<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 March 31, 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 May 9, 1997: 1,227,875
Transitional Small Business Disclosure Format Yes ___ No _X_
<PAGE> 2
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1997 (Unaudited) and September 30, 1996 ................ 1
Consolidated Statements of Income for the Three and Six
Months Ended March 31, 1997 and 1996 (Unaudited).................. 2
Consolidated Statement of Changes in Stockholders' Equity for the
Three and Six Months Ended March 31, 1997 (Unaudited) ............ 3
Consolidated Statements of Cash Flows for the Three and Six Months
Ended March 31, 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>
March 31 September 30
ASSETS 1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 2,101 $ 1,870
Interest-bearing deposits with depository institutions 6,432 9,824
--------- ---------
Total cash and cash equivalents 8,533 11,694
Investment securities available for sale 15,480 16,532
Mortgage-related securities available for sale 70,880 60,211
Loans held for sale 2,492 2,447
Investment securities held to maturity (approximate fair value
of $4,939 at March 31, 1997) 5,000
Mortgage-related securities held to maturity (approximate fair value
of $21,110 at March 31, 1997 and $22,060 at September 30, 1996) 22,121 23,221
Loans receivable - net 177,157 167,530
Accrued interest receivable 2,369 2,404
Real estate owned 1,855 1,557
Federal Home Loan Bank stock - at cost 3,191 2,337
Office properties and equipment - net 2,354 2,507
Deferred income taxes 1,693 2,111
Prepaid expenses and other assets 1,512 1,690
--------- ---------
TOTAL ASSETS $ 314,637 $ 294,241
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 223,412 $ 219,205
Advances from Federal Home Loan Bank 63,814 46,740
Accrued interest payable 1,465 1,501
Advances from borrowers for taxes and insurance 1,847 921
Accounts payable and accrued expenses 1,848 2,790
--------- ---------
Total liabilities 292,386 271,157
--------- ---------
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: March 31, 1997 and September 30, 1996,
1,227,875 and 1,292,500 shares, respectively 14 14
Additional paid in capital 12,734 12,659
Common stock acquired by stock benefit plans (2,082) (1,437)
Treasury stock at cost; 132,125 shares (2,556) (1,288)
Unrealized loss on available for sale securities - net of tax (630) (494)
Retained earnings - partially restricted 14,771 13,630
--------- ---------
Total stockholders' equity 22,251 23,084
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 314,637 $ 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 Six months ended
March 31 March 31
------------------- --------------------
1997 1996 1997 1996
------- ------- -------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on:
Loans $ 3,524 $ 3,328 $ 7,025 $ 6,741
Mortgage-related securities 1,543 1,223 2,976 2,492
Investments 370 117 673 276
Interest-bearing deposits 58 161 126 289
------- ------- -------- -------
Total interest income 5,495 4,829 10,800 9,798
------- ------- -------- -------
INTEREST EXPENSE:
Interest on:
Deposits 2,234 2,381 4,461 4,817
Federal Home Loan Bank advances 808 313 1,510 667
------- ------- -------- -------
Total interest expense 3,042 2,694 5,971 5,484
------- ------- -------- -------
NET INTEREST INCOME 2,453 2,135 4,829 4,314
PROVISION FOR LOAN LOSSES 60 37 116 75
------- ------- -------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,393 2,098 4,713 4,239
------- ------- -------- -------
OTHER INCOME (LOSS):
Service charges and other fees 236 255 486 526
Net gain (loss) on sale of:
Loans 53 46 110 56
Mortgage-related securities (11) (11)
Real estate owned 4 7 12 7
Other assets 46 46
Real estate operations (1) (4) (7) (6)
Other income 14 15 22 29
------- ------- -------- -------
Total other income 352 308 669 601
------- ------- -------- -------
OPERATING EXPENSES:
Salaries and employee benefits 817 742 1,572 1,753
Occupancy and equipment expenses 213 236 427 580
Professional fees 182 131 337 413
Federal deposit insurance premium 35 128 135 274
Bank service charges 94 106 189 215
Data processing 81 85 163 177
Advertising 77 46 138 104
Other 183 165 359 332
------- ------- -------- -------
Total operating expenses 1,682 1,639 3,320 3,848
------- ------- -------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,063 767 2,062 992
INCOME TAX EXPENSE 410 287 794 365
------- ------- -------- -------
NET INCOME $ 653 $ 480 $ 1,268 $ 627
======= ======= ======== =======
PRIMARY EARNINGS PER SHARE $ 0.58 $ 0.40 $ 1.08 $ 0.51
======= ======= ======== =======
FULLY DILUTED EARNINGS PER SHARE $ 0.58 $ 0.40 $ 1.08 $ 0.51
======= ======= ======== =======
</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>
Common Unrealized loss 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, 1996 $14 $12,659 $(1,437) $(1,288) $(494) $13,630 $23,084
Common stock acquired
by stock benefit plans (756) (756)
ESOP stock committed
to be released 41 41
Excess of fair value
above cost of stock
benefit plans committed
to be released 75 75
RRP amortization 70 70
Dividends - $.05 per share (127) (127)
Net unrealized loss on
securities available for
sale, net of tax (136) (136)
Purchase of treasury stock (1,268) (1,268)
Net income 1,268 1,268
--- ------- ------- ------- ----- ------- -------
BALANCE AT MARCH 31, 1997 $14 $12,734 $(2,082) $(2,556) $(630) $14,771 $22,251
=== ======= ======= ======= ===== ======= =======
</TABLE>
3
<PAGE> 6
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
March 31
---------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,268 $ 627
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization 183 326
Amortization of premiums (381) (55)
Loss (Gain) on sales of:
Loans (110) (55)
Mortgage-related securities available for sale 11
Real estate owned (12) (7)
Other assets (46)
Provision for loan losses 116 75
Amortization of stock benefit plans 186 198
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (13,697) (9,064)
Loans sold in the secondary market 13,652 8,190
Deferred income taxes 504 54
Accrued interest receivable 35 124
Prepaid expenses and other assets 123 (77)
Accrued interest payable (36) 150
Accrued expenses (942) (110)
-------- --------
Net cash provided by operating activities 843 387
-------- --------
INVESTING ACTIVITIES:
Loans originated or acquired (30,359) (27,259)
Purchases of:
Investment securities available for sale (3,000)
Mortgage-related securities available for sale (15,103) (19,774)
Investment securities held to maturity (5,000)
Mortgage-related securities held to maturity (2,013)
Purchase of FHLB stock (854) (148)
Proceeds from sales of real estate owned 438 186
Proceeds from sales of mortgage-related securities 12,785
Proceeds from sales of other assets 101
Principal collected on loans 20,765 20,717
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 1,000 2,065
Mortgage-related securities available for sale 4,485 3,258
Investment securities held to maturity 4,000
Mortgage-related securities held to maturity 1,083 2,644
Purchase of property and equipment (30) (34)
Net expenditures on real estate acquired through foreclosure and in development (586) (3)
-------- --------
Net cash used in investing activities (24,060) (6,576)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 4,207 2,953
Net proceeds from (repayments on) FHLB advances 17,074 (5,266)
Net increase in advances from borrowers for taxes and insurance 926 918
Common stock acquired by stock benefit plans (756) (704)
Purchase of treasury stock (1,268) (1,288)
Cash dividend (127)
-------- --------
Net cash provided by (used in) financing activities 20,056 (3,387)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (3,161) (9,576)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,694 22,668
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,533 $ 13,092
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 6,000 $ 5,608
Transfers of loans receivable into real estate owned 193 1,374
Cash payments of income taxes 30 225
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 MARCH 31, 1997 (UNAUDITED) AND SEPTEMBER 30, 1996 AND
(UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 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 March
31, 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>
March 31, 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 $12,500 $ 10 $ 35 $12,475
5 to 10 years 3,000 140 2,860
Other investments 145 145
------- ---- ------ -------
Total $15,645 $ 10 $ 175 $15,480
======= ==== ====== =======
Held to Maturity:
U.S. Treasury securities and securities
of U.S. Government agencies:
Over 10 years $ 5,000 $ 61 $ 4,939
------- ------ -------
Total $ 5,000 $ 61 $ 4,939
======= ====== =======
</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>
March 31, 1997
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale:
FHLMC pass-through certificates $13,121 $ 86 $ 123 $13,084
FNMA pass-through certificates 10,487 9 163 10,333
GNMA pass-through certificates 19,714 4 468 19,250
Collateralized mortgage obligations 28,421 123 331 28,213
------- ------ ------- -------
Total $71,743 $222 $1,085 $70,880
======= ====== ======= =======
Held to Maturity:
FHLMC pass-through certificates $ 3,308 $ 118 $ 3,190
FNMA pass-through certificates 10,705 $ 8 547 10,170
Collateralized mortgage obligations 8,108 14 372 7,750
------- ------ ------- -------
Total $22,121 $ 22 $1,037 $21,110
======= ====== ======= =======
</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>
March 31 September 30
1997 1996
--------- ------------
<S> <C> <C>
Real estate loans:
Single-family $129,529 $122,270
Construction and land 14,954 17,682
Multi-family and commercial 13,456 11,129
Consumer loans:
Home equity and lines of credit 22,362 20,444
Deposit 379 457
Education 692 917
Other 2,093 2,212
Commercial loans 3,493 2,923
-------- --------
Total loans 186,958 178,044
Loans in process (5,593) (6,368)
Allowance for loan losses (2,656) (2,624)
Deferred loan fees (1,552) (1,512)
-------- --------
Loans receivable - net $177,157 $167,530
======== ========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Six Months Ended
March 31
----------------------
1997 1996
------- -------
<S> <C> <C>
Balance beginning of period $2,624 $1,487
Provisions charged to income 116 75
Charge-offs (86) (47)
Recoveries 2
------ ------
Total $2,656 $1,515
====== ======
</TABLE>
At March 31, 1997 and September 30, 1996 non-performing loans (which
include loans in excess of 90 days delinquent) amounted to approximately
$5,860 and $6,321, respectively.
7
<PAGE> 10
6. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
March 31 September 30
1997 1996
----------------------- ------------------------
Amount Percent Amount Percent
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 4,804 2.1% $ 4,710 2.2%
NOW accounts 28,638 12.9 28,085 12.8
Passbook accounts 39,340 17.6 41,504 18.9
Money market demand accounts 16,234 7.3 16,159 7.4
Certificate accounts 134,396 60.1 128,747 58.7
-------- -------- -------- --------
Total $223,412 100.0% $219,205 100.0%
======== ======== ======== ========
</TABLE>
7. EARNINGS PER SHARE
Earnings per share ("EPS") was $0.58 and $1.08 for the three and six
months ended March 31, 1997, respectively. EPS was calculated based on the
number of common stock and common stock equivalents outstanding for the
three and six months ended March 31, 1997. Weighted average shares
outstanding were 1,095,148 and 1,142,195 for the three and six months
ended March 31, 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 March 31, 1997 of $.02 and no effect for March 31, 1996. The
dilutive earnings per share calculation would be the same for the quarters
March 31, 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 MARCH 31, 1997 (UNAUDITED) AND SEPTEMBER
30, 1996
Total assets of the Company increased $20.4 million or 6.9% from $294.2 million
at September 30, 1996 to $314.6 million at March 31, 1997 primarily due to a
$13.5 million net increase in the investment securities and mortgage-related
securities portfolios (including available for sale) and a $9.6 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 capital through asset growth. The loan growth was concentrated
primarily in single-family and 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.
Deposits increased $4.2 million or 1.9% from $219.2 million at September 30,
1996 to $223.4 million at March 31, 1997. The increase resulted primarily from
the growth in certificates of deposit accounts.
During the second quarter of fiscal 1997, the Company completed its second stock
repurchase program, repurchasing 64,625 shares at a total cost of approximately
$1.3 million or an average of $19.625 per share. Due primarily to the repurchase
as well as the purchase of shares of common stock for employee benefit plans,
partially offset by net income, stockholders' equity decreased $833,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
1997 AND 1996
Net Income.
Net income was $653,000 for the three months ended March 31, 1997 as compared to
$480,000 for the same period in 1996 while net income for the six months ended
March 31, 1997 was $1.2 million as compared to $627,000 for the same period in
1996. The $173,000 or 36.0% increase in net income for the three months ended
March 31, 1997 was primarily due to a $318,000 increase in net interest income
and a $44,000 increase in other income partially offset by a $123,000 increase
in income taxes. The $641,000 or 102.2% increase in net income for the six
months ended March 31, 1997 was primarily due to a $515,000 increase in net
interest income and a $68,000 increase in other income combined with a $528,000
decrease in operating expenses partially offset by a $429,000 increase in income
tax expense.
Net Interest Income.
Net interest income increased $318,000 or 14.9% to $2.5 million and $515,000 or
11.9% to $4.8 million for the three and six months ended March 31, 1997,
respectively. Such increases were primarily due to a $666,000 or 13.8% and a
$1.0 million or 10.2% increase in interest income for the three and six months
ended March 31, 1997, respectively, which were partially offset by a $348,000 or
12.9% and a $487,000 or 8.9% increase in interest expense during such periods.
The average balance of interest-earning assets increased $32.0 million and $25.5
million for the three and six months ended
9
<PAGE> 12
March 31, 1997, respectively, as compared to the same period in 1996. The
weighted average yield earned thereon for the three and six months ended March
31, 1997 increased 10 basis points to 7.49% and 3 basis points to 7.53%,
respectively. These increases were partially offset by an increase in the
average balance of interest-bearing liabilities of $38.7 million and $31.8
million for the three and six months ended March 31, 1997, respectively, as
compared to the same period in 1996. However, the weighted average rate paid
thereon decreased 13 basis points to 4.35% and 17 basis points to 4.38% during
the three and six months ended March 31, 1997, respectively, as compared to
4.48% and to 4.55%, during the three and six months ended March 31, 1996. The
interest rate spread and net interest margin amounted to 3.13% and 3.34% for the
three months ended March 31, 1997 as compared to 2.91% and 3.27% for the same
period in 1996. The interest rate spread and net interest margin were 3.15% and
3.37% for the six months ended March 31, 1997 as compared to 2.95% and 3.30% 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 slight increase in the overall cost
of funds.
Provision for Loan Losses.
The Company's provision for loan losses increased to $60,000 for the three
months ended March 31, 1997 as compared to $37,000 for the same period in 1996.
For the six months ended March 31, 1997 and 1996 the provision for loan losses
was $116,000 and $75,000, respectively. The increases were due to increases in
the loan portfolio.
The Company continues to monitor the Bennett bankruptcy proceedings and is
vigorously pursuing all options available to protect its interests. There has
been little change in the bankruptcy status since last reported in the Company's
Annual Report to stockholders for the year ended September 30, 1996.
Other Income.
Other income increased $44,000 or 14.3% to $352,000 and $68,000 or 11.3% to
$669,000 for the three and six months ended March 31, 1997, respectively, as
compared to the same periods 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.
Operating Expenses.
Operating expenses increased $43,000 or 2.6% during the three months ended March
31, 1997 as compared to the same period in 1996. Increases of $75,000, $51,000
and $31,000 were incurred in the compensation and employee benefits,
professional fees and advertising expenses partially offset by reductions in
occupancy and equipment expenses and federal deposit insurance premiums. For the
six months ended, March 31, 1997, operating expenses decreased $528,000 or 13.7%
primarily due to a $311,000 during the 1996 period provision 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 had experienced decreases of $34,000, $29,000, $139,000 and $40,000
in salaries and employee benefits expense, professional fees, federal deposit
insurance premiums and occupancy and equipment reflecting the effects of the
implementation of the cost reduction plan and lower deposit insurance charges to
SAIF institutions.
10
<PAGE> 13
Income Tax Expense.
Income tax expense increased $123,000 to $410,000 and $429,000 to $794,000
during the three and six months ended March 31, 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 March 31, 1997, the Company had $51.7 million in primarily
short-term 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 March 31, 1997, the total
approved loan commitments outstanding amounted to $10.5 million, not including
loans in process. At the same date, commitments under unused lines of credit
amounted to $4.5 million. Certificates of deposit scheduled to mature in one
year or less at March 31, 1997 totalled $77.9 million. Based upon its historical
experience, management believes that a significant portion of maturing deposits
will remain with the Company.
First Keystone Federal Savings Bank (the "Bank"), the Company's wholly owned
subsidiary, is required by the Office of Thrift Supervision ("OTS") to maintain
average daily balances of liquid assets and short-term liquid assets (as
defined) in amounts equal to 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 March 1997 was 8.5% and 4.4%,
respectively.
11
<PAGE> 14
As of March 31, 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 March 31, 1997, the Bank had
tangible capital and core capital equal to 7.2% of adjusted total assets and
total capital equal to 16.5% 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
Thomas M. Kelly, Executive Vice President of the Bank, was appointed to
the Board of Directors of both the Company and the Bank filling the
vacancy created by the resignation of Charles E. Rankin for personal
reasons. Mr. Rankin's resignation was not due to any disagreement with
the Company or its policies.
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: May 14, 1997 By: /s/ Donald S. Guthrie
----------------------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: May 14, 1997 By: /s/ Thomas M. Kelly
----------------------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
14
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