<PAGE>
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission File Number: 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
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Number of shares of Common Stock outstanding as of August 8, 1996: 1,292,500
Transitional Small Business Disclosure Format Yes No X
------ ------
<PAGE>
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1996 (Unaudited) and September 30, 1995 . . . . 1
Consolidated Statements of Income for the Three and Nine
Months Ended June 30, 1996 and 1995 (Unaudited) . . . . . 2
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended June 30, 1996 (Unaudited). . . . 3
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 1996 and 1995 (Unaudited). . . . . . . . . 4
Notes to Consolidated Financial Statements (Unaudited). . 5
Item 2. Managements's Discussion and Analysis of Financial Condition and
Results of Operations.. . . . . . . . . . . . . . . . . . 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes In Securities . . . . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 13
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
i
<PAGE>
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
June 30 September 30
ASSETS 1996 1995
- ------ ----------- ------------
(Unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 1,591 $ 2,091
Interest-bearing deposits 10,434 20,577
-------- --------
Total cash and cash equivalents 12,025 22,668
Investment securities available for sale 16,372
Mortgage-related securities available for sale 61,905 19,538
Loans held for sale 2,932 57
Investment securities held to maturity (approximate
fair value of $10,650 at September 30, 1995) 10,710
Mortgage-related securities held to maturity (approximate fair value
of $20,600 at June 30, 1996 and of $59,010 at September 30, 1995) 21,705 60,294
Loans receivable - net (allowance for loan losses of $1,508
at June 30, 1996 and $1,487 at September 30, 1995) 164,169 158,002
Accrued interest receivable 2,346 2,407
Real estate owned 1,593 465
Federal Home Loan Bank stock - at cost 1,982 1,492
Office properties and equipment - net 2,598 2,943
Deferred income taxes 1,580 1,010
Prepaid expenses and other assets 1,342 1,393
-------- --------
TOTAL ASSETS $290,549 $280,979
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $221,663 $223,753
Advances from Federal Home Loan Bank 39,642 28,411
Accrued interest payable 1,369 1,096
Advances from borrowers for taxes and insurance 2,805 1,035
Accounts payable and accrued expenses 2,150 2,221
-------- --------
Total liabilities 267,629 256,516
-------- --------
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; June 30, 1996 and September 30, 1995,
1,292,500 and 1,360,000 shares, respectively 14 14
Additional paid in capital 12,639 12,568
Common stock acquired by stock benefit plans (1,500) (1,006)
Treasury stock at cost; 67,500 shares (1,288)
Unrealized gain (loss) on available for sale securities - net of tax (853) 142
Retained earnings - substantially restricted 13,908 12,745
-------- --------
Total stockholders' equity 22,920 24,463
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $290,549 $280,979
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on:
Loans $3,322 $3,190 $10,063 $9,126
Mortgage-related securities 1,368 1,177 3,860 3,150
Investments 144 192 420 582
Interest-bearing deposits 74 202 363 462
------ ------ ------- -------
Total interest income 4,908 4,761 14,706 13,320
------ ------ ------- -------
INTEREST EXPENSE:
Interest on:
Deposits 2,278 2,522 7,095 7,174
Federal Home Loan Bank advances 362 313 1,030 716
------ ------ ------- -------
Total interest expense 2,640 2,835 8,125 7,890
------ ------ ------- -------
NET INTEREST INCOME 2,268 1,926 6,581 5,430
PROVISION FOR LOAN LOSSES 38 13 113 39
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,230 1,913 6,468 5,391
------ ------ ------- -------
OTHER INCOME (LOSS):
Service charges and other fees 263 259 789 756
Net gain (loss) on sale of:
Loans 45 101 17
Mortgage-related securities 60 (11) 60
Real estate owned 30 5 38 7
Real estate operations (13) (7) (19) (38)
Other income 12 17 40 70
------ ------ ------- -------
Total other income 337 334 938 872
------ ------ ------- -------
OPERATING EXPENSES:
Salaries and employee benefits 722 817 2,475 1,477
Occupancy and equipment expenses 219 226 799 674
Professional fees 201 144 614 341
Federal deposit insurance premium 126 158 400 408
Bank service charges 106 113 321 327
Data processing 77 98 254 288
Advertising 56 63 159 149
Other 180 189 512 549
------ ------ ------- -------
Total operating expenses 1,687 1,808 5,534 5,213
------ ------ ------- -------
INCOME BEFORE INCOME TAX EXPENSE 880 439 1,872 1,050
INCOME TAX EXPENSE 344 117 709 279
------ ------ ------- -------
NET INCOME $ 536 $ 322 $ 1,163 $ 771
------ ------ ------- -------
------ ------ ------- -------
EARNINGS PER COMMON SHARE $ 0.46 $ 0.26 $ 0.97 $ 0.46
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
- -------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Common Unrealized gain on
stock mortgage-related
Additional acquired by securities Total
Common paid-in stock benefit Treasury available for sale Retained stockholders'
stock capital plans stock (net of tax) earnings equity
------ ---------- ------------- -------- ------------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1995 $14 $12,568 $(1,006) $ 142 $12,745 $24,463
Common stock acquired
by stock benefit plans (704) (704)
Benefit plans stock committed
to be released 210 210
Excess of fair value
above cost of ESOP
stock committed to
released 71 71
Purchase of treasury stock (1,288) (1,288)
Net unrealized loss on
mortgage-related
securities available for
sale, net of tax (995) (995)
Net income 1,163 1,163
--- ------- -------- -------- ------ ------- --------
BALANCE AT JUNE 30, 1996 $14 $12,639 $(1,500) $(1,288) $(853) $13,908 $22,920
--- ------- -------- -------- ------ ------- --------
--- ------- -------- -------- ------ ------- --------
</TABLE>
3
<PAGE>
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30
----------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,163 $ 771
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization 422 284
Amortization of premiums (145) 250
Gain on sales of loans (101) (17)
Gain on sales of real estate owned (38) (8)
(Gain) Loss on sale of mortgage-related securities 11 (60)
Provision for losses on loans 113 39
Amortization of stock benefit plans 281
Changes in assets and liabilities which provided (used) cash:
Loans originated for resale (20,666) (4,179)
Loans sold in the secondary market 17,791 3,443
Deferred income taxes 58 204
Interest receivable 61 148
Prepaid expenses and other assets 51 (634)
Accrued interest payable 273 100
Accrued expenses (71) (403)
-------- --------
Net cash used in operating activities (797) (262)
-------- --------
INVESTING ACTIVITIES:
Loans originated or acquired (37,759) (41,318)
Purchases of investment securities available for sale (13,000)
Purchases of mortgage-related securities available for sale (25,770) (14,116)
Purchases of mortgage-related securities held to maturity (2,013)
Purchase of FHLB stock (490) (122)
Proceeds from sales of mortgage-related securities 12,785 3,247
Proceeds from sales of real estate owned 447 369
Principal collected on loans 30,395 27,808
Principal collected on mortgage-related securities 9,725 5,757
Maturities of investment securities available for sale 3,065
Maturities of investment securities held to maturity 4,000 3,500
Purchase of property and equipment (77) (676)
Additions to real estate acquired through foreclosure (73) (59)
-------- --------
Net cash used in investing activities (18,765) (15,610)
-------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts (2,090) 7,679
Net proceeds from FHLB advances and other borrowings 11,231 15,146
Net increase in advances from borrowers for taxes and insurance 1,770 1,984
Proceeds from the sale of stock, net of conversion costs 11,532
Common stock acquired by stock benefit plans (704)
Purchase of treasury stock (1,288)
-------- --------
Net cash provided by financing activities 8,919 36,341
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,643) 20,469
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,668 5,454
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $12,025 $25,923
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 8,186 $ 7,990
Transfers of loans receivable into real estate owned 1,515 451
Cash payments (refunds) of income taxes 395 (221)
Transfer of investment securities to investment securities available for sale 6,710
Transfer of mortgage-related securities to mortgage-related securities available for sale 43,823
Conversion of loans into mortgage-related securities available for sale 993
Net unrealized loss on mortgage-related securities available for sale 995 66
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 (UNAUDITED) AND SEPTEMBER 30, 1995 AND
(UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1996 AND 1995
- -------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the unaudited interim periods.
The results of operations of the three and nine month periods ended June
30, 1996 are not necessarily indicative of the results to be expected for
the year ending September 30, 1996. The consolidated financial statements
presented herein should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in the
Company's Annual Report to Stockholders for the year ended September 30,
1995.
2. INVESTMENT SECURITIES HELD TO MATURITY
A comparison of amortized cost and approximate fair value of investments,
by contractual maturities, is as follows:
September 30, 1995
------------------------
Amortized Approximate
Cost Fair Value
---- -----------
U.S. Treasury securities and securities
of U.S. Government agencies:
1 to 5 years $ 9,565 $ 9,505
5 to 10 years 1,000 1,000
Other investments 145 145
------- -------
Total $10,710 $10,650
------- -------
------- -------
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 an aggregate par value of $3,000. During
December 1995, the Company reclassified the remaining $6.7 million
investment securities held to maturity as permitted to be classified as
available for sale.
3. MORTGAGE-RELATED SECURITIES HELD TO MATURITY
Mortgage-related securities are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996 September 30, 1995
------------------------ ------------------------
Amortized Approximate Amortized Approximate
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $ 3,662 $ 3,435 $ 8,743 $ 8,630
FNMA pass-through certificates 11,636 11,025 26,014 25,500
Collateralized mortgage obligations 6,407 6,140 25,537 24,880
------- ------- ------- --------
Total $21,705 $20,600 $60,294 $59,010
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
5
<PAGE>
The collateralized mortgage obligations contain both fixed and adjustable
classes of bonds which are repaid in accordance with a predetermined
priority. The underlying collateral of the bonds are loans which are
insured by Federal Home Loan Mortgage Corporation or the Federal National
Mortgage Association.
4. ASSETS AVAILABLE FOR SALE
Assets available for sale at June 30, 1996 and September 30, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government agency debentures $16,500 $ 31 $ 303 $16,228
Municipal obligations 145 1 144
------- ---- ------ --------
Total $16,645 $ 31 $ 304 $16,372
------- ---- ------ --------
------- ---- ------ --------
Mortgage-related securities:
FHLMC pass-through certificates $13,519 $ 45 $ 263 $13,301
FNMA pass-through certificates 11,359 10 264 11,105
GNMA pass-through certificates 8,618 329 8,289
Collateralized mortgage obligations 29,527 169 486 29,210
------- ---- ------ --------
Total $63,023 $224 $1,342 $61,905
------- ---- ------ --------
------- ---- ------ --------
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Mortgage-related securities:
FHLMC pass-through certificates $ 3,935 $ 75 $ 4,010
FNMA pass-through certificates 2,913 $16 2,897
GNMA pass-through certificates 1,136 8 1,144
Collateralized mortgage obligations 11,322 165 11,487
------- ---- --- ------
Total $19,306 $248 $16 $19,538
------- ---- --- ------
------- ---- --- ------
</TABLE>
The mortgage-related securities designated as available for sale, by
definition, could be sold in response to changes in interest rates and
cash flows or for restructuring purposes.
6
<PAGE>
5. LOANS RECEIVABLE
Loans receivable consist of the following:
June 30 September 30
1996 1995
---- -----
Real estate loans:
Single-family $121,976 $115,225
Construction and land 15,706 16,343
Multi-family and commercial 11,370 11,789
Consumer loans:
Home equity and lines of credit 17,386 18,229
Deposit 439 350
Education 863 1,010
Other 2,256 1,491
Commercial loans 2,565 2,533
-------- --------
Total loans 172,561 166,970
Loans in process (5,370) (6,070)
Allowance for loan losses (1,508) (1,487)
Deferred loan fees (1,514) (1,411)
-------- --------
Loans receivable - net $164,169 $158,002
-------- --------
-------- --------
The following is an analysis of the allowance for loan losses:
Nine Months Ended Year Ended
June 30 September 30
1996 1995
---- ----
Beginning balance $1,487 $1,540
Provisions charged to income 113 52
Charge-offs (92) (168)
Recoveries 63
------ ------
Total $1,508 $1,487
------ ------
------ ------
At June 30, 1996 and September 30, 1995 non-performing loans (which include
loans in excess of 90 days delinquent) amounted to approximately $5,758 and
$3,150, respectively.
6. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
June 30 September 30
1996 1995
----------------- ----------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 6,012 2.7% $ 9,167 4.1%
NOW accounts 26,904 12.1 26,621 11.9
Passbook accounts 42,697 19.3 43,088 19.3
Money market demand accounts 17,111 7.7 17,892 8.0
Certificate accounts 128,939 58.2 126,985 56.7
-------- ---- -------- -----
Total $221,663 100.0% $223,753 100.0%
-------- ---- -------- -----
-------- ---- -------- -----
</TABLE>
7
<PAGE>
7. EARNINGS PER SHARE
Earnings per share ("EPS") was $0.46 and $0.97 for the three and nine
months ended June 30, 1996, respectively. EPS was calculated based on the
number of common stock and common stock equivalents outstanding for the
three and nine months ended June 30, 1996. Weighted average shares
outstanding were 1,160,406 and 1,200,476 for the three and nine months
ended June 30, 1996, respectively, and, in accordance with SOP 93-6, do not
include shares held by the stock benefit plans that were purchased and
unallocated during the periods.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1996 (UNAUDITED) AND
SEPTEMBER 30, 1995
Total assets of the Company increased $9.6 million or 3.4% from $281.0
million at September 30, 1995 to $290.5 million at June 30, 1996. The
increase in total assets during the nine months ended June 30, 1996 was due
primarily to a $5.7 million increase in investment securities (all of which
are available for sale as a result of the reclassification from held to
maturity), a $73.8 million increase in mortgage-related securities (including
both available for sale and held to maturity), a $2.9 million increase in
loans held for sale and a $6.2 million increase in loans receivable-net,
which increases were partially offset by a decrease in cash and cash
equivalents of $10.6 million. The decrease in cash and cash equivalents
reflected the repayment of $5.3 million of Federal Home Loan Bank advances
and the funding of a $2.1 million decrease in deposits. The increase in
loans receivable-net was due to the origination of residential loans for
portfolio retention slightly offset by decreases in the securities portfolio
as part of the Company's asset/liability strategy. Also as part of the
Company's asset/liability strategy, an aggregate of approximately $12.8
million of fixed and adjustable-rate mortgage-related securities were sold
for a loss of $11,000, with the proceeds being reinvested into higher
yielding loans and securities.
Real estate owned increased to $1.1 million at June 30, 1996 from $465,000 at
September 30, 1995 due to the acceptance of a deed in lieu of foreclosure on
the Company's only delinquent construction loan funding the acquisition of
and improvement of a 107-lot real estate development project and the
construction of 38 townhouses located in North Coventry Township in
Pennsylvania. The Company has engaged a local builder to complete the
project. It is currently expected that the project should be completed in 18
to 24 months.
Deposits decreased $2.1 million or .93% from $223.8 million at September 30,
1995 to $221.7 million at June 30, 1996. This reduction in deposits occurred
due to higher rate certificates of deposit maturing.
Stockholders' equity decreased approximately $1.5 million primarily due the
completion of the Company's initial stock repurchase program. A total of
67,500 shares (5% of the outstanding shares) were repurchased at an aggregate
cost of approximately $1.3 million.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 1996 AND 1995
NET INCOME.
Net income was $536,000 for the three months ended June 30, 1996 as compared
to $322,000 for the same period in 1995 while net income for the nine months
ended June 30, 1996 was $1.2 million as compared to $771,000 for the same
period in 1995. The $214,000 or 66.5% increase in net income for the three
months ended June 30, 1996 was due to a $342,000 increase in net interest
income, a $3,000 increase in other income together with a $121,000 decrease
in operating expenses partially offset by a $227,000 increase in income
taxes. The $392,000 or 50.8% increase in net income for the nine months
ended June 30, 1996 was due to a $1.2 million increase in net interest income
and a
9
<PAGE>
$66,000 increase in other income partially offset by increases of $321,000
and $430,000 in operating expenses and in income tax expense, respectively.
NET INTEREST INCOME.
Net interest income increased $342,000 or 17.8% to $2.3 million and $1.2
million or 21.2% to $6.6 million for the three and nine months ended June 30,
1996, respectively, as compared to the same period in 1995. With respect to
the quarter ended June 30, 1996, The increase was primarily due to a
$147,000 or 3.1% increase in interest income combined with a $195,000 or 6.9%
decrease in interest expense. With respect to the nine month period, the
increase reflected a $1.4 million or 10.4% increase in interest income,
offset partially by a $235,000 or 3.0% increase in interest expense. The
average balance of interest-earning assets increased $11.3 million and $18.9
million for the three and nine months ended June 30, 1996, respectively, as
compared to the same period in 1995. The interest rate spread and net
interest margin amounted to 3.09% and 3.40% for the three months ended June
30, 1996 as compared to 2.69% and 3.02% for the same period in 1995. The
weighted average yield earned on interest-earning assets decreased 10 basis
points to 7.36% during the three months ended June 30, 1996 as compared to
7.46% for the prior period in 1995. In addition, the weighted average rate
paid on interest-bearing liabilities decreased 50 basis points to 4.27%
during the three months ended June 30, 1996 as compared to 4.77% for the same
period in 1995. This decrease was attributable to higher interest-bearing
liabilities renewing at lower rates. The interest rate spread and net
interest margin were 2.99% and 3.33%, respectively, for the nine months
ended June 30, 1996 as compared to 2.70% and 2.96% for the same periods in
1995. During the nine months ended June 30, 1996, the weighted average yield
on interest-earning assets increased 18 basis points to 7.44% as compared to
7.26% for the prior period. This increase was partially offset by an
increase in the average balance of interest-bearing liabilities of $4.5
million for the nine months ended June 30, 1996, as compared to the same
period in 1995. In addition, the weighted average rate paid on
interest-bearing liabilities decreased 11 basis points to 4.45% during the
nine months ended June 30, 1996 as compared to 4.56% during the nine months
ended June 30, 1995.
PROVISION FOR LOAN LOSSES.
The Company's provision for loan losses increased to $38,000 for the three
months ended June 30, 1996 as compared to $13,000 for the same period in
1995. For the nine months ended June 30, 1996 and 1995 the provision for
loan losses was $113,000 and $39,000, respectively. The increases were due
to increases in the loan portfolio.
Between September 1992 and March 1996, the Company purchased 16 separate
pools of lease financings from Bennett Funding Group, Inc. ("Bennett
Funding") and its affiliates with a total balance outstanding as of June 30,
1996 of $3.9 million. Included in the total balance were $890,000 in
equipment leases (some of which are insured against default 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 issued
by Bennett Funding. Also included in the Company's total balance were $1.4
million in consumer receivables issued by Bennett Funding International, an
affiliate of Bennett Funding, secured by timeshare financing contracts, which
contracts are insured against default by a private insurer, and $475,000 in
equipment leases from Bennett Leasing Corp., another affiliate of Bennett
Funding. On March 29, 1996, Bennett Funding, a closely-held Syracuse, New
York-based leasing company, filed for Chapter 11 bankruptcy protection.
Subsequently, the Company has been advised that additional Bennett Funding
affiliates, including affiliates who act as the processor for
10
<PAGE>
payments due holders of leases and loans issued by Bennett Funding and its
affiliates, have been placed in bankruptcy by the Chapter 11 bankruptcy
trustee for Bennett Funding and/or others. Although the Company is continuing
to receive payments on the $1.4 million of consumer receivables issued by
Bennett Funding International, the Company has chosen to place the entire
$3.9 million amount outstanding held by the Company on non-accrual and to
classify the credits as substandard. Accordingly, at June 30, 1996, the
Company's total non-performing assets increased to $7.4 million or 2.53% of
total assets from $3.6 million or 1.29% of total assets at September 30,
1995. 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 $400,000
of its unallocated general loss allowance. The Company is actively monitoring
the bankruptcy proceedings. However, to date only limited information has
been made available by the bankruptcy trustee. As a consequence, 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. However, the Company is vigorously pursuing
all options available to protect its interests.
OTHER INCOME.
Other income increased $3,000 or 0.9% to $337,000 and $66,000 or 7.6% to
$938,000 for the three and nine months ended June 30, 1996, respectively, as
compared to the same period in 1995. The increase was primarily the result
of increases in the net gain on sale of loans as well as modest increases in
service charges and other fees.
OPERATING EXPENSES.
Operating expenses decreased $121,000 or 6.7% during the three months ended
June 30, 1996 as compared to the same period in 1995 primarily due to a
decrease in salaries and employee benefits expense reflecting the effects of
the implementation of the Company's restructuring plan. For the nine months
ended June 30, 1996, operating expenses increased $321,000 or 6.2% primarily
due to approximately a $311,000 provision relating to the Company's
restructuring plan. Increases of $147,000, $112,500 and $48,500 were incurred
in the compensation and employee benefits, occupancy and equipment and
professional fees expenses as part of the restructuring plan. In addition,
professional fees increased $224,500, net of the restructuring costs, the
majority of which related to various ongoing legal matters. See "Item 1 -
Legal Proceedings"
INCOME TAX EXPENSE
Income tax expense increased $227,000 to $344,000 and $430,000 to $709,000
during the three and nine months ended June 30, 1996, respectively, as
compared to the same periods in 1995. The increases were primarily a result
of an increase in income before income taxes and an increase in the state tax
expense. State tax expense was lower in prior periods due to the utilization
of certain state tax carryforwards.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Company's
primary sources of funds are deposits, amortization, prepayment and
maturities of outstanding loans and mortgage-related securities, sales of
loans, maturities of investment securities and other short-term investments,
borrowing and funds provided from operations. While scheduled payments from
the amortization of loans and mortgage-related securities and maturing
investment securities and short-term investments are relatively predictable
sources of funds, deposit flows and loan prepayments are greatly influenced
by general interest rates, economic conditions and competition. In addition,
the Company invests excess funds in overnight deposits and other short-term
interest-earning assets which provide liquidity to meet lending requirements.
The Company has been able to generate sufficient cash through its deposits
as well as borrowings (consisting solely of advances from the Federal Home
Loan Bank of Pittsburgh "FHLB") to satisfy its funding commitments. At June
30, 1996, the Company had $39.6 million in 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, mortgage-related
securities and investment securities. The Company uses its sources of funds
primarily to meet its ongoing commitments, to pay maturing certificates of
deposit and savings withdrawals, fund loan commitments and maintain a
portfolio of mortgage-related and investment securities. At June 30, 1996,
the total approved loan commitments outstanding amounted to $6.9 million, not
including loans in process. At the same date, commitments under unused lines
of credit amounted to $2.8 million. Certificates of deposit scheduled to
mature in one year or less at June 30, 1996 totalled $80.2 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 amounts 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 from withdrawals and repayments of short-term borrowings. The
liquidity requirements may vary from time to time at the direction of the OTS
depending upon economic conditions and deposit flows. The Company's average
monthly liquidity ratio and short-term liquid assets for June 1996 was 7.3%
and 3.6%, respectively.
As of June 30, 1996, the Company had regulatory capital which was in excess
of applicable limits. The Company is required under certain federal
regulations to maintain tangible capital equal to at least 1.5% of its
adjusted total assets, core capital equal to at least 3.0% of its adjusted
total assets and total capital to at least 8.0% of its risk-weighted assets.
At June 30, 1996, the Bank had tangible capital equal to 7.9% of adjusted
total assets, core capital equal to 7.9% of adjusted total assets and total
capital equal to 18.1% of risk-weighted assets.
12
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which requires the measurement of financial position
and operating results in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or in the same magnitude as the
price of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Company's assets and liabilities
are critical to the maintenance of acceptable performance levels.
13
<PAGE>
PART II
Item 1. 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. The plaintiffs
claimed damages of approximately $900,000 plus unspecified punitive
damages and costs. The case was finally settled on May 13, 1996 with
all of the plaintiffs. The Bank entered into the settlement to, among
other things, avoid the cost and disruption of continuing litigation.
Under the terms of the settlement agreement, the Bank provided $400,000
to the plaintiffs in settlement of all the claims thereof. The Bank had
previously established reserves with respect to a substantial portion
of such amount. The Bank has filed a claim with its insurance carrier
and has received full coverage for the claim, less its deductible.
The Bank has also filed a claim with its insurance carrier for recovery
of its expenses incurred in defense of the lawsuit. Discussions are
continuing with respect to the resolution of this matter.
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST KEYSTONE FINANCIAL, INC.
Date: August 13, 1996 By: /s/ Donald S. Guthrie
--------------------------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: August 13, 1996 By: /s/ Thomas M. Kelly
--------------------------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
15
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