieu of foreclosure action. At September 30, 1996,
the Bank's equity investment in First Pointe was a net deficit of $302 and First
Pointe had total assets of $1.2 million consisting of 13 units under development
and 23 building lots. For the year ended September 30, 1996, First Pointe had
total revenue of $255 and a net loss of $10,302. The Bank also has four other
inactive subsidiaries, three of which had been involved in either real estate
development or real estate management. With the Bank's cessation of its
involvement in such activity and the resolution of the various development
projects in which subsidiaries were involved, the Bank's subsidiaries involved
in such activities were placed in an inactive status. The other inactive
subsidiary was formed to engage in title insurance. See "-Asset Quality - Non-
Performing Assets" and Notes 1 and 7 of the Notes to Consolidated Financial
Statements in the Annual Report.
COMPETITION
The Bank faces strong competition both in attracting deposits and making
real estate loans. Its most direct competition for deposits has historically
come from other savings associations, credit unions and commercial banks located
in its market area including many large financial institutions which have
greater financial and marketing resources available to them. In addition, during
times of high interest rates, the Bank has faced additional significant
competition for investors' funds from short-term money market securities, mutual
funds and other corporate and government securities. The ability of the Bank to
attract and retain savings deposits depends on its ability to generally provide
a rate of return, liquidity and risk comparable to that offered by competing
investment opportunities.
The Bank experiences strong competition for real estate loans principally
from other savings associations, commercial banks and mortgage banking
companies. The Bank competes for loans principally through the interest rates
and loan fees it charges and the efficiency and quality of services it provides
borrowers and the convenient locations of its branch office network. Competition
may increase as a result of the continuing reduction of restrictions on the
interstate operations of financial institutions.
EMPLOYEES
The Bank had 72 full-time employees and 22 part-time employees as of
September 30, 1996. None of these employees is represented by a collective
bargaining agreement. The Bank believes that it enjoys excellent relations with
its personnel.
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REGULATION
The Company. The Company as a savings and loan holding company within the
meaning of the Home Owners' Loan Act, as amended ("HOLA") is required as such
with the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
Federal Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings association. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association; (ii)
transactions between the savings association and its affiliates; and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet a QTL test, then
such unitary holding company also shall become subject to the activities
restrictions applicable to multiple savings and loan holding companies and,
unless the savings association qualifies as a QTL within one year thereafter,
shall register as, and become subject to the restrictions applicable to, a bank
holding company. See "- The Bank - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings associations)
would thereafter be subject to further restrictions. No multiple savings and
loan holding company or subsidiary thereof which is not a savings association
shall commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof any business
activity, other than: (i) furnishing or performing management services for a
subsidiary savings association; (ii) conducting an insurance agency or escrow
business; (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings association; (iv) holding or managing properties used
or occupied by a subsidiary savings association; (v) acting as trustee under
deeds of trust; (vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies. The activities
described in (i) through (vi) above may only be engaged in after giving the OTS
prior notice and being informed that the OTS does not object to such activities.
In addition, the activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.
Limitations on Transactions with Affiliates. Transactions between savings
associations and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act ("FRA"). An affiliate of a savings association is any
company or entity which controls, is controlled by or is under common control
with the savings association. In a holding company context, the parent holding
company of a savings association (such as the Company) and any companies which
are controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
association may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association.
In addition, Sections 22(g) and (h) of the FRA place restrictions on loans
to executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, an executive officer and to a greater than 10%
stockholder of a savings institution (a "principal stockholder"), and certain
affiliated interests of either, may not exceed, together with all other
outstanding
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<PAGE> 32
loans to such person and affiliated interests, the savings institution's loans
to one borrower limit (generally equal to 15% of the institution's unimpaired
capital and surplus). Section 22(h) also requires that loans to directors,
executive officers and principal stockholders be made on terms substantially the
same as offered to employees of the Bank and also requires prior board approval
for certain loans. In addition, the aggregate amount of extensions of credit by
a savings institution to all insiders cannot exceed the institution's unimpaired
capital and surplus. Furthermore, Section 22(g) places additional restrictions
on loans to executive officers. At September 30, 1996, the Bank was in
compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings association or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings association or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings association, other than
a subsidiary savings association, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
FIRREA amended provisions of the Bank Holding Company Act of 1956 ("BHCA")
to specifically authorize the FRB to approve an application by a bank holding
company to acquire control of a savings association. FIRREA also authorized a
bank holding company that controls a savings association to merge or consolidate
the assets and liabilities of the savings association with, or transfer assets
and liabilities to, any subsidiary bank which is a member of the BIF with the
approval of the appropriate federal banking agency and the FRB. As a result of
these provisions, there have been a number of acquisitions of savings
associations by bank holding companies in recent years.
Federal Securities Laws. The Company's Common Stock is registered with the
Securities and Exchange Commission "SEC" under the Exchange Act. The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
Shares of common stock owned by an affiliate of the Company are subject to
the resale restrictions of Rule 144 under the Securities Act of 1933, as amended
("Securities Act"). If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the Company
who complies with the other conditions of Rule 144 (including those that require
the affiliate's sale to be aggregated with those of certain other persons) would
be able to sell in the public market, without registration, a number of shares
not to exceed, in any three-month period, the greater of (i) 1% of the
outstanding shares of the Company or (ii) the average weekly volume of trading
in such shares during the preceding four calendar weeks.
The Bank. The OTS has extensive regulatory authority over the operations of
savings associations. As part of this authority, savings associations are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.
The OTS' enforcement authority over all savings associations and their
holding companies was substantially enhanced by FIRREA. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. FIRREA significantly
increased the amount
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<PAGE> 33
of and grounds for civil money penalties. FIRREA requires, except under certain
circumstances, public disclosure of final enforcement actions by the OTS.
Insurance of Accounts. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the United States Government. As insurer, the
FDIC is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the OTS an
opportunity to take such action.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.
The FDIC is authorized to establish separate assessment rates for deposit
insurance for members of the BIF and SAIF. The FDIC may increase assessment
rates for either fund to restore the fund's ratio of reserves to insured
deposits to its statutorily set target level within a reasonable time, and may
decrease such assessment rates if such target level has been met. Until the SAIF
fund meets its target level, savings associations may not transfer to the BIF
fund. Furthermore, any such transfers, when permitted, would be subject to exit
and entrance fees. Under current FDIC regulations, SAIF member institutions are
assigned to one of three capital groups which are based solely on the level of
an institution's capital--"well capitalized," "adequately capitalized," and
"undercapitalized." These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from .23% for well capitalized, healthy
institutions to .31% for undercapitalized institutions with substantial
supervisory concerns. The insurance premium applicable to the Bank as of
September 30, 1996 was .23% of insured deposits.
The BIF fund met its target reserve level in September 1995, but the SAIF was
not expected to meet its target reserve level until at least 2002. Consequently,
in late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with respect to the semi-annual premium assessment
beginning January 1, 1996, reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to an annual minimum of $2,000) for
institutions in the lowest risk category, Deposit insurance premiums for SAIF
members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category).
On September 30, 1996, President Clinton signed into law legislation (the
"Deposit Insurance Funds Act of 1996") which will eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions by
recapitalizing the SAIF's reserves to the required ratio. The legislation
provides that all SAIF member institutions pay a one-time special assessment to
recapitalize the SAIF, which in the aggregate will be sufficient to bring the
reserve ratio in the SAIF to 1.25% of insured deposits. The legislation also
provides for the merger of the BIF and the SAIF, with such merger being
conditioned upon, among other things, the prior elimination of the federal
thrift charter.
Effective October 8, 1996, pursuant to the provision of the Deposit
Insurance Fund Act of 1996, FDIC regulations imposed a one-time special
assessment equal to 65.7 basis points for all SAIF-assessable deposits as of
March 31, 1995, which was collected on November 27, 1996. The Bank's one-time
special assessment amounted to approximately $1.4 million. Net of related tax
benefits, the one-time special assessment amounted to $876,000. The payment of
such special assessment had the effect of immediately reducing the Bank's
capital by such an amount. Nevertheless, this one-time special assessment did
not have a material adverse effect on the Bank's consolidated financial
condition nor did it cause non-compliance by the Bank with its regulatory
capital requirements.
On October 16, 1996, the FDIC proposed to lower assessment rates for SAIF
members to reduce the disparity in the assessment rates paid by BIF and SAIF
members. Beginning October 1, 1996, effective SAIF rates range from zero basis
points
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to 27 basis points. From 1997 through 1999, SAIF members will pay 6.4 basis
points to fund the Financing Corporation while BIF member institutions will pay
approximately 1.3 basis points. The Bank's insurance premiums, which have
amounted to 23 basis points, will be reduced to 6.4 basis points. Based upon the
$219.2 million of assessable deposits at September 30, 1996, the Bank would
expect to pay $365,000 less in insurance premiums per year.
Capital requirements. Federally insured savings associations are required
to maintain minimum levels of regulatory capital. Pursuant to FIRREA, the OTS
has established capital standards applicable to all savings associations. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
Current OTS capital standards require savings associations to satisfy three
different capital requirements. Under these standards, savings associations must
maintain "tangible" capital equal to 1.5% of adjusted total assets, "core"
capital equal to 3% of adjusted total assets and "total" capital (a combination
of core and "supplementary" capital) equal to 8.0% of "risk-weighted" assets.
For purposes of the regulation, core capital generally consists of common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits and "qualifying supervisory goodwill." Tangible capital is given the
same definition as core capital but does not include qualifying supervisory
goodwill and is reduced by the amount of all the savings association's
intangible assets, with only a limited exception for purchased mortgage
servicing rights ("PMSRs"). Both core and tangible capital are further reduced
by an amount equal to a savings association's debt and equity investments in
subsidiaries engaged in activities not permissible for national banks (other
than subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). At September 30, 1996, the Bank did not have any investment
in subsidiaries engaged in impermissible activities and required to be deducted
from its capital calculation.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") granted the OTS the authority to prescribe rules for the amount of
PMSRs that may be included in a savings association's regulatory capital and
required that the value of readily marketable PMSRs included in the calculation
of a savings association's regulatory capital not exceed 90% of fair market
value and that such value be determined at least quarterly. Under final OTS
rules effective March 4, 1994, (i) PMSRs do not have to be deducted from
tangible and core regulatory capital, provided that they do not exceed 50% of
core capital, (ii) savings associations are required to determine the fair
market value and to review the book value of their PMSRs at least quarterly and
to obtain an independent valuation of PMSRs annually, (iii) savings associations
that desire to include PMSRs in regulatory capital may not carry them at a book
value under GAAP that exceeds the discounted value of their future net income
stream and (iv) for purposes of calculating regulatory capital, the amount of
PMSRs reported as balance sheet assets should amount to the lesser of 90% of
their fair market value, 90% of their original purchase price or 100% of their
remaining unamortized book value. In June 1993, the OTS published a thrift
bulletin on the valuation of PMSRs ("TB 60"). At September 30, 1996, the Bank
had PMSRs totalling $232,000.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital does not exceed the savings association's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
repossessed assets or loans more than 90 days past due. Single-family
residential real estate loans which are not past-due or non-performing and which
have been made in accordance with prudent underwriting standards are assigned a
50% level in the risk-weighing system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans.
Off-balance sheet items also are adjusted to take into account certain risk
characteristics.
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating risk-based capital requirement. As a result, such an
institution will be required to maintain additional capital in order to comply
with the risk-based capital requirement. An institution with a greater than
"normal" interest rate risk is defined as an institution that would suffer a
loss of net portfolio value exceeding 2.0% of the estimated market value of its
assets in the event of a 200 basis point increase or decrease (with certain
minor exceptions) in interest rates. The interest rate risk component will be
calculated, on a quarterly basis, as one-half of the
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<PAGE> 35
difference between an institution's measured interest rate risk and 2.0%,
multiplied by the market value of its assets. The rule also authorizes the
Director of the OTS, or his designee, to waive or defer an institution's
interest rate risk component on a case-by-case basis. The final rule became
effective as of January 1, 1994 subject, however, to a two quarter "lag" time
between the reporting date of the data used to calculate an institution's
interest rate risk and the effective date of each quarter's interest rate risk
component. However, in October 1994 the Director of the OTS indicated that it
would waive the capital deductions for institutions with greater than "normal"
risk until the OTS publishes an appeals process. On August 21, 1995, the OTS
released Thrift Bulletin 67 which established (i) and appeals process to handle
:"requests for adjustments" to the interest rate risk component and (ii) a
process by which "well capitalized" institutions may obtain authorization to use
their own interest rate risk model to determine their interest rat risk
component. The Director of the OTS indicated, concurrent with release of Thrift
Bulletin 67, that the OTS will continue to delay the implementation of the
capital deduction for interest rate risk pending the testing of the appeals
process set forth in Thrift Bulletin 67.
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The following is a reconciliation of the Bank's equity determined in
accordance with GAAP to regulatory tangible, core, and risk-based capital at
September 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995 September 30, 1994
------------------------------ ----------------------------- -------------------------
Tangible Core Risk-based Tangible Core Risk-based Tangible Core Risk-based
Capital Capital Capital Capital Capital Capital Capital Capital Capital
-------- -------- -------- -------- -------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP equity $ 22,608 $ 22,608 $ 22,608 $ 23,129 $ 23,129 $ 23,129 $11,622 $11,622 $11,622
Purchased mortgage servicing (9) (9) (9) (27) (27) (27)
Assets required to be deducted(1) (55) (55) (55)
General valuation allowances 1,775 1,412 1,466
-------- -------- -------- -------- -------- -------- ------- ------- -------
Total regulatory capital 22,608 22,608 24,328 23,120 23,120 24,477 11,595 11,595 13,006
Minimum capital requirement per
FIRREA published guidelines 4,421 8,841 11,289 4,212 8,425 10,986 3,566 7,132 10,272
-------- -------- -------- -------- -------- -------- ------- ------- -------
Excess $ 18,187 $ 13,767 $ 13,039 $ 18,908 $ 14,695 $ 13,491 $ 8,029 $ 4,463 $ 2,734
======== ======== ======== ======== ======== ======== ======= ======= =======
</TABLE>
- ----------------------
(1) Consists of equity investment nonincludable in regulatory capital.
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Prompt Corrective Action. Under Section 38 of the FDIA as added by the
FDICIA, each federal banking agency is required to implement a system of prompt
corrective action for institutions which it regulates. In early September 1992,
the federal banking agencies, including the OTS, adopted substantially similar
regulations which are intended to implement Section 38 of the FDIA. These
regulations became effective December 19, 1992. Under the regulations, an
institution shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10% or more, has a Tier I risk-based capital ratio of 6%
or more, has a Tier I leverage capital ratio of 5% or more and is not subject to
any order or final capital directive to meet and maintain a specific capital
level for any capital measure, (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8% or more, a Tier I risk-based capital ratio of 4%
or more and a Tier I leverage capital ratio of 4% or more (3% under certain
circumstances) and does not meet the definition of "well capitalized," (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8%, a Tier I risk-based capital ratio that is less than 4% or a Tier I leverage
capital ratio that is less than 4% (3% under certain circumstances), (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6%, a Tier I risk-based capital ratio that is less than 3% or a
Tier I leverage capital ratio that is less than 3%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2%. Section 38 of the FDIA and the regulations promulgated
thereunder also specify circumstances under which a federal banking agency may
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized institution
to comply with supervisory actions as if it were in the next lower category
(except that the FDIC may not reclassify a significantly undercapitalized
institution as critically undercapitalized). At September 30, 1996 the Bank was
in the "well capitalized" category.
Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required minimum
liquid asset ratio is 5%. The Bank has consistently exceeded such regulatory
liquidity requirement and, at September 30, 1996, had a liquidity ratio of 8.46%
Accounting Requirements. FIRREA requires the OTS to establish accounting
standards to be applicable to all savings associations for purposes of complying
with regulations, except to the extent otherwise specified in the capital
standards. Such standards must incorporate GAAP to the same degree as is
prescribed by the federal banking agencies for banks or may be more stringent
than such requirements. Such standards must have been fully implemented by
January 1, 1994 and must be phased in as provided in federal regulations in
effect on May 1, 1989.
Applicable OTS accounting regulations and reporting requirements apply the
following standards: (i) regulatory reports will incorporate GAAP when GAAP is
used by federal banking agencies; (ii) savings association transactions,
financial condition and regulatory capital must be reported and disclosed in
accordance with OTS regulatory reporting requirements that will be at least as
stringent as for national banks; and (iii) the director of the OTS may prescribe
regulatory reporting requirements more stringent than GAAP whenever the director
determines that such requirements are necessary to ensure the safe and sound
reporting and operation of savings associations.
The accounting principles for depository institutions are currently
undergoing review to determine whether the historical cost model or market-based
measure of valuation is the appropriate measure for reporting the assets of such
institutions in their financial statements. Such proposal is controversial
because any change in applicable accounting principles which require depository
institutions to carry mortgage-backed securities and mortgage loans at fair
market value could result in substantial losses to such institutions and
increase volatility in their liquidity and operations. Currently, it cannot be
predicted whether there may be any changes in the accounting principles for
depository institutions in this regard beyond those imposed by SFAS 115 or when
any such might become effective.
Qualified Thrift Lender Test. Under Section 2303 of the Economic Growth and
Regulatory Paper work Reduction Act of 1996, a savings association can comply
with the QTL test by wither meeting the QTL test set forth in the HOLA and
implementing regulation or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended ("Code"). A savings institution that does not comply with the
QTL test must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the association may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the association shall
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<PAGE> 38
be restricted to those of a national bank; (iii) the association shall not be
eligible to obtain any advances from its FHLB; and (iv) payment of dividends by
the association shall be subject to the rules regarding payment of dividends by
a national bank. Upon the expiration of three years from the date the
association ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
The QTL Test set forth in the HOLA requires that Qualified Thrift
Investments ("QTLs") represent 65% of portfolio assets. Portfolio assets are
defined as total assets less intangibles, property used by a savings association
in its business and liquidity investments in an amount not exceeding 20% of
assets. Generally, QTLs are residential housing relate assets, The 1996
amendments allow small business loans, credit card loans, student loans and
loans for personal, family and household purposes to be included without
limitation as qualified investments. At September 30, 1996, approximately 92.5%
of the Bank's assets were invested in QTLs, which was in excess of the
percentage required to qualify the Bank under the QTL Test in effect at that
time.
Restrictions on Capital Distributions. OTS regulations govern capital
distributions by savings associations, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association to make capital distributions. Generally, the regulation
creates a safe harbor for specified levels of capital distributions from
associations meeting at least their minimum capital requirements, so long as
such associations notify the OTS and receive no objection to the distribution
from the OTS. Savings institutions and distributions that do not qualify for the
safe harbor are required to obtain prior OTS approval before making any capital
distributions.
Generally, savings associations that before and after the proposed
distribution meet or exceed their fully phased-in capital requirements, or Tier
1 associations, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the association's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
association's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the association. Failure to
meet fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions including possible prohibition without
explicit OTS approval. See "- Capital Requirements."
In order to make distributions under these safe harbors, Tier 1 and Tier 2
associations must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 association deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 association as a result of such a determination. The Bank
currently is a Tier 1 institution for purposes of the regulation dealing with
capital distributions.
OTS regulations also prohibit the Bank from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of the Bank would be reduced below the amount required to be
maintained for the liquidation account established by it for certain depositors
in connection with its conversion from mutual to stock form.
Community Reinvestment. Under the Community Reinvestment Act of 1977, as
amended ("CRA"), as implemented by OTS regulations, a savings association has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. FIRREA amended the CRA to require, effective
July 1, 1990, public disclosure of an institution's CRA rating and require the
OTS to provide a written evaluation of an institution's CRA performance
utilizing a four tiered descriptive rating system in
37
<PAGE> 39
lieu of the existing five-tiered numerical rating system. The Bank received an
"outstanding" rating as a result of its last evaluation in February 1995.
Policy Statement on Nationwide Branching. Effective May 11, 1992, the OTS
amended and codified its policy statement on branching by federally chartered
savings associations to delete then-existing regulatory restrictions on the
branching authority of such associations and to permit nationwide branching to
the extent allowed by federal statute. (Prior OTS policy generally permitted
interstate branching for federally chartered savings associations only to the
extent allowed state-chartered savings associations in the states where the
association's home office was located and where the branch was sought or if the
branching resulted from OTS approval of a supervisory interstate acquisition of
a troubled institution.) Current OTS policy generally permits a federally
chartered savings association to establish branch offices outside of its home
state if the association meets the domestic building and loan test in Section
7701(a)(19) of the Code or the asset composition test of subparagraph (c) of
that section, and if, with respect to each state outside of its home state where
the association has established branches, the branches, taken alone, also
satisfy one of the two tax tests. An association seeking to take advantage of
this authority would have to have a branching application approved by the OTS,
which would consider the regulatory capital of the association and its record
under the CRA, as amended, among other things.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its advances from the FHLB of Pittsburgh,
whichever is greater. At September 30, 1996, the Bank had $2.3 million in FHLB
stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. For the years ended September 30, 1996 and
1995, dividends paid by the FHLB of Pittsburgh to the Bank totalled
approximately $106,000 and $94,000, respectively.
Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and Super
NOW checking accounts) and non-personal time deposits. At September 30, 1996,
the Bank was in compliance with applicable requirements. However, because
required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets.
Miscellaneous. In addition to requiring a new system of risk-based
insurance assessments and a system of prompt corrective action with respect to
undercapitalized banks, as discussed above, recent legislation requires federal
banking regulators to adopt regulations in a number of areas to ensure bank
safety and soundness, including: internal controls; credit underwriting; asset
growth; management compensation; ratios of classified assets to capital; and
earnings. Recent legislation also restricts the activities of state-chartered
insured banks; amends various consumer banking laws; limits the ability of
"undercapitalized banks" to borrow from the FRB's discount window; and requires
regulators to perform annual on-site bank examinations and set standards for
real estate lending.
38
<PAGE> 40
FEDERAL AND STATE TAXATION
General. The Company and the Bank are subject to the corporate tax
provisions of the Code, as well as certain additional provisions of the Code
which apply to thrift and other types of financial institutions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Company and
the Bank.
Fiscal Year. For the year ended September 30, 1995 and thereafter, the
Company and the Bank and its subsidiaries file a consolidated federal income tax
return on a fiscal year basis. Prior to September 30, 1995, the Company and the
Bank and its subsidiaries filed consolidated federal income tax returns on a
calendar year basis.
Method of Accounting. The Bank maintains its books and records for federal
income tax purposes using the accrual method of accounting. The accrual method
of accounting generally requires that items of income be recognized when all
events have occurred that establish the right to receive the income and the
amount of income can be determined with reasonable accuracy, and that items of
expense be deducted at the later of (i) the time when all events have occurred
that establish the liability to pay the expense and the amount of such liability
can be determined with reasonable accuracy or (ii) the time when economic
performance with respect to the item of expense has occurred.
Bad Debt Reserves. As a "domestic building and loan association," the Bank
is permitted to establish reserves for bad debts and to make annual additions
thereto which qualify as deductions from taxable income. The bad debt deduction
is generally based on a savings institution's actual loss experience (the
"Experience Method"). In addition, provided that certain definitional tests
relating to the composition of assets and the nature of its business are met, a
savings institution may elect annually to compute its allowable addition to its
bad debt reserves for qualifying real property loans (generally loans secured by
improved real estate) by reference to a percentage of its taxable income (the
"Percentage Method").
Under the Experience Method, the deductible annual addition is the amount
necessary to increase the balance of the reserve at the close of the taxable
year to the greater of (i) the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum of
the loans outstanding at the close of those six years or (ii) the balance in the
reserve account at the close of the Bank's "base year," which was its tax year
ended December 31, 1987.
Under the Percentage Method, the bad debt deduction with respect to
qualifying real property loans is computed as a percentage of the Bank's taxable
income before such deduction, as adjusted for certain items (such as capital
gains and the dividends received deduction). Under this method, a qualifying
institution such as the Bank generally may deduct 8% of its taxable income. In
the absence of other factors, the availability of the Percentage Method has
permitted a qualifying savings institution, such as the Bank, to be taxed at an
effective federal income tax rate of 31.28%, as compared to 34% for corporations
generally.
For taxable years ended on or before December 31, 1988, the Bank has
generally elected to use the Percentage Method to compute the amount of its bad
debt deduction with respect to its qualifying real property loans. For all
taxable years ended after December 31, 1988 with the exception of the September
30, 1996 tax year, the Bank has elected to use the Experience Method to compute
the amount of its bad debt deduction with respect to its qualifying real
property loans. As of September 30, 1996, the Bank's qualified assets
constituted approximately 92.3% of its total assets and the balance of its
accumulated bad debt reserve was 1.0% of its qualifying and non-qualifying
loans. As a result, the Bank does not believe that any of the restrictions
imposed upon the computation of the bad debt deduction would be a limiting
factor.
The income of the Company or any non-bank subsidiaries would not be subject
to the bad debt deduction allowed the Bank, whether or not consolidated tax
returns are filed.
In August 1996, the Small Business Job Protection Act (the "Act") was
signed into law. The Act repealed the percentage of taxable income method of
accounting for bad debts for thrift institutions effective for years beginning
after December 31, 1995. The Act will require the Company as of October 1, 1996
to change its method of
39
<PAGE> 41
computing reserves for bad debts to the experience method. The bad debt
deduction allowable under this method is available to small banks with assets
less than $500 million. Generally, this method will allow the Company to deduct
an annual addition to the reserve for bad debts equal to the increase in the
balance of the Company's reserve for bad debts at the end of the year to an
amount equal to the percentage of total loans at the end of the year, computed
using the ratio of the previous six years net charge offs divided by the sum of
the previous six years total outstanding loans at year end.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in a method of accounting
determined solely with respect to he "applicable excess reserves" of the
institution. The amount of the applicable excess reserves will be taken into
account ratable over a six-taxable year period, beginning with the first taxable
year beginning after December 31, 1995. The timing of the recapture may be
delayed for a two-year period provided certain residential lending requirements
are met. For financial reporting purposes, the Company will not incur any
additional tax expense. At September 30, 1996, under SFAS No. 109, deferred
taxes were provided on the difference between the book reserve at September 30,
1996 and the applicable excess reserve in an amount equal to the Bank's increase
in the tax reserve from December 31, 1987 to September 30, 1996.
Distributions. While the Bank maintains a bad debt reserve, if it were to
distribute cash or property to its sole stockholder having a total fair market
value in excess of its accumulated tax-paid earnings and profits, or were to
distribute cash or property to its stockholder in redemption of its stock, the
Bank would generally be required to recognize as income an amount which, when
reduced by the amount of federal income tax that would be attributable to the
inclusion of such amount in income, is equal to the lesser of: (i) the amount of
the distribution or (ii) the sum of (a) the amount of the accumulated bad debt
reserve of the Bank with respect to qualifying real property loans (to the
extent that additions to such reserve exceed the additions that would be
permitted under the experience method) and (b) the amount of the Bank's
supplemental bad debt reserve.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20%
on a base of regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI"). The alternative minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
an item of tax preference is the excess of the bad debt deduction allowable for
a taxable year pursuant to the percentage of taxable income method over the
amount allowable under the experience method. The other items of tax preference
that constitute AMTI include (a) tax-exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) for taxable years beginning after 1989, 75% of the
excess (if any) of (i) adjusted current earnings as defined in the Code, over
(ii) AMTI (determined without regard to this preference and prior to reduction
by net operating losses). Net operating losses can offset no more than 90% of
AMTI. Certain payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years.
Audit by IRS. The Bank's consolidated federal income tax returns for
taxable years through December 31, 1994 have been closed for the purpose of
examination by the IRS.
STATE TAXATION
The Company is subject to the Pennsylvania Corporate Net Income Tax and
Capital Stock and Franchise Tax. The Corporate Net Income Tax rate for fiscal
1996 is 9.99% and is imposed on the Company's unconsolidated taxable income for
federal purposes with certain adjustments. In general, the Capital Stock Tax is
a property tax imposed at the rate of 1.3% of a corporation's capital stock
value, which is determined in accordance with a fixed formula.
The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax Act
(the ("MTIT"), as amended to include thrift institutions having capital stock.
Pursuant to the MTIT, the Bank's tax rate is 11.5%. The MTIT exempts the Bank
from all other taxes imposed by the Commonwealth of Pennsylvania for state
income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with GAAP with certain
adjustments. The MTIT, in computing GAAP income, allows for the deduction of
interest earned on state and federal securities, while disallowing a percentage
of a thrift's interest expense deduction in the proportion of interest income on
those securities to the overall interest income of the Bank. Net operating
losses, if any, thereafter can be carried forward three years for MTIT purposes.
40
<PAGE> 42
ITEM 2. PROPERTIES
At September 30, 1996, the Bank conducted business from its executive
offices located in Media, Pennsylvania and four full-service offices
located in Delaware County, Pennsylvania. See also Note 8 of the Notes
to Consolidated Financial Statements in the Annual Report.
The following table sets forth certain information with respect to the
Bank's offices at September 30, 1996.
<TABLE>
<CAPTION>
Net Book Value
of Amount of
Description/Address Leased/Owned Property Deposits
------------------- ------------ -------- --------
(In thousands)
<S> <C> <C> <C>
Executive Offices:
Main Office
22 West State Street
Media, Pennsylvania 19063 Owned $1,042 $ 73,041
Branch Offices:
3218 Edgmont Avenue
Brookhaven, Pennsylvania 19015 Owned 232 74,809
Routes 1 and 100
Chadds Ford, Pennsylvania 19318 Leased(1) 84 17,012
23 East Fifth Street
Chester, Pennsylvania 19013 Leased(2) 306 16,327
330 Dartmouth Avenue
Swarthmore, Pennsylvania 19081 Owned 134 38,016
------ --------
$1,798 $219,205
====== ========
</TABLE>
----------------------------
(1) Lease expiration date is September 30, 2000. The Bank has two
five year renewal options.
(2) Lease expiration date is December 31, 2005. The Bank has one
ten year renewal option.
41
<PAGE> 43
ITEM 3. LEGAL PROCEEDINGS.
In April 1994, a lawsuit was filed in the Court of Common Pleas in
Delaware County. The lawsuit was brought on behalf of the estates of
eight individuals arising out of the activities of a now deceased
attorney who maintained a law practice in Media, Pennsylvania. The
attorney was accused of misappropriating the funds of such estates for
which he served as counsel, executor and administrator. During the
fiscal year ended September 30, 1996, the case settled with all of the
plaintiffs in the amount of $400,000 with the settlement amount being
completely covered by insurance, less any deductible.
Other than the matter discussed above, the Bank is involved in routine
legal proceedings occurring in the ordinary course of business which,
in the aggregate, are believed by management to be immaterial to the
financial condition of the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from page
3 of the Registrant's 1996 Annual Report. At December 16, 1996 there
were approximately 489 shareholders of record, not including the number
of persons or entities whose stock is held in nominee or street name
through various brokerage firms or banks.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required herein is incorporated by reference from pages
8 to 17 of the Registrant's 1996 Annual Report.
ITEM 7. FINANCIAL STATEMENTS.
The information required herein is incorporated by reference form pages
18 to 39 of the Registrant's 1996 Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND PROMOTORS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT.
The information required herein is incorporated by reference from pages
2 to 5 and page 12 of the Registrant's Proxy Statement dated December
31, 1996 ("Proxy Statement").
42
<PAGE> 44
ITEM 10. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from
pages 8 to 12 of the Registrant's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from
pages 6 to 7 of the Registrant's Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page
12 of the Registrant's Proxy Statement.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report.
(1) The following documents are filed as part of this report
and are incorporated herein by reference from the
Registrant's Annual Report.
Report of Independent Auditors.
Consolidated Statements of Financial Condition at
September 30, 1996 and 1995.
Consolidated Statements of Income for the Years Ended
September 30, 1996, 1995 and 1994.
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended September 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994.
Notes to the Consolidated Financial Statements.
(2) All schedules for which provision is made in the
applicable accounting regulation of the SEC are omitted
because they are not applicable or the required
information is included in the Consolidated Financial
Statements or notes thereto.
(3) The following exhibits are filed as part of this Form
10-KSB, and this list includes the Exhibit Index.
43
<PAGE> 45
<TABLE>
<CAPTION>
No Description Page
- -- ----------- ----
<S> <C>
3.1 Amended and Restated Articles of Incorporation of
First Keystone Financial, Inc. (*)
3.2 Amended and Restated Bylaws of First Keystone Financial, Inc. (*)
4 Specimen Stock Certificate of First Keystone Financial, Inc. (*)
10.1 Employee Stock Ownership Plan and Trust of First Keystone Financial, Inc. (*)
10.2 401(K)/ Profit Sharing Plan of First Keystone Federal Savings Bank *
10.3 Employment Agreement between First Keystone Financial, Inc. and
Donald S. Guthrie (incorporated by reference from Exhibit 10.3 to
Registrant's Form 10-KSB for the year ended September 30, 1995).
10.4 Employment Agreement between First Keystone Financial, Inc. and
Stephen J. Henderson (incorporated by reference from Exhibit 10.4 to
Registrant's Form 10-KSB for the year ended September 30, 1995).
10.5 Employment Agreement between First Keystone Financial, Inc. and
Thomas M. Kelly (incorporated by reference from Exhibit 10.5 to
Registrant's Form 10-KSB for the year ended September 30, 1995).
10.6 Form of Severance Agreement between First Keystone Financial, Inc. and
Elizabeth M. Mulcahy (incorporated by reference from Exhibit 10.6 to
Registrant's Form 10-KSB for the year ended September 30, 1995).
10.8 Form of Severance Agreement between First Keystone Financial, Inc. and
Carol Walsh (incorporated by reference from Exhibit 10.8 to
Registrant's Form 10-KSB for the year ended September 30, 1995).
10.9 1995 Stock Option Plan (incorporated by reference from Exhibit
10.9 to Registrant's Form 10-KSB for the year ended September 30,
1995).
</TABLE>
44
<PAGE> 46
<TABLE>
<S> <C>
10.10 1995 Recognition and Retention Plan and Trust Agreement,
(incorporated by reference from Exhibit 10.10 to Registrants
Form 10-KSB for the year ended September 30, 1995).
11 Statement re: Computation of Earnings
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant - Reference is made to Item 1
"Business," for the required information
23 Consent of Experts and Counsel
</TABLE>
- -----------------------
(*) Incorporated by reference from the Registration Statement Form S-1
(Registration No. 33-84824) filed by the Registrant with the SEC on
October 6, 1994, as amended.
(b) Reports filed in Form 8-K.
None.
45
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
By:/s/ Donald S. Guthrie
-----------------------------
Donald S. Guthrie
President and Chief Executive
Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report had been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Donald S. Guthrie December 27, 1996
- --------------------------------------------------
Donald S. Guthrie
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Thomas M. Kelly December 27, 1996
- -----------------------------------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
/s/ Donald A. Purdy December 27, 1996
- ------------------------------------------------
Donald A. Purdy
Chairman of the Board
/s/ William K. Betts December 27, 1996
- ------------------------------------------------
William K. Betts
Director
/s/ Edward Calderoni December 27, 1996
- ------------------------------------------------
Edward Calderoni
Director
/s/ Silvio F. D'Ignazio December 27, 1996
- ------------------------------------------------
Silvio F. D'Ignazio
Director
</TABLE>
46
<PAGE> 48
<TABLE>
<S> <C>
/s/ Olive J. Faulkner December 27, 1996
- ------------------------------------------------
Olive J. Faulkner
Director
/s/ Edmund Jones December 27, 1996
- ------------------------------------------------
Edmund Jones
Director
/s/ Willard F. Letts December 27, 1996
- ------------------------------------------------
Willard F. Letts
Director
/s/ Walter J. Lewicki December 27, 1996
- ----------------------------------------------
Walter J. Lewicki
Director
/s/ Charles E. Rankin December 27, 1996
- ---------------------------------------------
Charles E. Rankin
Director
/s/ Joan G. Taylor December 27, 1996
- -----------------------------------------------
Joan G. Taylor
Director
</TABLE>
47
<PAGE> 1
Exhibit 11.
Statement re: Computation of Earnings
Earnings per share for the year ended September 30, 1996 is based on net income
of $885,000 divided by the weighted average number of shares and equivalent
shares outstanding during the period of 1,191,583.
Earnings per share is based on income from January 25, 1995 (the date of the
initial public offering) through September 30, 1995 of $928,000 divided by the
weighted-average number of shares and equivalent shares outstanding during the
period of 1,254,237. Since the initial offering was completed on January 25,
1995, earnings per share information for prior years is not applicable.
<PAGE> 1
EXHIBIT 13
TABLE OF CONTENTS
Selected Consolidated and Other Financial Data ...................... 2
A Message to Our Shareholders ....................................... 4
The Year in Review .................................................. 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations ................. 8
Report of Independent Auditors ...................................... 18
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition ............. 19
Consolidated Statements of Income .......................... 20
Consolidated Statements of Changes in Stockholders' Equity . 21
Consolidated Statements of Cash Flows ...................... 22
Notes to Consolidated Financial Statements ................. 23
Corporate Information ............................................... 40
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of First Keystone Financial,
Inc. set forth below does not purport to be complete and should be read in
conjunction with, and is qualified in its entirety by, the more detailed
information, including the Consolidated Financial Statements and related Notes,
appearing elsewhere herein.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
SELECTED FINANCIAL DATA:
Total assets $294,241 $ 280,979 $ 237,749 $ 233,516 $ 232,399
Loans receivable, net 167,530 158,002 142,226 137,186 147,739
Mortgage-related securities, net 23,221 60,294 68,369 64,213 46,004
Investment securities 10,710 12,145 11,238 11,997
Assets held for sale:
Mortgage-related and equity securities 60,211 19,538 251 946
Loans 2,447 57 168 1,245 1,633
Real estate owned 1,557 465 503 971 2,084
Deposit accounts 219,205 223,753 216,065 218,361 218,731
FHLB advances and other borrowings 46,740 28,411 5,267 343
Stockholders' equity 23,084 24,463 11,622 11,206 10,161
Non-performing assets 6,909 3,621 5,879 6,455 7,116
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATIONS DATA:
Interest income $19,837 $ 18,295 $ 15,547 $ 16,573 $ 18,389
Interest expense 10,932 10,767 9,153 10,048 12,197
------ ------ ----- ------ ------
Net interest income 8,905 7,528 6,394 6,525 6,192
Provision for loan losses 1,250 52 416 390 120
Net interest income
after provision for loan losses 7,655 7,476 5,978 6,135 6,072
Other income (expense):
Service charges and other fees 1,047 1,029 1,010 962 924
Net gain on sales of interest-earning assets 203 113 350 778 545
Net gain (loss) on real estate activities 2 (44) (47) 17 228
Net recovery on real estate investments 280
Other 56 89 158 119 116
Operating expenses 8,645(1) 7,036 7,728 6,918 6,334
-------- ----- ----- ----- -----
Income (Loss) before income taxes,
extraordinary item
and cumulative effect of change in
accounting principle 318 (1) 1,627 (279) 1,093 1,831
Income tax expense (benefit) (567) 504 (95) 127 546
Extraordinary item, utilization of
state tax carryforward 79 100
Cumulative effect of change in
accounting for income taxes 600
-------- --------- --------- --------- ---------
Net income $ 885(1) $ 1,123 $ 416 $ 1,045 $ 1,385
========== ========= ========= ========= =========
Earnings per common share $ .74(1) $ .74 N/A N/A N/A
========== ========= ========= ========= =========
</TABLE>
- ---------------
(1) Includes the effects of the one-time SAIF special assessment. The
effects of the assessment increased operating expenses and decreased
income before income taxes by $1.4 million. The effects of the
assessment also decreased net income and earnings per share by
$876,000 and $.74, respectively.
2
<PAGE> 3
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS:
Average yield earned on interest-earning assets 7.45% 7.37% 6.84% 7.31% 8.25%
Average rate paid on interest-bearing liabilities 4.42 4.62 4.18 4.58 5.60
Average interest rate spread 3.03 2.75 2.66 2.73 2.65
Net interest margin 3.34 3.03 2.81 2.88 2.78
Ratio of interest-earning assets to
interest-bearing liabilities 107.65 106.55 103.77 103.33 102.37
Net interest income after provision for loan losses to
operating expenses 88.55(2) 106.25 77.36 88.68 95.86
Operating expenses as a percent of average assets 3.14(2) 2.73 3.29 2.95 2.74
Return on average assets 0.32(2) 0.44 .18 0.45 0.60
Return on average equity 3.84(2) 5.59 3.60 10.07 14.83
Ratio of average equity to average assets 8.36 7.80 4.91 4.42 4.04
Full-service offices at end of period 5 5 5 5 5
- ------------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS:(3)
Non-performing loans as a
percent of gross loans receivable 3.15 1.98 3.74 3.92 3.32
Non-performing assets as a
percent of total assets 2.35 2.12 2.46 2.76 3.06
Allowance for loan losses as a
percent of gross loans receivable 1.54 .93 1.07 0.91 1.42
Allowance for loan losses as a
percent of nonperforming loans 49.03 47.12 28.65 23.07 42.43
Net loans charged-off to average
interest-earning loans receivable 0.07 0.07 0.10 0.89 0.03
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS:(3)
Tangible capital ratio 7.67 8.23 4.88 4.80 4.37
Core capital ratio 7.67 8.23 4.88 4.80 4.37
Risk-based capital ratio 17.24 17.82 10.13 10.77 9.34
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(2) Includes the effects of the one-time SAIF special assessment of $1.4
million. Excluding the one-time effects, the ratio of net interest
income after provision for loan losses to operating expenses and
operating expenses as a percent of average assets were 106.04% and
2.62%, respectively. In addition, return on average assets and return
on average equity were .64% and 7.64%, respectively, excluding the
assessment.
(3) Asset Quality Ratios and Capital Ratios are end of period ratios,
except for charge-offs to average loans. With the exception of end of
period ratios, all ratios are based on average daily balances during
the indicated periods.
The following table shows market price information for Company's Common Stock
(NASDAQ Symbol: FKFS). The prices set forth below represent the high and low
prices on the Nasdaq National Market System during the periods indicated. During
the periods presented, the Company did not declare or pay any dividend on its
common stock. (See Note 20 to the Consolidated Financial Statements.)
<TABLE>
<CAPTION>
PRICE PER SHARE
-------------------
QUARTERLY PERIOD ENDED HIGH LOW
- ---------------------- ---- ---
<S> <C> <C>
March 31, 1995(a) $12.75 $10.25
June 30, 1995 13.375 12.25
September 30, 1995 18.00 14.25
December 31, 1995 21.00 15.25
March 31, 1996 20.75 18.50
June 30, 1996 19.00 17.00
September 30, 1996 18.25 16.75
</TABLE>
(a) The Company's Common Stock commenced trading on January 26, 1995.
3
<PAGE> 4
A MESSAGE TO OUR SHAREHOLDERS
[PHOTO OF DONALD S. GUTHRIE]
I am pleased to report that in our first full year as a public company, First
Keystone Financial, Inc., the holding company for First Keystone Federal Savings
Bank, has successfully implemented a number of the initiatives outlined in our
strategic plan during this past fiscal year:
ENHANCING SHAREHOLDER VALUE;
As part of the Company's initiatives to enhance shareholder value, the Company
repurchased 5% of its issued and outstanding shares of common stock in the first
quarter of 1996. In addition, as a result of the Company's strong earnings and
capital position, your Board of Directors established a dividend policy with an
initial quarterly dividend of $.05 per share payable in the first quarter of
1997.
INCREASING THE COMPANY'S CORE EARNINGS;
Excluding a one-time special assessment, core earnings have grown substantially,
net interest margin has increased and our profitability ratios have improved. In
the fourth quarter of this fiscal year, the Company, as did most banking
institutions with Savings Association Insurance Fund (SAIF) deposits, had to pay
a one-time assessment to recapitalize SAIF. As a result, the Company earned net
income of $885,000 or .$74 per share for the year ended September 30, 1996,
which reflects the effects of this $1.4 million pre-tax charge and a $1.2
million provision for possible loan losses. Excluding the one-time special
assessment, the Company's net income was $1.8 million for fiscal 1996, an
increase of $638,000 or 56.8% compared to fiscal 1995. The Company's earnings
per share for fiscal 1996 were $.74 per share (including the one-time special
assessment) and $1.48 per share (excluding the one-time special assessment) as
compared to $.74 in fiscal 1995.
The one-time special assessment of 65.7 basis points on SAIF-insured deposits
was part of federal legislation passed by Congress and signed by the President
in September of 1996. The legislation also lowers the SAIF premium from 23 cents
per $100 of deposits to approximately 6.5 cents per $100 of deposits. We are
pleased that the insurance issue has finally been resolved as this will result
in an annual estimated pre-tax savings of $365,000 per year for the Company.
4
<PAGE> 5
REDUCING THE COMPANY'S OPERATING EXPENSE RATIOS;
Excluding the one-time assessment, the Company experienced a slight increase in
operating expenses of $200,000 due primarily to a one time charge of
approximately $311,000 incurred in association with the implementation of a cost
reduction program announced in the first quarter of fiscal 1996. However,
operating expenses as a percentage of average assets decreased from 2.7% of
average assets during 1995 to 2.4% of average assets during 1996. Through staff
reduction, controlled expenses and greater use of technology, operating expenses
have begun to decline from $1.8 million in the fourth quarter of fiscal 1995
compared to $1.7 million for the fourth quarter of 1996.
MEETING THE BANKING NEEDS OF OUR CUSTOMERS AND THE COMMUNITIES THAT WE SERVE.
In keeping with the Company's strategic plan to increase core earnings and
enhance net interest margin, in 1996, First Keystone expanded its services to
include commercial lending. With more than 12 years of commercial lending
experience, the Vice President of this new division will focus on small to
moderate sized businesses located in the Delaware Valley region. Recognizing
that commercial accounts are built on relationships and not just transactions,
we will develop this part of our portfolio with the same prudent management
style that has been the foundation of our success. This is a natural extension
to our product line as First Keystone has been serving many of these businesses
with their traditional retail banking needs for years. We see this new program
as a significant opportunity to grow our business accounts and diversify our
portfolio by providing a quicker response time and more personalized service
than larger banks headquartered in cities and states outside our region, since
as a community bank, management and its Board of Directors are local and have a
comprehensive understanding of the Bank's marketplace.
As a new public company, we have had a successful first flight, but many
opportunities lie ahead. We understand that there is no substitute for results
and we plan to deliver even greater results in 1997. We plan to continue to
increase our core earnings, improve our profitability ratios, provide our
shareholders enhanced value and deliver an ever improving level of service to
our valuable customers. Your Board of Directors, officers and dedicated
employees are committed to these goals in 1997.
On behalf of myself, the Board of Directors, officers and employees of First
Keystone, we thank you for your continued support and wish you and your family a
healthy and prosperous new year.
/s/ Donald S. Guthrie
-------------------------------------
Donald S. Guthrie
President and Chief Executive Officer
[PHOTO CAPTION]
"Unlike other area banks which keep changing their names and their people,
Monika and I appreciate the personal attention and relationships we've developed
with the people at First Keystone Federal."
Z. Rehoric
Kenny's Flower Shop, Media
[PHOTO OF Z. Rehoric}
5
<PAGE> 6
[PHOTO OF Emily R. Myers]
[PHOTO CAPTION]
"My branch manager took the time to research my account and located a cancelled
check which saved me a substantial amount of money -- First Keystone Federal
saved the day for me."
Emily R. Myers
Decision Design Research, Inc.
YEAR END HIGHLIGHTS
ON TECHNOLOGY...
During 1996, First Keystone introduced Check Imaging to its services portfolio.
This system eliminates the cost of collating and returning customer checks by
mail. It also minimizes employee time required to research account inquiries. In
the fourth quarter of 1995, the Bank introduced 24-Hour Telephone Banking which
has won wide acceptance with our customers in 1996. Many types of customer
transactions and inquiries can now be processed through the Bank's automated
system 7 days a week, 24 hours a day by a touch tone telephone. The volume of
monthly transactions that are handled by this system has increased by 78% from
the first quarter of this fiscal year compared to the last quarter of this year.
Previously these transactions were done by Bank personnel.
OUR STRENGTH IN LENDING . . .
Management, recognizing the customer's propensity for a more comprehensive
product line and the intent of Congress as recently expressed in the newly
enacted BIF/SAIF legislation, launched its commercial lending department in the
fall of 1996. The solid judgement and knowledge of the marketplace that has been
the cornerstone of First Keystone's success will serve as a tremendous resource
as this part of the Bank's portfolio grows.
Capitalizing on our relationship with established builders in our area, and
the Company's solid reputation in the local construction market, First Keystone
placed renewed emphasis on construction lending, increasing its construction and
land loan portfolio from $16.3 million at September 30, 1995 to $17.7 million at
September 30, 1996.
Similarly, the Bank ended 1996 with $20.4 million in consumer loans up from
$18.2 million in 1995, due primarily to a successful home equity promotion
conducted in the third and fourth quarters.
Refinancing activity increased in the third quarter as a result of further
reductions in long-term interest rates. Overall, originations of single-family
real estate remained steady at $54.0 million.
6
<PAGE> 7
In accordance with the Company's strategic plan to diversify its portfolio in
order to enhance shareholder value through increased interest rate margins and
fee revenue, after several years as a correspondent for nonconforming loans, in
1996 the Company began to expand its residential product line to include the
origination of credit-impaired loans through First Keystone's new "Fresh Start"
mortgage program. A third outside loan solicitor was hired to augment these
efforts.
REINVESTING IN THE COMMUNITY...
First Keystone, like many local banks, was started more than 100 years ago
during the industrial revolution, when the thousands of workers who manned the
factories and maintained the port of Chester needed loans to buy their homes.
The big city banks weren't there for these laborers, and so the community
established its own building and loan associations which provided mortgages and
a means to save for the future. This sense of community is a tradition that
hasn't been lost at First Keystone Federal. The Bank supports and sponsors many
civic and community activities such as the Halloween Parade and the Media Arts
and Crafts Show.
The Company is proud of our leadership role in the participation in loan
programs for low and moderate incomes as we continue to be recognized by the
Federal Home Loan Bank of Pittsburgh's Affordable Housing Program as a leader
among our financial peers. The federal regulators have also recognized First
Keystone's achievements by its designation of an "outstanding" in community
reinvestment for the last five years.
PRODUCT DEVELOPMENT
AND STRATEGIC MARKETING...
Direct mail will continue to be a major marketing tool throughout 1997 as we
focus our efforts on providing multiple services to our existing household base
in order to develop more loyal and less rate sensitive customers. In addition,
we will continue to cross-sell our new "Escrow Manager," a single escrow account
designed to enhance record keeping and reporting for commercial deposit account
holders, as we evaluate the demand for a Cash Management Account allowing these
commercial accounts greater flexibility in controlling their specific cash
needs.
Also for 1997, we are investigating new areas for acquisition and/or branch
development. In each of these instances, our objective is to take advantage of
growth opportunities as they present themselves -- opportunities that will
further refine the quality and efficiency of our services to meet the needs of
our ever changing and growing customer base.
[PHOTO CAPTION]
"I needed a 'rainy day' savings account for my business, one that didn't require
a huge minimum deposit. I looked all over town, and First Keystone Federal was
the only bank who would help me!"
Larry Cooperman
Media Pretzel Company
[PHOTO OF Larry Cooperman]
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
On January 25, 1995, the Board of Directors of First Keystone Federal Savings
Bank (the "Bank") completed its Conversion from a federally chartered mutual
savings bank to a federally chartered stock savings bank with the concurrent
formation of a holding company (the "Conversion"). The Conversion resulted in
the Bank becoming a wholly-owned subsidiary of First Keystone Financial, Inc.
(the "Company"). The Conversion was accounted for in a manner similar to a
pooling of interests. Accordingly, the Bank's assets, liabilities and equity
continue to be reflected based on historical amounts.
As the Company presently does not own any operating subsidiaries other than
the Bank, the discussion below with respect to the results of operations relates
primarily to the Bank, and the financial data for the period prior to the
Conversion reflects financial data of the Bank. For purposes of this discussion,
First Keystone Financial, Inc., including its wholly-owned subsidiaries, will be
referred to as the "Company". The following discussion should be read in
conjunction with the Company's consolidated financial statements presented
elsewhere herein.
The Company's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, which principally consist of loans, mortgage-related securities and
investment securities, and interest expense on interest-bearing liabilities,
which principally consist of deposits and Federal Home Loan Bank ("FHLB")
advances. The Company's results of operations also are affected by the provision
for loan losses, resulting from management's assessment of the adequacy of the
allowance for loan losses; the level of its non-interest income, including
service charges and other fees, and gains and losses from the sale of certain
assets, the level of its operating expenses; and income tax expense.
Asset and Liability Management
The principal objective of the Company's asset and liability management
function is to evaluate the interest rate risk included in certain assets and
liabilities, determine the level of risk appropriate given the Company's
business focus, operating environment, capital and liquidity requirements and
performance objectives, establish prudent asset concentration guidelines and
manage the risk consistent with Board approved guidelines. Through management,
the Company seeks to reduce both the vulnerability and volatility of its
operations to changes in interest rates and to manage the ratio of interest-rate
sensitive assets to interest-rate sensitive liabilities within specified
maturities or repricing dates. The Company's actions in this regard are taken
under the guidance of the Asset/Liability Committee ("ALCO"), which is chaired
by the Chief Financial Officer and comprised of members of the Company's senior
management. The ALCO, at a minimum, meets quarterly to review, among other
things, the sensitivity to interest rate changes of the Company's assets and
liabilities, the book and market values of assets and liabilities, unrealized
gains and losses, purchase and sale activity and maturities of investments and
borrowings. In connection therewith, the ALCO generally reviews the Company's
liquidity, cash flow needs, maturities of investments, deposits and borrowings,
current market conditions and interest rates. In addition, the pricing of the
Company's residential loans and deposits is reviewed at least weekly while the
pricing of loans originated for sale in the secondary market is reviewed daily.
The ALCO reports to the Company's Board of Directors on a quarterly basis.
The Company's primary asset/liability monitoring tool consists of various
asset/liability simulation models, which are prepared on a quarterly basis and
are designed to capture the dynamics of balance sheet, rate and spread movements
and to quantify variations in net interest income under different interest rate
environments.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
The Company also utilizes market value analysis, which addresses
the change in equity value arising from movements in interest rates. The market
value of equity is estimated by valuing the Company's assets and liabilities.
The extent to which assets have gained or lost value in relation to the gains or
losses of liabilities determines the appreciation or depreciation in equity on a
market value basis. Market value analysis is intended to evaluate the impact of
immediate and sustained shifts of the current yield curve upon the market value
of the current balance sheet.
A more conventional but limited Asset/Liability monitoring tool involves an
analysis of the extent to which assets and liabilities are "interest rate
sensitive" and measures an institution's interest rate sensitivity "gap." An
asset or liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity "gap" is defined as the difference between interest-earning assets
and interest-bearing liabilities maturing or repricing within a given time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income, while
a positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would tend to affect
net interest income adversely. While a conventional gap measure may be useful,
it is limited in its ability to predict trends in future earnings. It makes no
presumptions about changes in prepayment tendencies, deposit or loan maturity
preferences or repricing time lags that may occur in response to a change in the
interest rate environment.
Changes in Financial Condition
General. Total assets of the Company increased by $13.3 million, or 4.7%, from
$281.0 million at September 30, 1995 to $294.2 million at September 30, 1996.
The increase was due primarily to a $11.9 million or 7.5% increase in loans
receivable and loans held for sale, and a $9.4 million, or 10.4% , increase in
investment and mortgage-related securities (including securities classified as
available for sale) offset, in part, by a $10.8 million, or 52.3% decrease in
interest-bearing deposits. The net increase was funded primarily from proceeds
of shorter term borrowings.
Cash and Investments. Cash and investments (including investments available
for sale) decreased by $5.2 million, or 15.4%, to $28.2 million at September 30,
1996 compared to $33.4 million at September 30, 1995. The decrease was due to
decreases in cash and cash equivalents as the Company used various cash
management techniques to increase earnings, including investing the funds in
higher-yielding shorter term government securities and maintaining minimal lower
yielding overnight deposits.
Loans Held For Sale and Loans Receivable, Net. Aggregate loans receivable
(loans receivable, net and loans held for sale) increased $11.9 million or 7.5%
to $170.0 million at September 30, 1996 compared to $158.1 million at September
30, 1995. The increase is the result of the Company's continued emphasis on
residential and consumer lending. Contributing to the increase were a $7.0
million or 6.1% increase in originated residential loans, a $1.3 million or 8.2%
increase in originated construction loans and a $2.9 million or 14.0% increase
in originated consumer loans.
Mortgage-Related Securities and Mortgage-Related Securities Available For
Sale. Mortgage-related securities and mortgage-related securities available for
sale increased in the aggregate by $3.6 million, or 4.5%, to $83.4 million at
September 30, 1996 compared to $79.8 million at September 30, 1995. The increase
is a result of the Company's leveraging its equity position, in conjunction with
its loans receivable portfolio, to increase interest income. In accordance with
the requirements of a Financial Accounting Standards Board ("FASB") special
report and in order to enhance the Company's ability to respond to changes in
interest rates, the
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Company reclassified in December 1995 approximately $50.5 million in securities
from its held to maturity category to the available for sale category.
Additional purchases during the year were designated as either held to maturity
or available for sale depending on bond characteristics (i.e. term, yield and
price volatility, prepayment speeds) and the Company's asset/liability strategy.
Non-Performing Assets. The Company's total non-performing loans and real
estate owned increased $3.3 million or 90.8% from $3.6 million or 1.3% of total
assets at September 30, 1995 to $6.9 million or 2.3% of total assets at
September 30, 1996. The increase in the nonperforming assets was due to the
inclusion of lease financings from the Bennett Funding Group, Inc., a
closely-held Syracuse, New York-based leasing company ("Bennett Funding") and
affiliated companies.
Between September 1992 and March 1996, the Company purchased 16 separate
pools of lease financings from Bennett Funding and its affiliates with a total
balance outstanding as of September 30, 1996 of $3.8 million. Included in the
total balance were $890,000 in equipment leases (some of which are insured by a
private insurer), $800,000 in interim contract financings for equipment leases
which have not yet been pooled and sold and $380,000 in consumer financings.
Also included in the Company's total balance were $1.3 million in consumer
receivables issued by Resort Funding, Inc., an affiliate of Bennett Funding,
secured by timeshare financing contracts and $475,000 in equipment leases from
Aloha Capital Corp., another affiliate of Bennett Funding. On March 29, 1996,
Bennett Funding filed for Chapter 11 bankruptcy protection. On April 24, 1996,
Aloha Capital Corp. and other Bennett Funding affiliates, including affiliates
who act as the processor for payments due holders of lease and loans issued by
Bennett Funding and its affiliates, also filed for Chapter 11 bankruptcy
protection. Although the Company is continuing to receive payments on the $1.3
million in consumer receivables (approximately $100,000 in principal reduction
had been received through September 30, 1996) from Resort Funding, Inc., the
Company has chosen to place the entire $3.8 million on non-accrual status and
has classified the credits as substandard. Although the Company has not
established any specific reserves or charged off any portion of the financings,
the Company, in accordance with its policy regarding classified assets, has
allocated approximately $1.4 million of its unallocated general loss allowance.
The Company is actively monitoring the bankruptcy proceedings and is vigorously
pursuing all options available to protect its interest. However, no assurance
can be given that significant additional provisions or charge offs will not be
required or that losses will not be incurred in connection with the resolution
of the situation. Other non-performing loans, which amounted to $1.5 million at
September 30, 1996, consist primarily of single-family residential mortgage
loans.
Real estate owned increased $1.1 million to $1.6 or .53% of total assets at
September 30, 1996 as compared to $465,000 or .17% at September 30, 1995. The
increase was a result of the Company's acceptance of a deed in lieu of
foreclosure on the Company's only delinquent construction loan for the
acquisition and improvement of a 107-lot real estate development project located
in Pennsylvania. Seventy-one of the townhouses have been completed and sold and
the Company has engaged a local builder to complete the project. It is expected
that the project should be completed in 18 to 24 months.
Deposits. Deposits decreased by $4.5 million, or 2.0%, from $223.8 million
at September 30, 1995 to $219.2 million at September 30, 1996. This decrease was
primarily due to a $4.5 million decrease in non-interest bearing accounts as the
balance in the prior year was unusually high. Certificates of deposit increased
$1.8 million or 1.4% from September 30, 1995 to September 30, 1996 despite the
maturing of approximately $20.0 million in high rate, long-term certificates.
Offsetting this increase was a $1.9 million or 2.1% net decline in passbook, NOW
and money market accounts. The shift in deposits accounts reflects general
market conditions as customers sought to invest in higher yielding certificates
of deposit.
Borrowings. The Company's borrowings, comprised solely of advances from the
FHLB, increased $18.3 million to $46.7 million at September 30, 1996 from $28.4
million at
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
September 30, 1995. The FHLB advances had a weighted average interest
rate of 5.83% at September 30, 1996 and were used to fund loan and investment
growth.
Equity. At September 30, 1996, total stockholders' equity was $23.1 million
or 7.8% of total assets, compared to $24.5 million or 8.7% of total assets at
September 30, 1995. The $1.4 million decrease was due to the Company's
repurchase of 67,500 shares of treasury stock for $1.3 million, a decrease of
$636,000 in unrealized loss on available for sale securities and the purchase of
stock for employee benefit programs of $704,000, offset by net income for the
year and the amortization of expense relating to the employee benefit plans. The
decrease in the capital ratio was due to the aforementioned factor as well as
the increase in total assets as the Company leveraged its capital.
Average Balances, Net Interest Income and Yields Earned and Rates Paid. The
following table sets forth, for the periods indicated, information regarding (i)
the total dollar amount of interest income of the Company from interest-earning
assets and the resultant average yields; (ii) the total dollar amount of
interest expense on interest-bearing liabilities and the resultant average rate;
(iii) net interest income; (iv) interest rate spread; and (v) net interest
margin. Information is based on average daily balances during the indicated
periods.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1996 1995 1994
---- ---- ----
YIELD/COST AT AVERAGE AVERAGE AVERAGE
SEPTEMBER 30, AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
1996 BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---- ------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable(1) 7.89% $164,359 $13,459 8.19% $151,198 $12,472 8.25% $137,457 $11,066 8.05%
Mortgage-related securities(2) 6.73 80,539 5,229 6.49 71,832 4,377 6.09 67,843 3,581 5.28
Investment securities 6.57 11,534 715 6.20 12,844 756 5.89 10,872 584 5.37
Other interest-earning assets 5.75 9,930 434 4.37 12,433 690 5.55 11,150 316 2.83
------- ------ ------- ------ ------- ------
Total interest-earning assets 7.38 266,362 19,837 7.45 248,307 18,295 7.37 227,322 15,547 6.84
---- ------ ---- ------ ---- ------ ----
Noninterest-earning assets 9,325 9,198 7,785
----- ----- -----
Total assets $275,687 $257,505 $235,107
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits 4.05 $220,303 9,363 4.25 $216,511 9,732 4.49 $218,338 9,112 4.17
FHLB advances and other
borrowings 5.83 27,119 1,569 5.79 16,539 1,035 6.26 721 41 5.69
---- ------ ----- ------ ----- --- --
Total interest-bearing liabilities 4.36 247,422 10,932 4.42 233,050 10,767 4.62 219,059 9,153 4.18
---- ------ ---- ------ ---- ----- ----
Noninterest-bearing liabilities 5,210 4,382 4,500
----- ----- -----
Total liabilities 252,632 237,432 223,559
Stockholders' equity 22,604 20,073 11,548
------ ------ ------
Total liabilities and
stockholders' equity $275,687 $257,505 $235,107
========== ======== ========
Net interest-earning assets $ 18,940 $ 15,257 $ 3,763
======== ======== ========
Net interest income/interest
rate spread 3.02% $ 8,905 3.03% $7,528 2.75% $ 6,394 2.66%
==== ======= ==== ====== ==== ======= ====
Net yield on interest-earning assets(3) 3.34% 3.03% 2.81%
==== ==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities 107.65% 106.55% 103.77%
====== ====== ======
</TABLE>
- ---------------
(1) Includes non-accrual loans.
(2) Includes assets classified as either available for sale or held
for sale.
(3) Net interest income divided by interest-earning assets.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Rate/Volume Analysis. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total change in rate and volume. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to rate and the
change due to volume.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1996 VS. 1995 1995 vs. 1994
------------- -------------
INCREASE TOTAL INCREASE TOTAL
(DECREASE) DUE TO INCREASE (DECREASE)DUE TO INCREASE
RATE VOLUME (DECREASE) RATE VOLUME (DECREASE)
---- ------ ---------- ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
INTEREST-EARNINGS ASSETS:
Loans receivable(1) $ (90) $ 1,077 $ 987 $ 278 $ 1,128 $ 1,406
Mortgage-related securities(1) 298 554 852 576 220 796
Investment securities 44 (85) (41) 59 113 172
Other interest-earning assets (132) (124) (256) 334 40 374
---- ---- ---- --- -- ---
Total interest-earning assets 120 1,422 1,542 1,247 1,501 2,748
--- ----- ----- ----- ----- -----
INTEREST-BEARING LIABILITIES:
Deposits (543) 174 (369) 695 (75) 620
FHLB advances on other borrowings (71) 605 534 4 990 994
--- --- --- - --- ---
Total interest-bearing liabilities (614) 779 165 699 915 1,614
---- --- --- --- --- -----
Increase in net interest income $ 734 $ 643 $ 1,377 $ 548 $ 58 $ 1,134
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes assets classified as either available for sale or held for sale.
Results of Operations
General. The Company reported net income of $885,000, $1.1 million, and
$416,000 for the years ended September 30, 1996, 1995 and 1994, respectively.
The $238,000, or 21.2%, decrease in net income for the year ended September 30,
1996 compared to the year ended September 30, 1995 was primarily due to a $1.6
million, or 22.9% increase in operating expenses and a $1.2 million increase in
the provision for loan losses offset by a $1.4 million, or 18.3% increase in net
interest income, a $1.1 million decrease in income taxes and a $121,000 or 10.2%
increase in other income. The increase in operating expenses for the year ended
September 30, 1996 was primarily due to the one-time Savings Association
Insurance Funds ("SAIF") special assessment of $1.4 million. Excluding this
assessment, net income increased $638,000 to $1.8 million in fiscal 1996, an
increase of 56.8%.
The $707,000, or 170.0%, increase in net income for the year ended September
30, 1995 compared to the year ended September 30, 1994 was primarily due to a
$1.1 million, or 17.7%, increase in net interest income, a $692,000, or 9.0%,
decrease in operating expenses and a $364,000, or 87.5%, decline in the
provision for loan losses, which were partially offset by a $284,000, or 19.3%,
decrease in other income, a $599,000 increase in income tax expense and the
recognition of a cumulative effect of a change in accounting principle of
$600,000 during the year ended September 30, 1994.
Net Interest Income. Net interest income is determined by interest rate spread
(i.e., the difference between the yields earned on interest-earning assets and
the rates paid on interest-bearing liabilities) and the relative amounts of
interest-earning assets and interest-bearing liabilities. The Company's average
interest-rate spread was 3.03%, 2.75% and 2.66% during the years ended September
30, 1996, 1995 and 1994, respectively. The Company's interest-rate spread was
3.02% at September 30, 1996. The Company's net interest
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
margin (i.e., net interest income as a percentage of average interest-earning
assets) was 3.34%, 3.03% and 2.81% during the years ended September 30, 1996,
1995 and 1994, respectively.
Net interest income increased by $1.4 million, or 18.3%, in the year ended
September 30, 1996 to $8.9 million compared to $7.5 million in fiscal 1995. The
reason for such increase was a $1.5 million, or 8.4%, increase in total interest
income offset by a $165,000, or 1.5%, increase in total interest expense. Net
interest income increased by $1.1 million, or 17.7%, in fiscal 1995 compared to
fiscal 1994 due to a $2.7 million, or 17.7% increase in interest income offset
by a $1.6 million, or 17.6% increase in total interest expense.
Interest Income. Total interest income amounted to $19.8 million for the year
ended September 30, 1996 compared to $18.3 million for the year ended September
30, 1995. The primary reason for the increase in the 1996 period was a $987,000,
or 7.9%, increase in interest on loans as a result of a $13.2 million, or 8.7%,
increase in the average balance of the loan portfolio partially offset by a 6
basis point (with 100 basis points being equal to 1.0%) decrease in the average
yield earned thereon. The increase in the average balance of the loan portfolio
in fiscal 1996 reflects increased origination of both fixed and adjustable-rate
mortgage loans held in the portfolio while the decrease in the yield reflects
lower rates of interest earned during fiscal 1996. Additionally, interest income
on mortgage-related securities, investments and other interest-earning assets
increased $555,000, or 9.5% due to a $4.9 million, or 5.0% increase in the
aggregate average balances thereof and a 25 basis point increase in the yield
earned due to general increases in the interest rate environment.
The $2.7 million, or 17.7%, increase in total interest income during the year
ended September 30, 1995 over 1994 was primarily due to a $1.4 million, or
12.7%, increase in interest income on loans. This increase was due to a $13.7
million, or 10.0% increase in the average balance of the loan portfolio combined
with a 20 basis point rise in the average yield earned thereon. The increase in
the average balance of the loan portfolio in the 1995 period reflects increased
origination of both fixed and adjustable-rate mortgage loans held in the
portfolio while the increase in the yield reflects higher market rates of
interest earned in the 1995 period. Additionally, interest income on
mortgage-related securities, investments and other interest-earning assets
increased $1.3 million, or 29.9%, due to a $7.2 million, or 8.1%, increase in
the aggregate average balances and a 101 basis point increase in the yield
earned. The increases reflected a combination of both the effects of the general
rise in interest rates during the period and the implementation of various asset
liability strategies.
Interest Expense. Total interest expense increased by $165,000, or 1.5%, in
the year ended September 30, 1996 compared to fiscal 1995. The reason for such
increase was a $534,000 increase in interest expense on borrowings offset by a
$369,000 decrease in interest expense on deposits. The increase in interest
expense on borrowings was due to a $10.6 million, or 64.0% increase in the
average balance offset by a 47 basis point decline in the average rate paid on
borrowings. The decrease in interest paid on deposits was due to a 24 basis
point decline in the average rate paid on deposits offset in part by a $3.8
million increase in the average balance of deposits. The increase in the average
balances of deposits and borrowings was used to fund loan originations and
purchases of investment securities. The decrease in the rates paid on deposits
was due to the maturing of some long-term high interest rate deposits. Interest
rates on borrowings also declined due to a decline in short-term interest rates.
Total interest expense amounted to $10.8 million for the year ended September
30, 1995 as compared to $9.2 million for fiscal 1994. The $1.6 million, or
17.6%, increase in interest expense in fiscal 1995 compared to fiscal 1994 was
due to a $620,000 increase in interest expense on deposits and a $994,000
increase in interest expense on borrowings. The increase in interest expense on
deposits was due to a 32 basis point increase in the average rate paid on
deposits partially offset by a decline in the average balances of $1.8 million.
The
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
increase in interest expense on borrowings was primarily due to an increase
in the average balance of $15.8 million along with an increase in the average
rate paid of 57 basis points. The increase in the average balance of borrowings
was used to fund mortgage originations and, to a lesser extent, purchases of
mortgage-related and investment securities. The increase in the average paid
reflects the effects of the general increases in market rates of interest during
fiscal 1995.
Provisions 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 market area, and other factors
related to the collectibility of the Company's loan portfolio. Management of the
Company assesses the allowance for loan losses on a monthly basis and makes
provisions for loan losses as deemed appropriate by management in order to
maintain the adequacy of the allowance for loan losses. For the year ended
September 30, 1996, the provision for loan losses amounted to $1.2 million as
compared to $52,000 for fiscal 1995. The increase in the provision for fiscal
1996 reflected an increased amount for the Bennett Funding bankruptcies. (See
Changes in Financial Condition -- Non Performing Assets) For the year ended
September 30, 1994, the provision for loan losses was $416,000. The decrease in
the provision for loan losses during fiscal 1995 reflected management's
assessment of the risk of loss inherent in the loan portfolio. At September 30,
1996, the Company's allowance for loan losses amounted to 49.03% of total
non-performing loans and 1.54% of gross loans receivable.
Although management of the Company believes that the Company's allowance for
loan losses was adequate at September 30, 1996, based on facts and circumstances
available to it, there can be no assurances that additions to such allowance
will not be necessary in future periods, which would adversely affect the
Company's results of operations. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
provision for loan losses and the carrying value of its other non-performing
assets based on their judgments about information available to them at the time
of their examination. The Company was last examined by the OTS as of April 1996.
The Company was not required to increase its provision for loan losses or adjust
the carrying value of its other non-performing assets as a result of such
examination.
Other Income. For the year ended September 30, 1996, the Company reported
other income of $1.3 million compared to $1.2 million of other income for the
year ended September 30, 1995. The primary reason for the $121,000 or 10.2%
increase in other income in fiscal 1996 was a $156,000 increase in net gain on
sales of mortgage loans held for sale partially offset by an decrease of $66,000
on gains on sales of investments and mortgage-related securities. The $284,000,
or 19.3%, decline in other income for the year ended September 30, 1995 as
compared to fiscal 1994 was due to decreases in gains on sales of mortgage loans
of $297,000, partially offset by an increase of $60,000 on gains on sales of
investments and mortgage-related securities. The increase in gains on sales of
loans for fiscal 1996 reflected the Company's increased emphasis on the
origination and sale, servicing released, of non-conforming loans. The decline
in the gains on sales of mortgage loans during fiscal 1995 reflected the
decrease in mortgage banking activity as a result of the increasing interest
rate environment experienced during most of the year.
Operating Expenses. Operating expenses include compensation and employee
benefits, occupancy and equipment expense, FDIC premiums, data processing
expense and other items. Operating expenses increased $1.6 million, or 22.9%,
for the year ended September 30, 1996 compared to the year ended September 30,
1995 and amounted to $8.6 million in fiscal 1996 compared to $7.0 million in
fiscal 1995. The primary reason for the increase in operating expenses was the
one-time SAIF special assessment of $1.4 million relating to deposit
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
insurance. As a result of recent legislation, the one-time assessment will
recapitalize the SAIF insurance fund to the 1.25% of total insured deposits
currently required by the Federal Deposit Insurance Corporation. This
recapitalization will decrease the amount of insurance that the Company will pay
to insure deposit accounts from the current $.23 per $100 of deposits to $.065
per $100, which amount effectively reflects the amount required to be paid by
SAIF-insured institutions to pay the debt service on the Financing Corporation
bonds. Also contributing to the increase in expenses for fiscal 1996 was a
$311,000 charge to earnings for certain costs relating to the restructuring that
the Company commenced in the first fiscal quarter. In addition, professional
fees increased $257,000, or 47.9%, due to increased costs relating to litigation
involving the Company as well as increased professional costs in the first full
year of operation as a public company. Operating expenses decreased $692,000, or
9.0%, for the year ended September 30, 1995 compared to the year ended September
30, 1994, and amounted to $7.0 million in fiscal 1995 compared to $7.7 million
in fiscal 1994. The primary reason for the decrease in operating expenses was a
$572,000, or 14.8%, decrease in salaries and employee benefits. Salary and
employee benefits expense was higher in fiscal 1994 due to the accrual for
certain pension benefits under deferred compensation plans. In addition,
professional fees decreased $130,000, or 19.5%, to $536,000 during the year
ended September 30, 1995 as compared to fiscal 1994 due to the completion of the
discovery stages of litigation. See Note 15 to the Consolidated Financial
Statements.
Income Taxes. The Company recognized an income tax benefit of $567,000 for the
year ended September 30, 1996, compared to income tax expense of $504,000 for
fiscal 1995. The benefit in fiscal 1996 was the result of an adjustment for
prior year tax contingencies of approximately $700,000. Excluding this benefit,
the income tax expense was $133,000, or 41.8% of pre-tax income. The Company's
effective tax rate amounted to 31.0% for the year ended September 30, 1995. The
higher percentage in fiscal 1996 related to the expiration of state tax
carryforwards during fiscal 1995. The Company incurred income tax expense of
$504,000 for the year ended September 30, 1995, compared to recognizing an
income tax benefit of $95,000 for fiscal 1994. The benefit recorded during the
year ended September 30, 1994 reflected the effects of the loss before income
taxes (exclusive of the effects of the extraordinary item and the change in
accounting principle).
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for income Taxes," during fiscal 1994. The general objective of
SFAS No. 109 is to recognize annually the deferred tax assets and liabilities
which will arise from future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. As a result of
the adoption of SFAS No. 109, the Company recognized $600,000 in income during
the year ended September 30, 1994 representing the cumulative effect of this
change in accounting principle. See Note 11 to the Consolidated Financial
Statements.
Federal legislation enacted in August 1996 repealed the percentage of taxable
income method of accounting for bad debts for thrift institutions effective for
years beginning after December 31, 1995. The Company was required as of October
1, 1996 to adopt the experience method computation for bad debts and to provide
for taxes relating to excess bad debts reserves over the base year of December
1987. As of September 30, 1996, the Company has provided deferred income taxes
on their excess bad debt reserves.
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, prepayments and maturities
of outstanding loans and mortgage-related securities, sales of loans, maturities
of investment securities and other short-term investments, borrowings and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-related
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
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 the ability to obtain advances from the
FHLB of Pittsburgh through several credit programs and in addition, has
established a line of credit with the FHLB in an amount not to exceed 10% of
assets and subject to certain conditions, including holding a predetermined
amount of FHLB stock as collateral. This line of credit is used from time to
time for liquidity purposes. As an additional source of funds, the Company has
access to the Federal Reserve discount window, but only after it has exhausted
its access to the FHLB of Pittsburgh. At September 30, 1996, the Company had
$46.7 million of outstanding 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 and mortgage-related
securities. The Company uses its sources of funds primarily to meet its ongoing
commitments, to pay maturing savings certificates and savings withdrawals, fund
loan commitments and maintain a portfolio of mortgage-backed and investment
securities. At September 30, 1996, the total approved loan commitments
outstanding amounted to $5.7 million. At the same date, commitments under unused
lines of credit and loans in process on construction loans amounted to $ 9.9
million. Certificates of deposit scheduled to mature in one year or less at
September 30, 1996 totalled $73.1 million. Based upon its historical experience,
management believes that a significant portion of maturing deposits will remain
with the Company.
The Company 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 amount equal to 5% and 1%, respectively, of net withdrawable
deposits and borrowings payable in one year or less to assure its ability to
meet demand for withdrawals and repayment 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 Company's average
monthly liquidity ratio and short-term liquid assets for September 1996 was
8.46% and 3.02%, respectively.
The OTS requires that the Bank meet minimum regulatory tangible, core, tier 1
risk-based and total risk-based capital requirements. At September 30, 1996, the
Bank exceeded all regulatory capital requirements and was deemed a "well
capitalized" institution for regulatory purposes. See Note 12 to the
Consolidated Financial Statements.
The Company, as a separately incorporated holding company, has no significant
operations other than serving as the sole stockholder of the Bank. On an
unconsolidated basis, the Company has no paid employees. The Company's assets
consist primarily of its investment in the Bank and its only material source of
income consists of earnings from its investment in the Bank. The only expenses
incurred by the Company relate to its reporting obligations under the Securities
Exchange Act of 1934, and related expenses as a publicly traded company. The
Company is directly reimbursed by the Bank for all such expenses. Management
believes that the Company has adequate liquidity available to respond to its
limited liquidity demands. Under applicable federal regulations, the Bank may
pay dividends within certain limits and only after notice to the OTS. See Note
20 to the Consolidated Financial Statements.
Recent Accounting Pronouncements
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This standard
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
carrying amount of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. An impairment
loss is recognized only if the sum of the expected future cash flow is less than
the carrying amount of the asset. It also requires that long-lived assets and
certain identifiable intangibles be reported at the lower of carrying amount or
fair value less cost to sell. This standard is effective for financial
statements issued for fiscal years beginning after December 15, 1995. The
adoption of SFAS No.121 is not expected to have a material effect on the
Company's financial condition or results of operations.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." This standard, effective for fiscal years beginning after December 31,
1995, will prospectively require the Company, which services mortgage loans for
others in return for a servicing fee, to recognize these servicing rights as
assets, regardless of how such asset was acquired. Additionally, the Company
will be required to assess the fair value of these assets at each reporting date
to determine impairment. The adoption of SFAS No. 122 is not expected to have a
material effect on the financial condition or results of operations of the
Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based employee compensation plans. This statement encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
income and, if presented, earnings per share, as if this Statement had been
adopted. The accounting requirements of this Statement are effective for
transactions entered into for fiscal years that begin after December 15, 1995;
however, companies are required to disclose information for awards granted in
their first fiscal year beginning after December 15, 1994. The adoption of SFAS
No. 123 is not expected to have a material effect on the Company's financial
condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Under SFAS
No. 125, after the transfer of a financial asset, the Company would recognize
the financial and servicing assets it controls and the liabilities it has
incurred. Furthermore, the Company would no longer recognize the financial
assets for which control has been surrendered and liabilities that have been
extinguished. SFAS No.125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996. The
adoption of SFAS No.125 is not expected to have a material effect on the
Company's financial condition or results of operations.
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 require 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
prices 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.
17
<PAGE> 18
[DELOITTE & TOUCHE LLP LETTERHEAD]
Board of Directors
First Keystone Financial, Inc. and Subsidiaries
Media, Pennsylvania 19063
We have audited the accompanying consolidated statements of financial
condition of First Keystone Financial, Inc. and Subsidiaries (the "Company") as
of September 30, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity and cash flows for the years then ended. We have
also audited the related consolidated statements of income, retained earnings
and cash flows of First Keystone Federal Savings Bank and Subsidiaries (the
"Predecessor Bank") for the year ended September 30, 1994. These consolidated
financial statements are the responsibility of the Company's and the Predecessor
Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
First Keystone Financial, Inc. and Subsidiaries at September 30, 1996 and 1995
and the results of their operations and their cash flows for the years then
ended, and the results of operations and cash flows of First Keystone Federal
Savings Bank and Subsidiaries for the year ended September 30, 1994 in
accordance with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, on January
25, 1995, the Predecessor Bank converted from a federally chartered mutual
savings bank into a federally chartered capital stock savings bank with the
concurrent formation of the Company.
As discussed in Note 11 to the consolidated financial statements, the
Predecessor Bank changed its method of accounting for income taxes to conform
with SFAS No. 109, effective October 1, 1993.
/s/ DELOITTE & TOUCHE LLP
- ----------------------------
Deloitte & Touche LLP
Philadelphia, Pennsylvania
November 8, 1996
DELOITTE TOUCHE
TOHMATSU
INTERNATIONAL
18
<PAGE> 19
First Keystone Financial, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
(dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30
------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 1,870 $ 2,091
Interest-bearing deposits with depository institutions 9,824 20,577
----- ------
Total cash and cash equivalents 11,694 22,668
Investment securities available for sale 16,532
Mortgage-related securities available for sale 60,211 19,538
Loans held for sale 2,447 57
Investment securities held to maturity -- at amortized cost (approximate fair value
of $10,650) 10,710
Mortgage-related securities held to maturity -- at amortized cost (approximate fair value
of $22,060 and $59,010 at September 30, 1996 and 1995, respectively) 23,221 60,294
Loans receivable -- net 167,530 158,002
Accrued interest receivable 2,404 2,407
Real estate owned 1,557 465
Federal Home Loan Bank stock -- at cost 2,337 1,492
Office properties and equipment -- net 2,507 2,943
Deferred income taxes 2,111 1,010
Prepaid expenses and other assets 1,690 1,393
----- -----
TOTAL ASSETS $ 294,241 $ 280,979
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 219,205 $ 223,753
Advances from Federal Home Loan Bank 46,740 28,411
Accrued interest payable 1,501 1,096
Advances from borrowers for taxes and insurance 921 1,035
Accounts payable and accrued expenses 2,790 2,221
----- -----
Total liabilities 271,157 256,516
------- -------
Commitments and Contingencies
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; September 30, 1996 and 1995, 1,292,500
and 1,360,000 shares, respectively 14 14
Additional paid in capital 12,659 12,568
Common stock acquired by stock benefit plans (1,437) (1,006)
Treasury stock at cost, 67,500 shares (1,288)
Unrealized (loss) gain on available for sale securities -- net of tax (494) 142
Retained earnings -- partially restricted 13,630 12,745
------ ------
Total stockholders' equity 23,084 24,463
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 294,241 $ 280,979
========= =========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 20
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(dollars in thousands, except per share data)
YEAR ENDED SEPTEMBER 30
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Interest on:
Loans $ 13,459 $ 12,472 $ 11,066
Mortgage-related securities 5,229 4,377 3,581
Investments 715 756 584
Interest-bearing deposits 434 690 316
------ ------ ------
TOTAL INTEREST INCOME 19,837 18,295 15,547
------ ------ ------
INTEREST EXPENSE:
Interest on:
Deposits 9,363 9,732 9,112
Federal Home Loan Bank advances 1,569 1,035 41
----- ----- -----
TOTAL INTEREST EXPENSE 10,932 10,767 9,153
------ ------ -----
Net interest income 8,905 7,528 6,394
Provision for loan losses 1,250 52 416
----- ----- -----
Net interest income after provision for loan losses 7,655 7,476 5,978
----- ----- -----
OTHER INCOME (LOSS):
Service charges and other fees 1,047 1,029 1,010
Net (loss) gain on sale of:
Investments and mortgage-related securities (6) 60
Loans 209 53 350
Real estate owned 34 (3) 2
Real estate operations (32) (41) (49)
Other income 56 89 158
----- ----- -----
TOTAL OTHER INCOME 1,308 1,187 1,471
----- ----- -----
OPERATING EXPENSES:
Salaries and employee benefits 3,236 3,289 3,861
Occupancy and equipment 1,022 911 850
Professional fees 793 536 666
Federal deposit insurance premium 530 550 602
SAIF special assessment 1,426
Bank service charges 401 434 415
Data processing 337 371 364
Advertising 201 195 210
Other 699 750 760
----- ----- -----
TOTAL OPERATING EXPENSES 8,645 7,036 7,728
----- ----- -----
Income (Loss) before income tax expense (benefit) 318 1,627 (279)
Income tax expense (benefit) (567) 504 (95)
-------- -------- --------
Income (Loss) before cumulative effect of change in accounting principle 885 1,123 (184)
Cumulative effect of change in accounting for income taxes 600
-------- -------- --------
NET INCOME $ 885 $ 1,123 $ 416
======== ======== ========
EARNINGS PER COMMON SHARE $ .74 $ .74 N/A
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 21
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)ON
COMMON SECURITIES TOTAL
ADDITIONAL ACQUIRED BY AVAILABLE STOCK-
COMMON PAID-IN STOCK BENEFIT TREASURY FOR SALE RETAINED HOLDERS'
STOCK CAPITAL PLANS STOCK (NET OF TAX) EARNINGS EQUITY
----- ------- ----- ----- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 $11,206 $11,206
Net income 416 416
--- -------- ------- ------- ----- ------- -------
Balance at September 30, 1994 11,622 11,622
Common stock issued $14 $12,539 12,553
Common stock acquired
by stock benefit plans $(1,088) (1,088)
ESOP stock committed
to be released 82 82
Excess of fair value above
cost of stock benefit plans
committed to be released 29 29
Net unrealized gain on
securities available for
sale, net of tax $ 142 142
Net income 1,123 1,123
--- -------- ------- ------- ----- ------- -------
Balance at September 30, 1995 14 12,568 (1,006) 142 12,745 24,463
Common stock acquired
by stock benefit plans (704) (704)
ESOP stock committed
to be released 109 109
Excess of fair value above
cost of stock benefit plans
committed to be released 91 91
RRP amortization 164 164
Net unrealized loss relating to
transfer of securities from held
to maturity to available for sale,
net of tax (227) (227)
Net unrealized loss on
securities available for
sale, net of tax (409) (409)
Purchase of treasury stock $(1,288) (1,288)
Net income 885 885
--- -------- ------- ------- ----- ------- -------
BALANCE AT SEPTEMBER 30, 1996 $14 $ 12,659 $(1,437) $(1,288) $(494) $13,630 $23,084
=== ======== ======= ======= ===== ======= =======
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 22
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 885 $ 1,123 $ 416
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for depreciation and amortization 520 408 324
Amortization of premiums (discounts) (161) (54) 169
Gain on sales of loans (209) (53) (350)
Gain (Loss) on sales of investments and
mortgage-related securities available for sale 6 (60)
(Gain) Loss on sales of real estate owned (34) 3 (2)
Provision for loan losses 1,250 52 416
Amortization of stock benefit plans 364 111
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (30,239) (5,501) (27,996)
Loans sold in the secondary market 27,849 5,612 29,073
Deferred income taxes (700) 146 (939)
Accrued interest receivable 3 (117) (293)
Prepaid expenses and other assets (297) (252) (372)
Accrued interest payable 405 (136) 142
Accrued expenses 569 (344) 856
-------- -------- --------
Net cash provided by operating activities 211 938 1,444
-------- -------- --------
INVESTING ACTIVITIES:
Loans originated or acquired (52,056) (51,976) (42,682)
Purchases of:
Investments held to maturity (5,065) (5,145)
Investments available for sale (18,000)
Mortgage-related securities held to maturity (4,013)
Mortgage-related securities available for sale (25,770) (21,919) (32,310)
(Purchase) Redemption of FHLB stock (845) (122) 1,868
Proceeds from sales of investment and mortgage-related
securities available for sale 17,790 3,247
Proceeds from sales of real estate owned 1,009 579 732
Principal collected on loans 40,160 35,073 37,630
Proceeds from maturities, calls or repayments of:
Investment securities available for sale 3,065
Mortgage-related securities available for sale 3,908 578
Investment securities held to maturity 4,000 6,500 1,000
Mortgage-related securities held to maturity 8,347 7,881 28,446
Purchase of property and equipment (84) (765) (523)
Net expenditures on real estate acquired through foreclosure and in development (371) (69) (82)
-------- -------- --------
Net cash used in investing activities (22,860) (26,058) (11,066)
-------- -------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts (4,548) 7,688 (2,296)
Net proceeds from FHLB and other borrowings 18,329 23,144 4,924
Net increase (decrease) in advances from borrowers for taxes and insurance (114) 37 191
Common stock acquired by stock benefit plans (704)
Purchase of treasury stock (1,288)
Proceeds from the sale of stock, net of conversion costs 11,465
-------- -------- --------
Net cash provided by financing activities 11,675 42,334 2,819
-------- -------- --------
Increase (Decrease) in cash and cash equivalents (10,974) 17,214 (6,803)
Cash and cash equivalents at beginning of year 22,668 5,454 12,257
-------- -------- --------
Cash and cash equivalents at end of year $ 11,694 $ 22,668 $ 5,454
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 10,500 $ 10,900 $ 8,970
Cash payments (refunds) of income taxes 720 (47) 17
Transfers of loans receivable into real estate owned 1,768 507 283
Transfers of investment securities to investment securities available for sale 6,710
Transfers of mortgage-related securities to mortgage-related securities available for sale 43,823
Conversion of loans into mortgage-related securities available for sale 993
</TABLE>
See notes to consolidated financial statements
22
<PAGE> 23
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND ORGANIZATION STRUCTURE
On September 21, 1994, the Board of Directors of First
Keystone Federal Savings Bank (the "Bank") adopted a plan of conversion
to convert from a federally chartered mutual savings bank to a
federally chartered capital stock savings bank with the concurrent
formation of a holding company (the "Conversion").
The Conversion was completed on January 25, 1995 with the
issuance by the holding company, First Keystone Financial, Inc. (the
"Company"), of 1,360,000 shares of its common stock in a public
offering to the Bank's eligible depositors and borrowers, members of
the general public and the Bank's employee stock ownership plan (the
"ESOP"). In exchange for the net conversion proceeds of $11.5 million,
less $1.0 million retained by the Company, the Company acquired 100% of
the issued and outstanding capital stock of the Bank.
The Bank is principally in the business of attracting deposits
through its branch offices and investing those deposits together with
funds from borrowings and operations in single family residential,
commercial real estate and commercial business loans. The Bank is
primarily supervised and regulated by the Office of Thrift Supervision.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company, the Bank, and the Bank's wholly-owned
subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements
and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Securities Held to Maturity and Securities Available for Sale
The Company requires that investments be categorized as held
to maturity or available for sale or trading. Securities held to
maturity are carried at amortized cost only if the Company has the
positive intent and ability to hold these securities to maturity.
Securities available for sale are carried at fair value with resulting
unrealized gains or losses recorded to equity, net of tax. At September
30, 1996 and 1995, there were no securities held in a trading account.
In November 1995, the Financial Accounting Standards Board
(the "FASB") issued a special report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" (the "Questions and Answers Guide"). In December 1995, in
accordance with the provisions of the Questions and Answers Guide, the
Company reclassified certain securities with an aggregate amortized
cost of $50.5 million from held to maturity to available for sale. The
Questions and Answers Guide further states that reclassifications from
the held-to-maturity category that result from this one-time
reassessment will not call into question the intent of an enterprise to
hold other debt securities to maturity in the future.
Allowance for Loan Losses
An allowance for loan losses is maintained at a level that
management considers adequate to provide for losses based upon an
evaluation of known and inherent risks in the loan portfolio.
Management's evaluation of the portfolio is based upon past loss
experience, current economic conditions and other relevant factors.
While management uses the best information available to make such
evaluation, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations.
The Company adopted Statement of Financial
23
<PAGE> 24
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
Accounting Standards ("SFAS") No. 114 "Accounting by Creditors for
Impairment of a Loan" and No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures," as of
October 1, 1995. SFAS No. 114 requires that impaired loans be measured
based either on the present value of expected future cash flows
discounted at the loan's effective interest rate, or the loan's
observable market price or the fair value of the collateral if the loan
is collateral dependent. The provision for loan losses charged to
expense is based upon past loan loss experience and an evaluation of
losses in the current loan and lease portfolio, including the
evaluation of impaired loans under SFAS No. 114. A loan is considered
to be impaired when, based upon current information and events, it is
probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan. An insignificant delay
or insignificant shortfall in amounts of payments does not necessarily
result in the loan being identified as impaired. For this purpose,
delays less than 90 days are considered to be insignificant. SFAS No.
114 does not apply to large groups of smaller balance homogeneous loans
that are collectively evaluated for impairment, except for those loans
restructured under a troubled debt restructuring. Loans collectively
evaluated for impairment include consumer loans and residential real
estate loans. At September 30, 1996, the Company's impaired loans
consisted of smaller balance consumer and residential mortgage loans.
Mortgage Banking Activities
The Company originates mortgage loans held for investment and
for sale. At origination, the mortgage loan is identified as either
held for sale or for investment purposes. Mortgage loans held for sale
are carried at the lower of cost or forward committed contracts (which
approximates market), determined on a net aggregate basis.
At September 30, 1996, 1995, and 1994, loans serviced for
others totalled approximately $127,229, $134,600 and $140,900,
respectively. Servicing loans for others consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to
investors, and foreclosure processing. Loan servicing income is
recorded on the cash basis and includes servicing fees from investors
and certain charges collected from borrowers, such as late payment
fees. The Company has fiduciary responsibility for related escrow and
custodial funds aggregating approximately $998 and $950 at September
30, 1996 and 1995, respectively.
Income Recognition on Loans
Interest on loans is credited to income when earned. Accrual
of loan interest is discontinued and a reserve established on existing
accruals if management believes after considering economic and business
conditions and collection efforts, that the borrowers' financial
condition is such that collection of interest is doubtful.
Real Estate Owned
Real estate owned consists of properties acquired by
foreclosure or deed in-lieu-of foreclosure. These assets are initially
recorded at the lower of carrying value of the loan or estimated fair
value less selling costs at the time of foreclosure and at the lower of
the new cost basis or net realizable value thereafter. The amounts
recoverable from real estate owned could differ materially from the
amounts used in arriving at the net carrying value of the assets at the
time of foreclosure because of future market factors beyond the control
of the Company. Costs relating to the development and improvement of
real estate owned properties are capitalized and those relating to
holding the property are charged to expense.
Office Properties and Equipment
Office properties and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the
expected useful lives of the assets. The costs of maintenance and
repairs are expensed as they are incurred, and renewals and betterments
are capitalized.
Income Taxes
Deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carry-
24
<PAGE> 25
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
ing amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
Interest Rate Risk
At September 30, 1996 and 1995, the Company's assets consist
primarily of assets that earned interest at either adjustable or fixed
interest rates whose average life is longer term. Those assets were
funded primarily with shorter term liabilities that have interest rates
which vary over time with market rates. Since the assets and
liabilities reprice at different times, the Company is exposed to
interest rate risk.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash
equivalents include cash and amounts due from depository institutions
and interest-bearing deposits with depository institutions.
New Accounting Pronouncements Not Yet Adopted
In May 1995, the FASB issued SFAS No. 122 "Accounting for
Mortgage Servicing Rights." This statement, which is effective for
fiscal years beginning after December 15, 1995, will require the
Company, which services mortgage loans for others in return for
servicing fees, to recognize, prospectively, these servicing rights as
assets, regardless of how such assets are acquired. Additionally, the
Company would be required to assess the fair value of these assets at
each reporting date to determine any potential impairment. Management
of the Company does not believe this pronouncement will have a material
effect on its results of operations or financial position.
In June 1996, FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The statement, which is effective for transactions
occurring after December 31, 1996, requires an entity to recognize the
financial and servicing assets it controls and liabilities it has
incurred, derecognize financial assets when control has been
surrendered, and derecognize liabilities when extinguished. It requires
that servicing assets and other retained interests in transferred
assets be measured by allocating the previous carrying amount between
the asset sold, if any, and retained interest, if any, based on their
relative fair values at the date of the transfer. It also provides
implementation guidance for servicing of financial assets,
securizations, loan syndications and participations and transfers of
loan receivables with recourse. The statement supersedes SFAS No. 122,
"Accounting for Mortgage Servicing Rights." Management of the Company
does not believe the statement will have a material impact on the
Company's results of operations or financial position when adopted.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which encourages, rather than requires,
entities to account for stock compensation awards based on the
estimated fair value at the date of the grant. Entities would be
permitted, however, to continue to apply Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees."
Entities who continue to apply APB No. 25 would be required to disclose
in a footnote, pro forma net income and earnings per share determined
as if the entity had applied the new method.
This method is effective for the Company's financial
statements for fiscal year ending September 30, 1997 with pro forma
disclosures of the application for awards made in fiscal year 1996
presented in the 1997 financial statements. The Company has not elected
to adopt the recognition provisions of SFAS No. 123 for its employee
stock-based arrangements. SFAS No. 123, when adopted, is not expected
to have a material impact on the Company's financial position or
results of operations.
Reclassifications
Certain reclassifications have been made to the September 30,
1995 and 1994 consolidated financial statements to conform with the
September 30, 1996 presentation. Such reclassifications had no impact
on the reported net income.
25
<PAGE> 26
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
3. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities,
by contractual maturities, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAIN LOSS FAIR VALUE
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury securities and securities
of U.S. Government agencies:
1 to 5 years $ 13,500 $ 48 $ 30 $13,518
5 to 10 years 3,000 130 2,870
Other investments 145 1 144
-------- ---- ---- -------
Total $ 16,645 $ 48 $161 $16,532
======== ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAIN LOSS FAIR VALUE
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held to Maturity:
U.S. Treasury securities and securities
of U.S. Government agencies:
1 to 5 years $ 9,565 $ 10 $ 70 $ 9,505
5 to 10 years 1,000 1,000
Other investments 145 145
-------- ---- ---- -------
Total $ 10,710 $ 10 $ 70 $10,650
======== ==== ==== =======
</TABLE>
Included in investment securities are structured notes with
various U.S. Government agencies. At September 30, 1995, these
structured notes were comprised of step-up bonds with par values of
$3,000. There were no structured notes as of September 30, 1996.
26
<PAGE> 27
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
4. MORTGAGE-RELATED SECURITIES
Mortgage-related securities available for sale and
mortgage-related securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAIN LOSS FAIR VALUE
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Available for Sale:
FHLMC pass-through certificates $12,852 $ 93 $ 144 $12,801
FNMA pass-through certificates 11,079 8 162 10,925
GNMA pass-through certificates 8,355 230 8,125
Collateralized mortgage obligations 28,616 102 358 28,360
------- ---- ------ -------
Total $60,902 $203 $ 894 $60,211
======= ==== ====== =======
Held to Maturity:
FHLMC pass-through certificates $ 3,631 $ 161 $ 3,470
FNMA pass-through certificates 11,383 $ 27 510 10,900
Collateralized mortgage obligations 8,207 517 7,690
------- ---- ------ -------
Total $23,221 $ 27 $1,188 $22,060
------- ---- ------ -------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAIN LOSS FAIR VALUE
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Available for Sale:
FHLMC pass-through certificates $ 3,935 $ 75 $ 4,010
FNMA pass-through certificates 2,913 $ 16 2,896
GNMA pass-through certificates 1,136 8 1,145
Collateralized mortgage obligations 11,322 165 11,487
------- ---- ------ -------
Total $19,306 $248 $ 16 $19,538
======= ==== ======= =======
Held to Maturity:
FHLMC pass-through certificates $ 8,743 $ 54 $ 167 $ 8,630
FNMA pass-through certificates 26,014 87 601 25,500
Collateralized mortgage obligations 25,537 63 720 24,880
------- ---- ------ -------
TOTAL $60,294 $204 $ 1,488 $59,010
======= ==== ======= =======
</TABLE>
The collateralized mortgage obligations contain both fixed and
adjustable classes of securities which are repaid in accordance with a
predetermined priority. The underlying collateral of the securities are
loans which are primarily insured by FHLMC, FNMA, and GNMA.
Mortgage-related securities with a carrying value of $6,467
and $4,787 were pledged as collateral for public funds on deposit and
treasury tax and loan processing at September 30, 1996 and 1995,
respectively (see Note 9).
27
<PAGE> 28
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
5. ACCRUED INTEREST RECEIVABLE
The following is a summary of accrued interest receivable by category:
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------
1996 1995
---- ----
<S> <C> <C>
Loans $ 1,724 $ 1,781
Mortgage-related securities 476 445
Investment securities 204 181
--------- --------
Total $ 2,404 $ 2,407
========= ========
</TABLE>
6. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------
1996 1995
---- ----
<S> <C> <C>
Real estate loans:
Single-family $ 122,270 $ 115,225
Construction and land 17,682 16,343
Multi-family and commercial 11,129 11,789
Consumer loans:
Home equity and lines of credit 20,444 18,229
Deposit 457 350
Education 917 1,010
Other 2,212 1,491
Commercial loans 2,923 2,533
--------- ---------
Total loans 178,044 166,970
Loans in process (6,368) (6,070)
Allowance for loan losses (2,624) (1,487)
Deferred loan fees (1,512) (1,411)
--------- --------
Loans receivable -- net $ 167,530 $ 158,002
========= =========
</TABLE>
The Company originates loans primarily in its local market
area of Delaware and Chester Counties, Pennsylvania to borrowers that
share similar attributes. This concentration of credit exposes the
Company to a higher degree of risk associated with this economic
region.
The Company offers loans to its directors and senior officers
on terms available to the general public. There were approximately $435
and $474 of loans outstanding to senior officers and directors as of
September 30, 1996 and 1995, respectively. The amount of repayments
during the years ended September 30, 1996 and 1995 totalled $81 and
$35, respectively. There was $41 of new loans granted during fiscal
year 1996 while none were granted during fiscal year 1995.
The Company has undisbursed portions under consumer and
commercial lines of credit as of September 30, 1996 of $2,803 and $707,
respectively.
The Company originates both adjustable and fixed interest rate
loans and purchases mortgage-backed securities and collateralized
mortgage obligations in the secondary market. The originated
adjustable-rate loans have interest rate adjustment limitations and are
generally indexed to U.S. Treasury securities plus a fixed margin. The
adjustable mortgage-related securities adjust to various national
indices plus a fixed margin. Future market factors
28
<PAGE> 29
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
may affect the correlation of the interest rate adjustment with rates
the Company pays on the short-term deposits that have been primarily
utilized to fund these loans. At September 30, 1996, the composition of
these loans and mortgage-related securities follows:
<TABLE>
<CAPTION>
FIXED-RATE ADJUSTABLE-RATE
------------------------------------ -----------------------------------
TERM TO
TERM TO MATURITY BOOK VALUE RATE ADJUSTMENT BOOK VALUE
---------------- ---------- --------------- ----------
<S> <C> <C> <C>
1 month to 1 year $ 3,919 1 month to 1 year $ 72,178
1 year to 3 years 8,381 1 year to 3 years 31,038
3 years to 5 years 11,482 3 years to 5 years 4,337
5 years to 10 years 18,214
Over 10 years 105,559
--------- --------
Total $ 147,555 $107,553
========= ========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 1,487 $ 1,540 $ 1,265
Provisions charged to income 1,250 52 416
Charge-offs (113) (168) (141)
Recoveries 63
------- ------- -------
Total $ 2,624 $ 1,487 $ 1,540
======= ======= =======
</TABLE>
At September 30, 1996 and 1995, non-performing loans (which
include loans in excess of 90 days delinquent) amounted to
approximately $5,352 and $3,156, respectively.
7. REAL ESTATE OWNED
Real estate owned is comprised of:
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------
1996 1995
---- ----
<S> <C> <C>
Real estate acquired in settlement of loans $ 365 $465
Real estate acquired and in development 1,192
------ ----
Total $1,557 $465
====== ====
</TABLE>
In fiscal year 1996, First Pointe, Inc., a subsidiary of the
Company, accepted a deed in lieu of foreclosure on a construction loan
for the acquisition and improvement of a 107-lot real estate
development project located in Pennsylvania. As of September 30, 1996,
seventy one of the townhouses were completed and sold. Work-in-process
consists of 13 units of which one is a sample home.
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classification
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------
1996 1995
---- ----
<S> <C> <C>
Land and buildings $ 3,878 $ 3,857
Furniture, fixtures and equipment 3,333 3,340
------- -------
Total 7,211 7,197
Accumulated depreciation and amortization (4,704) (4,254)
------- -------
Net $ 2,507 $ 2,943
======= =======
</TABLE>
29
<PAGE> 30
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
9. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------------------------------
1996 1995
--------------------- -----------------------
AMOUNT PERCENT Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 4,710 2.2% $ 9,167 4.1%
NOW accounts 28,085 12.8 26,621 11.9
Passbook accounts 41,504 18.9 43,088 19.3
Money market demand accounts 16,159 7.4 17,892 8.0
Certificate accounts 128,747 58.7 126,985 56.7
-------- ----- -------- -----
Total $219,205 100.0% $223,753 100.0%
======== ===== ======== =====
</TABLE>
The weighted average interest rates for deposits were 4.05%
and 4.38% at September 30, 1996 and 1995, respectively.
At September 30, 1996 and 1995, the Company has pledged
certain mortgage-related securities aggregating approximately $3,415
and $1,535, respectively as collateral for government deposits.
A summary of scheduled maturities of certificates is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------
1996
----
<S> <C>
Within one year $ 73,143
One to two years 23,460
Two to three years 6,778
Thereafter 25,366
--------
Total $128,747
--------
</TABLE>
A summary of interest expense on deposits is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NOW accounts $ 372 $ 436 $ 417
Passbook accounts 1,030 1,169 1,381
Money market demand accounts 487 536 651
Certificate accounts 7,474 7,591 6,663
------ ------ ------
Total $9,363 $9,732 $9,112
====== ====== ======
</TABLE>
10. ADVANCES FROM FEDERAL HOME LOAN BANK
A summary of advances from the Federal Home Loan Bank ("FHLB") of
Pittsburgh follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------------------------------
1996 1995
------------------- --------------------
WEIGHTED Weighted
AVERAGE average
INTEREST interest
AMOUNT RATE Amount rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Advances from FHLB due by September 30,
1996 $21,950 6.0%
1997 $ 39,200 5.8% 6,200 5.9
1998 6,700 5.9
Thereafter 840 6.1 261 6.0
-------- --- ------- ---
Total $ 46,740 5.8% $28,411 6.0%
======== === ======= ===
</TABLE>
The advances are collateralized by Federal Home Loan Bank stock and
substantially all first mortgage loans.
30
<PAGE> 31
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
11. INCOME TAXES
The Company is permitted under the Internal Revenue Code (the
"Code") to deduct an annual addition to the reserve for bad debts in
determining taxable income, subject to certain limitations.
The Company's deduction is based upon the percentage of
taxable income method as defined by the Code. The bad debt deduction
allowable under this method equals 8% of taxable income determined
without regard to that deduction and with certain adjustments. This
addition differs from the bad debt experience used for financial
accounting purposes.
In August 1996, the Small Business Job Protection Act (the
"Act") was signed into law. The Act repealed the percentage of taxable
income method of accounting for bad debts for thrift institutions
effective for years beginning after December 31, 1995. The Act will
require the Company as of October 1, 1996 to change its method of
computing reserves for bad debts to the experience method. The bad debt
deduction allowable under this method is available to small banks with
assets less than $500 million. Generally, this method will allow the
Company to deduct an annual addition to the reserve for bad debts equal
to the increase in the balance of the Company's reserve for bad debts
at the end of the year to an amount equal to the percentage of total
loans at the end of the year, computed using the ratio of the previous
six years net chargeoffs divided by the sum of the previous six years
total outstanding loans at year end.
A thrift institution required to change its method of
computing reserves for bad debts will treat such change as a change in
a method of accounting determined solely with respect to the
"applicable excess reserves" of the institution. The amount of the
applicable excess reserves will be taken into account ratably over a
six-taxable year period, beginning with the first taxable year
beginning after December 31, 1995. The timing of this recapture may be
delayed for a two-year period provided certain residential lending
requirements are met. For financial reporting purposes, the Company
will not incur any additional tax expense. At September 30, 1996, under
SFAS No. 109, deferred taxes were provided on the difference between
the book reserve at September 30, 1996 and the applicable excess
reserve in the amount equal to the Bank's increase in the tax reserve
from December 31, 1987 to September 30, 1996. Retained earnings at
September 30, 1996 and 1995 includes approximately $2.5 million
representing bad debt deductions for which no deferred income taxes
have been provided.
Income tax provision (benefit) is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1996 1995 1994
---- ---- ----
Current
<S> <C> <C> <C>
Federal $ 30 $307 $ 242
State 103 51 2
----- ---- -----
Subtotal 133 358 244
Deferred (700) 146 (339)
----- ---- -----
Total $(567) $504 $ (95)
===== ==== =====
</TABLE>
The Company's effective tax rate is less than the statutory
federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
------------------------------------------------------------------------
1996 1995 1994
-------------------- --------------------- --------------------
PERCENTAGE Percentage Percentage
OF PRETAX of Pretax of Pretax
AMOUNT INCOME Amount Income Amount Income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $ 108 34.0% $553 34.0% $(95) 34.0%
Increase (decrease) in taxes resulting from:
Adjustment for resolution
of tax contingency (700) (220.2)
State tax -- net of federal tax effect 68 21.3 33 2.0 1
Other (43) (13.4) (82) (5.1) (1)
------ ------ ---- ---- ---- ----
Total $ (567) (178.3) $504 30.9% $(95) 34.0%
====== ====== ==== ==== ==== ====
</TABLE>
31
<PAGE> 32
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
The tax effect of temporary differences that give rise to
significant portions of the deferred tax accounts, calculated at 34%,
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------
1996 1995
---- ----
<S> <C> <C>
Accelerated depreciation $ 209 $ 172
Allowance for loan losses 851 506
Deferred loan fees 25 112
Accrued expenses 678 259
Unrealized gain (loss) on available for sale securities 311 (90)
Other 37 51
------ -------
Total deferred tax asset $2,111 $ 1,010
====== =======
</TABLE>
Effective October 1, 1993, the Company adopted SFAS No. 109
"Accounting for Income Taxes." A cumulative effect of a change in
accounting principle of $600 was recorded during the year ended
September 30, 1994.
12. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts and
ratios (set forth in the table below) of tangible and core capital (as
defined in the regulations) to adjusted assets (as defined), and of
Tier I and total capital (as defined) to average assets (as defined).
Management believes, as of September 30, 1996, that the Bank meets all
capital adequacy requirements to which it is subject.
As of September 30, 1996, the most recent notification from
the Office of Thrift Supervision categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain
minimum tangible, core and risk-based ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also
presented in the table. At September 30, 1995, core capital and
tangible capital are adjusted by $9, which is the amount excluded for
certain purchased mortgage servicing rights which did not occur in
fiscal year 1996. At September 30, 1996 and 1995, risk-based capital,
for regulatory requirements, is increased by $1,775 and $1,412,
respectively, of general loan loss reserves and decreased by $55 for
equity investments, for a total of $24,328 and $24,477, respectively.
32
<PAGE> 33
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REQUIRED TO BE
REQUIRED FOR WELL CAPITALIZED
CAPITAL ADEQUACY UNDER PROMPT
ACTUAL PURPOSES CORRECTIVE ACTION
---------------------- ---------------------- ----------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
At September 30, 1996:
CORE (LEVERAGE) 22,608 7.7% 8,841 3.0% 14,735 5.0%
TIER I RISK-BASED 23,120 16.8 11,223 4.0 16,835 6.0
TOTAL RISK-BASED 24,328 17.2 11,289 8.0 14,111 10.0
TANGIBLE 22,608 7.7 4,421 1.5
At September 30, 1995:
Core (Leverage) 23,120 8.2% 8,425 3.0% 14,041 5.0%
Tier I risk-based 23,120 16.8 11,223 4.0 16,835 6.0
Total risk-based 24,477 17.8 11,986 8.0 14,111 10.0
Tangible 23,120 8.2 4,212 1.5
</TABLE>
At the date of the Conversion, the Bank established a
liquidation account in an amount equal to its retained income as of
August 31, 1995. The liquidation account is maintained for the benefit
of eligible account holders and supplemental eligible account holders
who continue to maintain their accounts at the Bank after the
Conversion. The liquidation account is reduced annually to the extent
that eligible account holders and supplemental eligible account holders
have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an eligible account holder's or
supplemental eligible account holder's interest in the liquidation
account. In the event of a complete liquidation of the Bank, each
eligible account holders and supplemental eligible account holders will
be entitled to receive a distribution from the liquidation account in
an amount proportionate to the current adjusted qualifying balances for
accounts then held.
The Bank may not declare or pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof
would cause equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would
otherwise violate regulatory requirements.
13. LEASE COMMITMENTS
The future minimum rental payments required under operating
leases that have initial or remaining noncancelable lease terms in
excess of one year as of September 30, 1996 are as follows:
<TABLE>
<CAPTION>
September 30:
<S> <C>
1997 $ 96
1998 96
1999 96
2000 96
2001 27
Thereafter 115
-----
Total minimum future rental payments $ 526
=====
</TABLE>
Leasehold expense was approximately $155, $137 and $143 for
the years ended September 30, 1996, 1995 and 1994, respectively.
33
<PAGE> 34
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
14. EMPLOYEE BENEFITS
401(k/) Profit Sharing Plan
The Bank's 401(k/) profit sharing plan covers substantially
all full-time employees of the Company and provides for pre-tax
contributions by the employees with matching contributions at the
discretion of the Board of Directors determined at the beginning of the
calendar year. All amounts are fully vested. The Board has approved up
to a 5% of salary match for calendar years 1995 and 1994 and up to a
2.5% of salary match for calendar year 1996. Pension expense was $88,
$142 and $137 for the years ended September 30, 1996, 1995 and 1994,
respectively.
Common Stock Acquired By The Employee Stock Ownership Plan
In connection with the Conversion, the Company established an
ESOP for the benefit of eligible employees. The Company purchased
108,800 shares of common stock on behalf of the ESOP in the Conversion.
At September 30, 1996, 19,040 shares of the total ESOP shares were
committed to be released. The Company accounts for its ESOP in
accordance with AICPA Statement of Position 93-6, "Employers Accounting
for Employee Stock Ownership Plans," which requires the Company to
recognize compensation expense equal to the fair value of the ESOP
shares during the periods in which they become committed to be
released. To the extent that the fair value of the ESOP shares differs
from the cost of such shares, this differential will be charged or
credited to equity as additional paid-in-capital. Management expects
the recorded amount of expense to fluctuate as continuing adjustments
are made to reflect changes in the fair value of the ESOP shares. The
Company's ESOP, which is internally leveraged, does not report the loan
receivable from the ESOP as an asset and does not report the ESOP debt
from the employer as a liability. The Company recorded compensation and
employee benefit expense related to the ESOP of $200 and $111 for the
year ended September 30, 1996 and 1995, respectively. During fiscal
1996, the Board of Directors authorized the Company to lend funds to
ESOP to permit it to purchase an additional 38,775 shares of common
stock on behalf of the ESOP.
Recognition and Retention Plan
At a Special Meeting of the Stockholders held on July 26,
1995, the 1995 Recognition and Retention Plan and Trust (the "RRP") was
approved by the Company's stockholders. The Company has granted an
aggregate of 38,148 shares to the Company's Board of Directors and
executive officers subject to vesting and other provisions of the RRP.
At September 30, 1996 the deferred cost of unearned RRP shares
totaled $540 and is recorded as a charge against stockholders' equity.
Compensation expense will be recognized ratably over the five year
vesting period for shares granted. For the fiscal years ended September
30, 1996 and 1995, the Company recorded compensation and employee
benefit expense of $137 and $27 relating to the RRP.
Stock Option Plan
At a Special Meeting of the Stockholders held on July 26,
1995, the 1995 Stock Option Plan (the "Plan") was approved by the
Company's stockholders. Common Stock totaling 136,000 shares has been
reserved for issuance under the Plan. An aggregate of 118,184 stock
options have been granted to the Company's executive officers,
nonemployee directors and other key employees, subject to vesting and
other provisions of the Plan. Such options were not materially dilutive
during the years ended September 30, 1996 and 1995. During the years
ended September 30, 1996 and 1995, no options were exercised.
A summary of transactions under the Plan is as follows:
<TABLE>
<CAPTION>
EXERCISE AVERAGE
NUMBER OF PRICE PRICE
OPTION SHARES RANGE PER SHARE
------------- ----- ---------
Outstanding at September 30, 1994
<S> <C> <C> <C>
Granted 119,680 $15.00 - 15.00 $15.00
------- --------------- ------
Outstanding at September 30, 1995 119,680 15.00 - 15.00 15.00
Granted 3,400 17.00 - 17.00 17.00
Canceled (4,896) 15.00 - 15.00 15.00
------- --------------- ------
Outstanding at September 30, 1996 118,184 $15.00 - 17.00 $15.06
======= =============== ======
</TABLE>
34
<PAGE> 35
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
Other
The Company established an expense accrual in connection with
the anticipated funding of a trust to be created to formalize the
Company's deferred compensation arrangements with four former officers
of the Company. A total of $532 and $616 was included in the Company's
liabilities at September 30, 1996 and 1995.
15. COMMITMENTS AND CONTINGENCIES
The Company has outstanding loan commitments, excluding
undisbursed portion of loans in process and equity lines of credit, of
approximately $5,651 and $6,428 as of September 30, 1996 and 1995,
respectively, which are all expected to be funded within four months.
Of these commitments outstanding, the breakdown between fixed and
adjustable rate loans is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------
1996 1995
---- ----
<S> <C> <C>
Fixed-rate (ranging from 6.38% to 16.75%) $3,551 $3,951
Adjustable-rate 2,100 2,477
------ ------
Total $5,651 $6,428
====== ======
</TABLE>
Generally, long-term, fixed rate loans are sold in the
secondary market, depending on cash flow, interest rate, risk
management and other considerations. There were approximately $3,653
and $57 in outstanding commitments to sell loans at September 30, 1996
and 1995, respectively.
In April 1994, a lawsuit was filed on behalf of the estates of
eight individuals arising out of the activities of a now deceased
attorney who maintained a law practice in Media, Pennsylvania. The
attorney was accused of misappropriating the funds of such estates for
which he served as counsel, executor and administrator. During the
year, the case settled with all of the plaintiffs in the amount of
$400,000, with the settlement amount being completely covered by
insurance, less any deductible. There are various claims and pending
actions against the Company and its subsidiaries arising out of the
conduct of its business. In the opinion of the Company's management and
based upon advice of legal counsel, the resolution of these matters
will not have a material adverse impact on the consolidated financial
position or the results of operations of the Company and its
subsidiaries.
16. RELATED PARTY TRANSACTIONS
The Company retains a law firm in which one of the Company's
Directors is a member. In addition to providing general legal counsel
to the Company, the firm also prepares mortgage documents and attends
loan closings for which it is paid directly by the borrower.
17. SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, the Economic Growth and Paperwork
Reduction Act of 1996, which includes the recapitalization of the
Savings Association Insurance Fund (SAIF), became law. Accordingly, all
depository institutions with SAIF insured deposits will be charged a
one-time special assessment on their SAIF-assessible deposits as of
March 31, 1995 at the rate of 65.7 basis points, payable on November
27, 1996. The Bank accrued $1.4 million for this special assessment at
September 30, 1996.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of
financial instruments is made in accordance with the requirements of
SFAS No. 107, "Disclosures about the Fair Value of Financial
Instruments." The estimated fair value amounts have been determined by
the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required to
interpret market data to develop the
35
<PAGE> 36
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------------------------------------
1996 1995
------------------------- ----------------------
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------ ----- ------ -----
Assets:
<S> <C> <C> <C> <C>
Cash and interest-earning deposits $ 11,694 $ 11,694 $ 22,668 $ 22,668
Investment securities 16,532 16,532 10,710 10,650
Loans 169,977 177,320 158,059 159,283
Mortgage-related securities 83,432 82,271 79,832 78,548
Liabilities:
Savings deposits 41,504 41,504 43,088 43,088
NOW and MMDA deposits 48,954 48,954 53,680 53,680
Certificates of deposit 128,747 127,915 126,985 127,317
FHLB advances 46,740 48,016 28,411 28,381
Off balance sheet commitments 15,529 15,529 15,527 15,527
</TABLE>
The fair value of cash and interest-earning deposits is their
carrying value due to their short term nature. The fair value of
investments and mortgage-related securities is based on quoted market
prices, dealer quotes, and prices obtained from independent pricing
services. The fair value of loans is estimated, based on present values
using approximate current entry-value interest rates, applicable to
each category of such financial instruments.
The fair value of NOW deposits, MMDA deposits, and savings
deposits is the amount reported in the financial statements. The fair
value of certificates of deposit and FHLB advances is based on a
present value estimate, using rates currently offered for deposits of
similar remaining maturity.
No adjustment was made to the entry-value interest rates for
changes in credit performing commercial loans, construction loans, and
land loans for which there are no known credit concerns. Management
believes that the risk factor embedded in the entry-value interest
rates, along with the general reserves applicable to the performing
commercial, construction, and land loan portfolios for which there are
no known credit concerns, result in a fair valuation of such loans on
an entry-value basis. The fair value of non-performing loans, with a
recorded book value of approximately $5,352 and $3,156 (which are
collateralized by real estate properties with property values in excess
of carrying amounts) as of September 30, 1996 and 1995 respectively was
not estimated because it is not practicable to reasonably assess the
credit adjustment that would be applied in the marketplace for such
loans. The fair value estimates presented herein are based on pertinent
information available to management as of September 30, 1996 and 1995.
Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these financial
statements since that date and, therefore, current estimates of fair
value may differ significantly from the amounts presented herein.
36
<PAGE> 37
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
19. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements of First Keystone Financial, Inc. are as
follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30
------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Interest-bearing deposits $ 1,008 $ 1,194
Investment in subsidiary bank 22,115 23,272
Other assets 35 35
-------- --------
Total assets $ 23,158 $ 24,501
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 74 $ 38
-------- --------
Stockholders' Equity:
Common stock 14 14
Preferred stock
Additional paid-in capital 12,659 12,568
Common stock acquired by stock benefit plans (1,437) (1,006)
Treasury stock (1,288)
Unrealized gain (loss) on mortgage-related
available for sale (494) 142
Retained earnings 13,630 12,745
-------- --------
Total stockholders' equity 23,084 24,463
-------- --------
Total liabilities
and stockholders' equity $ 23,158 $ 24,501
======== ========
</TABLE>
37
<PAGE> 38
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE YEAR JANUARY 25, 1995
ENDED THROUGH
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
<S> <C> <C>
INTEREST INCOME
Loan to Employee Stock Ownership Plan $ 88 $ 70
Interest-earning deposits 20 18
Total interest income 108 88
---- ----
OPERATING EXPENSES 13 8
---- ----
Income before income taxes and equity in
undistributed income of subsidiary bank 95 80
Federal income tax expense 39 32
---- ----
Income before equity in undistributed
income of subsidiary bank 56 48
Equity in undistributed income
of subsidiary bank 829 880
---- ----
NET INCOME $885 $928
==== ====
</TABLE>
38
<PAGE> 39
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE YEAR JANUARY 25, 1995
ENDED THROUGH
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 885 $ 928
Adjustments to reconcile net income
to cash provided by operations:
Equity in undistributed earnings
of subsidiary bank (829) (880)
Amortization of common stock acquired
by stock option plans 364 111
Increase in other assets (35)
Increase in other liabilities 36 38
-------- --------
Net cash provided
by operating activities 456 162
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of common stock of subsidiaries (10,433)
Dividends received from subsidiary 1,350
-------- --------
Net cash provided (USED)
by investing activities 1,350 (10,433)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from
issuance of common stock 12,553
Common stock acquired by
stock benefit plans (704) (1,088)
Purchase of treasury stock (1,288)
-------- --------
Net cash (Used) Provided By
financing activities (1,992) 11,465
-------- --------
Increase (Decrease) in cash (186) 1,194
Cash at beginning of period 1,194
-------- --------
Cash at end of period $ 1,008 $ 1,194
======== ========
</TABLE>
20. SUBSEQUENT EVENT
On November 8, 1996, the Board of Directors of the Company
declared a cash dividend of $.05 per common share payable on December
1, 1996 to stockholders of record on November 20, 1996.
39
<PAGE> 40
FIRST KEYSTONE FINANCIAL, INC.
First Keystone Financial, Inc. is a unitary savings and loan holding company
conducting business through its wholly-owned subsidiary, First Keystone Federal
Savings Bank. The savings bank is a federally chartered SAIF-insured savings
institution operating through five full-service offices located in Delaware
County, Pennsylvania. The Company's headquarters is located at 22 West State
Street, Media, PA 19063.
DIRECTORS
Donald A. Purdy, Esquire
Chairman of the Board
William K. Betts; retired
Former Senior Vice President of Human Resources,
First Keystone Federal Savings Bank
Edward Calderoni
President of Century-21 Calderon Brothers
Silvio F. D'Ignazio
Owner of the Towne House Restaurant
Olive J. Faulkner; retired
Former Vice President and Corporate Secretary,
First Keystone Federal Savings Bank
Donald S. Guthrie, Esquire
President/CEO
Edmund Jones, Esquire
Chairman Emeritus
Member Jones, Guthrie & Strohm, P.C.
Willard F. Letts
President and Principal Stockholder
Eastern Flame Hardening Company
Walter J. Lewicki; retired
Former associate of Looker, Lees and Melcher, Inc.
Charles E. Rankin, Esquire
Vice Chairman of the Board
Joan G. Taylor; retired
Former Executive Director of the Young Women's
Christian Association (YWCA)
SENIOR OFFICERS
Donald S. Guthrie,
President/CEO
Thomas M. Kelly,
Executive Vice President/CFO
Stephen J. Henderson,
Senior Vice President/Lending
Elizabeth M. Mulcahy,
Senior Vice President/Human Resources
Carol Walsh,
Corporate Secretary
COUNSEL
Lawrence G. Strohm, Jr. Esquire
10 Beatty Road
Media, PA 19063
SPECIAL COUNSEL
Elias, Matz, Tiernan and Herrick L.L.P.
Suite 1200
734 15th Street, N.W.
Washington, DC 20005
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
EXECUTIVE OFFICES
22 West State Street
Media, PA 19063
(610) 565-6210
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Twenty-Fourth Floor
1700 Market Street
Philadelphia, PA 19103-3984
INVESTOR INFORMATION
Thomas M. Kelly
Executive Vice President/CFO
(610) 565-6210
SHAREHOLDER INFORMATION
Carol Walsh
Corporate Secretary
(610) 565-6210
STOCK INFORMATION
First Keystone Financial is traded on the Nasdaq National Market under the
symbol of "FKFS." There were approximately 526 shareholders of record, not
including the number of persons or entities whose stock is held in nominee or
street name through various brokerage firms or banks.
The Annual Meeting of Shareholders is scheduled for Wednesday, January 29, 1997,
at 2:00 p.m. to be held at the Towne House Restaurant, 117 Veterans Square,
Media, Pennsylvania.
40
<PAGE> 1
Exhibit 23.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements File
Nos. 333-09565 and 33-97562 of First Keystone Financial, Inc. on Form S-8 of our
report dated November 8, 1996, incorporated by reference in the Annual Report on
Form 10-KSB of First Keystone Financial, Inc. for the year ended September 30,
1996.
/s/ DELOITTE & TOUCHE, LLP
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
December 27, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000856751
<NAME>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 1,870
<INT-BEARING-DEPOSITS> 9,824
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 76,743
<INVESTMENTS-CARRYING> 23,221
<INVESTMENTS-MARKET> 22,060
<LOANS> 167,530
<ALLOWANCE> 2,624
<TOTAL-ASSETS> 294,241
<DEPOSITS> 219,205
<SHORT-TERM> 39,200
<LIABILITIES-OTHER> 5,212
<LONG-TERM> 7,540
0
0
<COMMON> 9,948
<OTHER-SE> 13,136
<TOTAL-LIABILITIES-AND-EQUITY> 23,084
<INTEREST-LOAN> 13,459
<INTEREST-INVEST> 5,944
<INTEREST-OTHER> 434
<INTEREST-TOTAL> 19,837
<INTEREST-DEPOSIT> 9,363
<INTEREST-EXPENSE> 10,932
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<INCOME-PRE-EXTRAORDINARY> 318
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<EPS-PRIMARY> .74
<EPS-DILUTED> .74
<YIELD-ACTUAL> 7.38
<LOANS-NON> 5,352
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</TABLE>
