<PAGE> 1
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, 1997
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 7, 1997: 1,227,875
Transitional Small Business Disclosure Format Yes No X
<PAGE> 2
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1997 (Unaudited) and September 30, 1996 ................................ 1
Consolidated Statements of Income for the Three and Nine
Months Ended June 30, 1997 and 1996 (Unaudited).................................. 2
Consolidated Statement of Changes in Stockholders' Equity for the
Three and Nine Months Ended June 30, 1997 (Unaudited)............................ 3
Consolidated Statements of Cash Flows for the Three and Nine Months
Ended June 30, 1997 and 1996 (Unaudited)......................................... 4
Notes to Consolidated Financial Statements (Unaudited)........................... 5
Item 2. Management'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
</TABLE>
i
<PAGE> 3
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
<TABLE>
<CAPTION>
June 30 September 30
ASSETS 1997 1996
- ------ ---------------------------
(Unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 1,843 $ 1,870
Interest-bearing deposits with depository institutions 8,918 9,824
--------- ---------
Total cash and cash equivalents 10,761 11,694
Investment securities available for sale 13,556 16,532
Mortgage-related securities available for sale 70,105 60,211
Loans held for sale 3,491 2,447
Investment securities held to maturity (approximate fair value
of $4,960 at June 30, 1997) 5,000
Mortgage-related securities held to maturity (approximate fair value
of $20,900 at June 30, 1997 and $22,060 at September 30, 1996) 21,622 23,221
Loans receivable - net 182,899 167,530
Accrued interest receivable 2,599 2,404
Real estate owned 1,848 1,557
Federal Home Loan Bank stock - at cost 3,515 2,337
Office properties and equipment - net 2,283 2,507
Deferred income taxes 1,383 2,111
Prepaid expenses and other assets 1,735 1,690
--------- ---------
TOTAL ASSETS $ 320,797 $ 294,241
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 228,747 $ 219,205
Advances from Federal Home Loan Bank 62,288 46,740
Accrued interest payable 1,396 1,501
Advances from borrowers for taxes and insurance 2,971 921
Accounts payable and accrued expenses 1,955 2,790
--------- ---------
Total liabilities 297,357 271,157
--------- ---------
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, 1997 and September 30, 1996,
1,227,875 and 1,292,500 shares, respectively 14 14
Additional paid in capital 12,810 12,659
Common stock acquired by stock benefit plans (2,071) (1,437)
Treasury stock at cost; 132,125 shares (2,556) (1,288)
Unrealized loss on available for sale securities - net of tax (139) (494)
Retained earnings - partially restricted 15,382 13,630
--------- ---------
Total stockholders' equity 23,440 23,084
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 320,797 $ 294,241
========= =========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
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
--------------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on:
Loans $ 3,723 $ 3,322 $ 10,748 $ 10,063
Mortgage-related securities 1,566 1,368 4,542 3,860
Investments 401 144 1,074 420
Interest-bearing deposits 69 74 195 363
------- ------- -------- --------
Total interest income 5,759 4,908 16,559 14,706
------- ------- -------- --------
INTEREST EXPENSE:
Interest on:
Deposits 2,314 2,278 6,774 7,095
Federal Home Loan Bank advances 914 362 2,424 1,030
------- ------- -------- --------
Total interest expense 3,228 2,640 9,198 8,125
------- ------- -------- --------
NET INTEREST INCOME 2,531 2,268 7,361 6,581
PROVISION FOR LOAN LOSSES 56 38 173 113
------- ------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,475 2,230 7,188 6,468
------- ------- -------- --------
OTHER INCOME (LOSS):
Service charges and other fees 236 263 722 789
Net gain (loss) on sale of:
Loans 88 45 198 101
Mortgage-related securities (11)
Real estate owned 30 12 38
Other assets 46
Real estate operations (7) (13) (14) (19)
Other income 8 12 30 40
------- ------- -------- --------
Total other income 325 337 994 938
------- ------- -------- --------
OPERATING EXPENSES:
Salaries and employee benefits 783 722 2,355 2,475
Occupancy and equipment expenses 208 219 635 799
Professional fees 230 201 566 614
Federal deposit insurance premium 36 126 171 400
Bank service charges 98 106 287 321
Data processing 81 77 244 254
Advertising 79 56 217 159
Other 191 180 551 512
------- ------- -------- --------
Total operating expenses 1,706 1,687 5,026 5,534
------- ------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 1,094 880 3,156 1,872
INCOME TAX EXPENSE 421 344 1,215 709
------- ------- -------- --------
NET INCOME $ 673 $ 536 $ 1,941 $ 1,163
======= ======= ======== ========
PRIMARY EARNINGS PER SHARE $ 0.60 $ 0.46 $ 1.64 $ 0.97
======= ======= ======== ========
FULLY DILUTED EARNINGS PER SHARE $ 0.60 $ 0.46 $ 1.64 $ 0.97
======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Common (loss) gain
stock on mortgage-
acquired by related
Additional stock securities Total
Common paid-in 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, 1996 $14 $12,659 $(1,437) $(1,288) $(494) $13,630 $23,084
Common stock acquired
by stock benefit plans (775) (775)
ESOP stock committed
to be released 36 36
Excess of fair value
above cost of stock
benefit plans committed
to be released 151 151
RRP amortization 105 105
Dividends - $.05 per share (189) (189)
Net unrealized gain on
securities available for
sale, net of tax 355 355
Purchase of treasury stock (1,268) (1,268)
Net income 1,941 1,941
--- ------- ------- ------- ----- ------- -------
BALANCE AT JUNE 30, 1997 $14 $12,810 $(2,071) $(2,556) $(139) $15,382 $23,440
=== ======= ======= ======= ===== ======= =======
</TABLE>
3
<PAGE> 6
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30
-----------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,941 $ 1,163
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization 270 422
Amortization of premiums (409) (145)
Loss (Gain) on sales of:
Loans (198) (101)
Mortgage-related securities available for sale 11
Real estate owned (12) (38)
Other assets (46)
Provision for loan losses 173 113
Amortization of stock benefit plans 292 281
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (24,535) (20,666)
Loans sold in the secondary market 23,491 17,791
Deferred income taxes 505 58
Accrued interest receivable (195) 61
Prepaid expenses and other assets (100) 51
Accrued interest payable (105) 273
Accrued expenses (835) (71)
-------- --------
Net cash provided by (used in) operating activities 237 (797)
-------- --------
INVESTING ACTIVITIES:
Loans originated or acquired (38,178) (37,759)
Purchases of:
Investment securities available for sale (4,005) (13,000)
Mortgage-related securities available for sale (16,103) (25,770)
Investment securities held to maturity (5,000)
Mortgage-related securities held to maturity (2,013)
Purchase of FHLB stock (1,178) (490)
Proceeds from sales of real estate owned 755 447
Proceeds from sales of mortgage-related securities 12,785
Proceeds from sales of other assets 101
Principal collected on loans 22,797 30,395
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 7,000 3,065
Mortgage-related securities available for sale 6,931 6,280
Investment securities held to maturity 4,000
Mortgage-related securities held to maturity 1,575 3,445
Purchase of property and equipment (46) (77)
Net expenditures on real estate acquired through foreclosure and in development (726) (73)
-------- --------
Net cash used in investing activities (26,078) (18,765)
-------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts 9,542 (2,090)
Net proceeds from FHLB advances 15,548 11,231
Net increase in advances from borrowers for taxes and insurance 2,050 1,770
Common stock acquired by stock benefit plans (775) (704)
Purchase of treasury stock (1,268) (1,288)
Cash dividend (189)
-------- --------
Net cash provided by financing activities 24,908 8,919
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (933) (10,643)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,694 22,668
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,761 $ 12,025
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 9,300 $ 8,186
Transfers of loans receivable into real estate owned 411 1,515
Cash payments of income taxes 430 395
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
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 7
FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 (UNAUDITED) AND SEPTEMBER 30, 1996 AND
(UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(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 six month periods ended June
30, 1997 are not necessarily indicative of the results to be expected
for the fiscal year ending September 30, 1997. 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, 1996.
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities,
by contractual maturities, are as follows:
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------------------
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 $ 9,500 $ 9 $ 8 $ 9,501
5 to 10 years 3,000 73 2,927
Other investments 1,124 4 1,128
-------- ---- ---- --------
Total $13,624 $13 $81 $13,556
======= === === =======
Held to Maturity:
U.S. Treasury securities and securities
of U.S. Government agencies:
Over 10 years $5,000 $40 $4,960
------ --- ------
Total $5,000 $40 $4,960
====== === ======
</TABLE>
5
<PAGE> 8
<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>
3. MORTGAGE-RELATED SECURITIES
Mortgage-related securities available for sale and mortgage-related
securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Available for Sale:
FHLMC pass-through certificates $12,346 $156 $ 53 $12,449
FNMA pass-through certificates 10,042 58 76 10,024
GNMA pass-through certificates 19,356 12 149 19,219
Collateralized mortgage obligations 28,520 238 345 28,413
------- ---- ---- -------
Total $70,264 $464 $623 $70,105
======= ==== ==== =======
Held to Maturity:
FHLMC pass-through certificates $ 3,122 $ 1 $ 83 $ 3,040
FNMA pass-through certificates 10,462 10 342 10,130
Collateralized mortgage obligations 8,038 308 7,730
------ ----- ---- -------
Total $21,622 $11 $733 $20,900
======= === ==== =======
</TABLE>
<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>
6
<PAGE> 9
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 FHLMC, FNMA or GNMA.
The mortgage-related securities designated as available for sale, by
definition, could be sold in response to changes in interest rates and
cash flows or for restructuring purposes.
5. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
June 30 September 30
1997 1996
---- ----
<S> <C> <C>
Real estate loans:
Single-family $131,738 $122,270
Construction and land 16,538 17,682
Multi-family and commercial 15,258 11,129
Consumer loans:
Home equity and lines of credit 22,809 20,444
Deposit 416 457
Education 430 917
Other 1,887 2,212
Commercial business loans 3,072 2,923
-------- --------
Total loans 192,149 178,044
Loans in process (6,053) (6,368)
Allowance for loan losses (1,570) (2,624)
Deferred loan fees (1,627) (1,512)
-------- --------
Loans receivable - net $182,899 $167,530
======== ========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Nine Months Ended
June 30
-----------------------
1997 1996
---- ----
<S> <C> <C>
Balance beginning of period $ 2,624 $1,487
Provisions charged to income 173 113
Charge-offs (1,241) (92)
Recoveries 14
------ ------
Total $ 1,570 $1,508
======= ======
</TABLE>
At June 30, 1997 and September 30, 1996 non-performing loans (which
include loans in excess of 90 days delinquent) amounted to
approximately $3,286 and $5,352, respectively.
7
<PAGE> 10
6. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
June 30 September 30
1997 1996
------------------ -------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 5,778 2.5% $ 4,710 2.2%
NOW accounts 29,119 12.7 28,085 12.8
Passbook accounts 39,105 17.1 41,504 18.9
Money market demand accounts 15,642 6.9 16,159 7.4
Certificate accounts 139,103 60.8 128,747 58.7
-------- ----- -------- -----
Total $228,747 100.0% $219,205 100.0%
======== ===== ======== =====
</TABLE>
7. EARNINGS PER SHARE
Earnings per share ("EPS") were $0.60 and $1.64 for the three and six
months ended June 30, 1997, respectively. EPS was calculated based on
the number of common stock and common stock equivalents outstanding for
the three and six months ended June 30, 1997. Weighted average shares
outstanding were 1,076,704 and 1,140,643 for the three and nine months
ended June 30, 1997, respectively, and, in accordance with Statement of
Position 93-6, do not include shares held by the stock benefit plans
that were purchased and remained unallocated during the periods.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share," ("SFAS 128") which is required to be adopted for financial
statements for both interim and annual periods after December 15, 1997.
At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. If
SFAS 128 were in effect now, it would have resulted in an increase in
earnings per share for the quarter ended June 30, 1997 of $.03 and
would have had no effect for the quarter ended June 30, 1996. The
dilutive earnings per share calculation would be the same for the
quarters June 30, 1997 and 1996 under either method.
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 (UNAUDITED) AND SEPTEMBER 30,
1996
Total assets of the Company increased $26.5 million or 9.0% from $294.2 million
at September 30, 1996 to $320.8 million at June 30, 1997 primarily due to a
$10.3 million aggregate net increase in the investment securities and
mortgage-related securities portfolios (including available for sale) and a
$15.4 million increase in loans receivable-net. The increase in investments,
mortgage-related securities and loans receivable is part of the Company's
strategy of maximizing the use of its capital through asset growth. The loan
growth was concentrated primarily in single-family real estate loans and to a
lesser extent in commercial real estate loans and consumer loans. The Company's
asset growth was primarily funded through the use of Federal Home Loan Bank
("FHLB") advances which increased $15.5 million to $62.3 million at June 30,
1997.
Deposits increased $9.5 million or 4.4% from $219.2 million at September 30,
1996 to $228.7 million at June 30, 1997. The increase resulted primarily from
the growth in certificates of deposit accounts which accounted for 60.8% of the
Company's total deposits at June 30, 1997..
The completion of the Company's second stock repurchase plan and the purchase of
shares of common stock for employee benefit plans partially offset the Company's
net income of $1.9 million for the nine months ended June 30, 1997, resulted in
stockholders' equity increasing by $356,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
1997 AND 1996
Net Income.
Net income was $673,000 for the three months ended June 30, 1997 as compared to
$536,000 for the same period in 1996 while net income for the nine months ended
June 30, 1997 was $1.9 million as compared to $1.2 million for the same period
in 1996. The $137,000 or 25.6% increase in net income for the three months ended
June 30, 1997 was primarily due to a $263,000 increase in net interest income
partially offset by a $18,000 increase in the provision for loan losses and a
$77,000 increase in income taxes. The $778,000 or 66.9% increase in net income
for the nine months ended June 30, 1997 was primarily due to a $780,000 increase
in net interest income and a $56,000 increase in other income combined with a
$508,000 decrease in operating expenses partially offset by a$60,000 increase in
provision for loan loss and a $506,000 increase in income tax expense.
Net Interest Income.
Net interest income increased $263,000 or 11.6% to $2.5 million and $780,000 or
11.9% to $7.4 million for the three and nine months ended June 30, 1997,
respectively. Such increases were primarily due to a $851,000 or 17.3% and a
$1.9 million or 12.6% increase in interest income for the three and nine months
ended June 30, 1997, respectively, which were partially offset by a $588,000 or
22.3% and a $1.1 million or 13.2% increase in interest expense during such
periods as the Company continued to leverage its capital during fiscal 1997. The
average balance of interest-earning assets
9
<PAGE> 12
increased $33.2 million and $27.7 million for the three and nine months ended
June 30, 1997, respectively, as compared to the same periods in 1996 . The
increase in the average balances was accompanied by an increase in the weighted
average yield earned thereon for the three and nine months ended June 30, 1997
by 32 basis points to 7.68% and 14 basis points to 7.58%, respectively. These
increases were partially offset by both an increase in the average balance of
interest-bearing liabilities of $38.3 million and $33.1 million for the three
and nine months ended June 30, 1997, respectively, as compared to the same
period in 1996, as well as during the quarter ended June 30, 1997, an increase
in the weighted average rate paid thereon by 25 basis points to 4.52%. However,
during the nine months ended June 30, 1997, the weighted average rate paid
decreased 2 basis points to 4.43%. The interest rate spread and net interest
margin amounted to 3.16% and 3.37% for the three months ended June 30, 1997 as
compared to 3.09% and 3.40% for the same period in 1996. The interest rate
spread and net interest margin were 3.15% and 3.37% for the nine months ended
June 30, 1997 as compared to 2.99% and 3.33% for the same periods in 1996. The
Company was able to increase the rates earned on assets with the general
increases in market rates occurring during the respective periods while only
experiencing a moderate increase in the overall cost of funds.
Provision for Loan Losses.
The Company's provision for loan losses increased to $56,000 for the three
months ended June 30, 1997 as compared to $38,000 for the same period in 1996.
For the nine months ended June 30, 1997 and 1996 the provision for loan losses
was $173,000 and $113,000, respectively. The increases were due to increases in
the size of the loan portfolio.
Total non-performing assets declined from the level at September 30, 1996 by
$1.8 million to $5.1 million at June 30, 1997 resulting from a settlement with
the bankruptcy trustee of the Bennett Funding Companies ("Bennett"). This 25.7%
reduction was primarily due to the return to performing status during the
quarter of certain consumer loans related to a non-bankrupt Bennett affiliate in
the amount of approximately $1.1 million and the charge-off of approximately
$1.1 million of previously established reserves related to the Bennett bankrupt
companies. Under the terms of the settlement, the Bank received in July 1997
approximately $984,000 which was a percentage of the cash collected on the
Bank's leases to date (such amount will further reduce the Company's
non-performing assets). In addition, the Bank will receive a percentage of the
cash collected on the remaining loans as payments from the lessees are received
by the Trustee. Primarily as a result of the settlement with Bennett, the
Company's ratio of non-performing assets and troubled debt restructurings to
total assets, at the end of the period was reduced from 2.35% at September 30,
1996 to 1.60% at June 30, 1997.
Other Income.
Other income decreased $12,000 or 3.6% to $325,000 for the three months ended
June 30, 1997 due to a decrease in service charges and other fees offset by a
net gain on sale of loans. However, other income increased $56,000 or 6.0% to
$994,000 for the nine months ended June 30, 1997 compared to the same period in
1996 . The increase was primarily a result of increases in the net gain on sales
of loans and other assets offset by a slight decrease in service charges and
other fees.
10
<PAGE> 13
Operating Expenses.
Operating expenses increased $19,000 or 1.1% during the three months ended June
30, 1997 as compared to the same period in 1996. Increases of $61,000, $29,000,
$23,000 and $11,000 were incurred in the compensation and employee benefits,
professional fees, advertising and other expenses partially offset by reductions
in occupancy and equipment expenses and federal deposit insurance premiums. For
the nine months ended, June 30, 1997, operating expenses decreased $508,000 or
9.2% primarily due to a $311,000 charge during the 1996 period relating to the
Company's restructuring plan implemented during the first quarter of fiscal
1996. Increases of $147,000, $112,500 and $48,500 were incurred in compensation
and employee benefits, occupancy and equipment expenses and professional fees
expenses as part of the restructuring plan. Exclusive of the one-time charge,
the Company experienced decreases of $229,000 and $51,000 in federal deposit
insurance premiums and occupancy and equipment expenses reflecting the effects
of the implementation of the cost reduction plan and lower deposit insurance
charges assessed on SAIF institutions.
Income Tax Expense.
Income tax expense increased $77,000 to $421,000 and $506,000 to $1.2 million
during the three and nine months ended June 30, 1997, respectively, as compared
to the same period in 1996. The increases were the result of increases in income
before income taxes.
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 FHLB of Pittsburgh to satisfy its funding
commitments.) At June 30, 1997, the Company had $50.2 million in short-term
outstanding advances from the FHLB of Pittsburgh as well as $10.1 million in
long-term advances therefrom.
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, 1997, the total approved
loan commitments outstanding amounted to $12.8 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$5.5 million. Certificates of deposit scheduled to mature in one year or less at
June 30, 1997 totalled $80.0 million. Based upon its historical experience,
management believes that a significant portion of maturing
11
<PAGE> 14
deposits will remain with the Company.
First Keystone Federal Savings Bank (the "Bank"), the Company's wholly owned
subsidiary, is required by the Office of Thrift Supervision ("OTS") to maintain
average daily balances of liquid assets and short-term liquid assets (as
defined) in amounts equal to 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 Bank's average monthly
liquidity ratio and short-term liquid assets for June 1997 was 8.5% and 4.0%,
respectively.
As of June 30, 1997, the Bank had regulatory capital in excess of applicable
limits. The Bank is required under certain federal regulations to maintain
tangible capital equal to at least 1.5% of its adjusted total assets, core
capital equal to at least 3.0% of its adjusted total assets and total capital to
at least 8.0% of its risk-weighted assets. At June 30, 1997, the Bank had
tangible capital and core capital equal to 7.3% of adjusted total assets and
total capital equal to 16.9% of risk-weighted assets.
Impact of Inflation and Changing Prices.
The Consolidated Financial Statements of the Company and related notes presented
herein have been prepared in accordance with generally accepted accounting
principles which requires the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation to a larger
extent than interest rates. In the current interest rate environment, liquidity
and the maturity structure of the Company's assets and liabilities are critical
to the maintenance of acceptable performance levels.
12
<PAGE> 15
PART II
Item 1. Legal Proceedings
Not applicable
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
None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
None
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST KEYSTONE FINANCIAL, INC.
Date: August 13, 1997 By: /s/ Donald S. Guthrie
----------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: August 13, 1997 By: /s/ Thomas M. Kelly
--------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
14
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