<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, 1998
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 10, 1998: 2,413,416
Transitional Small Business Disclosure Format Yes No X
<PAGE> 2
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
<S> <C>
Consolidated Statements of Financial Condition as of
June 30, 1998 (Unaudited) and September 30, 1997 ............................ 1
Consolidated Statements of Income for the Three and Nine
Months Ended June 30, 1998 and 1997 (Unaudited).............................. 2
Consolidated Statement of Changes in Stockholders' Equity for the
Nine Months Ended June 30, 1998 (Unaudited).................................. 3
Consolidated Statements of Cash Flows for the Three and Nine Months
Ended June 30, 1998 and 1997 (Unaudited)..................................... 4
Notes to Consolidated Financial Statements (Unaudited)....................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 14
Item 2. Changes in Securities........................................................ 14
Item 3. Defaults Upon Senior Securities.............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders.......................... 14
Item 5. Other Information............................................................ 14
Item 6. Exhibits and Reports on Form 8-K............................................. 14
SIGNATURES................................................................................... 15
</TABLE>
i
<PAGE> 3
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
June 30 September 30
ASSETS 1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 1,731 $ 1,832
Interest-bearing deposits with depository institutions 17,468 19,729
--------- ---------
Total cash and cash equivalents 19,199 21,561
Investment securities available for sale 36,120 10,211
Mortgage-related securities available for sale 95,313 104,472
Loans held for sale 6,394 4,577
Investment securities held to maturity - at cost (approximate fair value of
$5,010 at June 30, 1998 and $9,960 at September 30, 1997) 5,000 10,000
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $19,750 at June 30, 1998
and $20,200 at September 30, 1997) 19,971 20,707
Loans receivable - net 194,488 188,289
Accrued interest receivable 2,817 2,565
Real estate owned 1,919 1,672
Federal Home Loan Bank stock - at cost 4,207 3,769
Office properties and equipment - net 2,640 2,552
Deferred income taxes 511 680
Prepaid expenses and other assets 2,391 2,375
--------- ---------
TOTAL ASSETS $ 390,970 $ 373,430
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 241,773 $ 227,918
Advances from Federal Home Loan Bank 75,606 75,387
Securities sold under agreements to repurchase 24,600 24,600
Accrued interest payable 1,523 1,575
Advances from borrowers for taxes and insurance 3,019 913
Accounts payable and accrued expenses 2,830 2,085
--------- ---------
Total liabilities 349,351 332,478
--------- ---------
Guaranteed preferred beneficial interest in subordinated debt 16,200 16,200
Stockholders' Equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized;
none issued
Common stock, $.01 par value, 20,000,000 shares authorized; issued
and outstanding: 2,413,416 shares at June 30, 1998
and 2,456,838 shares at September 30, 1997 14 14
Additional paid-in capital 13,146 12,896
Common stock acquired by stock benefit plans (1,853) (2,038)
Treasury stock at cost; 376,362 and 264,250 shares at June 30, 1998
and September 30, 1997, respectively (4,379) (2,545)
Unrealized gain on available for sale securities - net of tax 775 408
Retained earnings - partially restricted 17,716 16,017
--------- ---------
Total stockholders' equity 25,419 24,752
--------- ---------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY $ 390,970 $ 373,430
========= =========
</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
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on:
Loans $ 4,102 $ 3,723 $ 12,297 $ 10,748
Mortgage-related securities 1,880 1,566 6,003 4,542
Investments 697 401 1,706 1,074
Interest-bearing deposits 97 69 368 195
-------- -------- -------- --------
Total interest income 6,776 5,759 20,374 16,559
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on:
Deposits 2,497 2,314 7,351 6,774
Federal Home Loan Bank advances 982 914 3,045 2,424
Other borrowings 373 1,116
-------- -------- -------- --------
Total interest expense 3,852 3,228 11,512 9,198
-------- -------- -------- --------
NET INTEREST INCOME 2,924 2,531 8,862 7,361
PROVISION FOR LOAN LOSSES 20 56 172 173
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,904 2,475 8,690 7,188
-------- -------- -------- --------
OTHER INCOME (LOSS):
Service charges and other fees 219 236 687 722
Net gain on sale of:
Loans 76 88 334 198
Investment and mortgage-related securities 9 56
Real estate owned 6 7 12
Other assets 1 1 46
Real estate operations (11) (7) (29) (14)
Other income 20 8 47 30
-------- -------- -------- --------
Total other income 320 325 1,103 994
-------- -------- -------- --------
OPERATING EXPENSES:
Salaries and employee benefits 916 783 2,735 2,355
Occupancy and equipment expenses 264 208 761 635
Professional fees 136 230 425 566
Federal deposit insurance premium 36 36 109 171
Bank service charges 104 98 305 287
Data processing 94 81 262 244
Advertising 69 79 216 217
Minority interest in expense of subsidiary 393 1,179
Other 351 191 772 551
-------- -------- -------- --------
Total operating expenses 2,363 1,706 6,764 5,026
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 861 1,094 3,029 3,156
INCOME TAX EXPENSE 160 421 972 1,215
-------- -------- -------- --------
NET INCOME $ 701 $ 673 $ 2,057 $ 1,941
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.33 $ 0.31 $ 0.96 $ 0.85
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.31 $ 0.30 $ 0.90 $ 0.83
======== ======== ======== ========
</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 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, 1997 $ 14 $ 12,896 $ (2,038) $ (2,545) $ 408 $ 16,017 $ 24,752
ESOP stock committed
to be released 80 80
Excess of fair value
above cost of ESOP
stock committed
to be released 250 250
RRP amortization 105 105
Dividends - $.15 per share (358) (358)
Net unrealized gain on
securities available for
sale, net of tax 367 367
Exercise of stock options 6 6
Purchase of treasury stock (1,840) (1,840)
Net income 2,057 2,057
-------- -------- -------- -------- -------- -------- --------
BALANCE AT JUNE 30, 1998 $ 14 $ 13,146 $ (1,853) $ (4,379) $ 775 $ 17,716 $ 25,419
======== ======== ======== ======== ======== ======== ========
</TABLE>
3
<PAGE> 6
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30
---------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,057 $ 1,941
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization 341 270
Amortization of premiums 85 (409)
Gain on sales of:
Loans (334) (198)
Investment securities and mortgage-related securities available for sale (56)
Real estate owned (7) (12)
Other assets (46)
Provision for loan losses 171 173
Amortization of stock benefit plans 441 292
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (47,813) (24,535)
Loans sold in the secondary market 45,996 23,491
Deferred income taxes 28 505
Accrued interest receivable (252) (195)
Prepaid expenses and other assets (16) (100)
Accrued interest payable (52) (105)
Accrued expenses 745 (835)
-------- --------
Net cash provided by operating activities 1,334 237
-------- --------
INVESTING ACTIVITIES:
Loans originated or acquired (39,125) (38,178)
Purchases of:
Investment securities available for sale (36,714) (4,005)
Mortgage-related securities available for sale (26,422) (16,103)
Investment securities held to maturity (2,000) (5,000)
Mortgage-related securities held to maturity (2,687)
Purchase of FHLB stock (438) (1,178)
Proceeds from sales of real estate owned 1,051 755
Proceeds from sales of mortgage-related securities 14,295
Proceeds from sales of investment securities 7,009 101
Principal collected on loans 33,176 22,796
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 4,070 7,000
Mortgage-related securities available for sale 21,316 6,931
Investment securities held to maturity 7,000
Mortgage-related securities held to maturity 3,468 1,575
Purchase of property and equipment (429) (46)
Net expenditures on real estate acquired through foreclosure and in development (1,248) (726)
-------- --------
Net cash used in investing activities (17,678) (26,078)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 13,855 9,542
Net proceeds from FHLB advances 219 15,548
Net increase in advances from borrowers for taxes and insurance 2,106 2,050
Common stock acquired by stock benefit plans (775)
Purchase of treasury stock (1,840) (1,268)
Cash dividend (358) (189)
-------- --------
Net cash provided by financing activities 13,982 24,908
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (2,362) (933)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,561 11,694
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,199 $ 10,761
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 11,564 $ 9,300
Transfers of loans receivable into real estate owned 193 411
Cash payments of income taxes 850 430
</TABLE>
See notes to consolidated financial statement
4
<PAGE> 7
FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1998 (UNAUDITED) AND
SEPTEMBER 30, 1997 AND (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
1998 AND 1997
- --------------------------------------------------------------------------------
(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, 1998 are not necessarily indicative of the results to be
expected for the fiscal year ending September 30, 1998. 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, 1997.
Certain information in this quarterly statement may constitute
forward-looking information that involves risks and uncertainties that
could cause actual results to differ materially from those estimated.
Persons are cautioned that such forward-looking statements are not
guarantees of future performance and are subject to various factors
which could cause actual results to differ materially from those
estimated. These factors include changes in general economic and market
conditions and the development of an interest rate environment that
adversely affects the interest rate spread or other income from the
Company's and the Bank's investments and operations.
5
<PAGE> 8
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities,
by contractual maturities, are as follows:
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------
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:
5 to 10 years $13,000 $ 8 $ 4 $13,004
Municipal obligations 13,400 117 40 13,477
Mutual funds 2,997 15 2,982
Preferred stocks 5,000 213 5,213
Other equity investments 1,352 92 1,444
------- ------- ------- -------
Total $35,749 $ 430 $ 59 $36,120
======= ======= ======= =======
Held to Maturity:
U.S. Treasury securities and securities
of U.S. Government agencies:
Over 10 years $ 5,000 $ 10 $ 5,010
------- ------- -------
Total $ 5,000 $ 10 $ 5,010
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
September 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 $ 4,000 $ 15 $ 4,015
5 to 10 years 3,000 $ 17 2,983
Municipal obligations 3,138 75 3,213
------- ------- ------- -------
Total $10,138 $ 90 $ 17 $10,211
======= ======= ======= =======
Held to Maturity:
U.S. Treasury securities and securities
of U.S. Government agencies:
Over 10 years $10,000 $ 40 $ 9,960
------- ------- -------
Total $10,000 $ 40 $ 9,960
======= ======= =======
</TABLE>
6
<PAGE> 9
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, 1998
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale:
FHLMC pass-through certificates $ 11,959 $ 162 $ 12,121
FNMA pass-through certificates 21,354 207 $ 14 21,547
GNMA pass-through certificates 26,797 130 50 26,877
Collateralized mortgage obligations 34,400 508 140 34,768
-------- -------- -------- --------
Total $ 94,510 $ 1,007 $ 204 $ 95,313
======== ======== ======== ========
Held to Maturity:
FHLMC pass-through certificates $ 5,199 $ 20 $ 29 $ 5,190
FNMA pass-through certificates 9,022 22 144 8,900
Collateralized mortgage obligations 5,750 1 91 5,660
-------- -------- -------- --------
Total $ 19,971 $ 43 $ 264 $ 19,750
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
September 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 $ 17,540 $ 213 $ 9 $ 17,744
FNMA pass-through certificates 14,587 149 21 14,715
GNMA pass-through certificates 28,938 133 17 29,054
Collateralized mortgage obligations 42,814 376 231 42,959
-------- -------- -------- --------
Total $103,879 $ 871 $ 278 $104,472
======== ======== ======== ========
Held to Maturity:
FHLMC pass-through certificates $ 2,747 $ 15 $ 52 $ 2,710
FNMA pass-through certificates 10,053 29 272 9,810
Collateralized mortgage obligations 7,907 17 244 7,680
-------- -------- -------- --------
Total $ 20,707 $ 61 $ 568 $ 20,200
======== ======== ======== ========
</TABLE>
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 primarily consists of
loans which are insured by FHLMC, FNMA, or the 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.
7
<PAGE> 10
4. LOANS RECEIVABLE - NET
Loans receivable consist of the following:
<TABLE>
<CAPTION>
June 30 September 30
1998 1997
--------- ------------
<S> <C> <C>
Real estate loans:
Single-family $ 143,692 $ 135,168
Construction and land 16,522 16,400
Multi-family and commercial 19,053 18,305
Consumer loans:
Home equity and lines of credit 20,216 22,964
Deposit 184 348
Education 418 365
Other 1,502 1,690
Commercial loans 1,828 2,000
--------- ---------
Total loans 203,415 197,240
Loans in process (5,505) (5,670)
Allowance for loan losses (1,761) (1,628)
Deferred loan fees (1,661) (1,653)
--------- ---------
Loans receivable - net $ 194,488 $ 188,289
========= =========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Nine months ended
June 30
---------------------
1998 1997
------- -------
<S> <C> <C>
Balance beginning of period $ 1,628 $ 2,624
Provisions charged to income 172 173
Charge-offs (54) (1,241)
Recoveries 15 14
------- -------
Total $ 1,761 $ 1,570
======= =======
</TABLE>
At June 30, 1998 and September 30, 1997 non-performing loans (which
include loans in excess of 90 days delinquent) amounted to
approximately $2,669 and $2,077, respectively.
5. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
June 30 September 30
1998 1997
--------------------- ---------------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 9,089 3.8% $ 6,165 2.7%
NOW accounts 29,639 12.2 27,754 12.2
Passbook accounts 39,309 16.3 38,035 16.7
Money market demand accounts 16,480 6.8 16,429 7.2
Certificate accounts 147,256 60.9 139,535 61.2
-------- ------- -------- -------
Total $241,773 100.0% $227,918 100.0%
======== ======= ======== =======
</TABLE>
8
<PAGE> 11
6. EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share".
This statement, which supercedes APB Opinion No. 15, simplifies the
standards for computing earnings per share ("EPS"). SFAS 128 replaces
the current "primary" and "fully diluted" earnings per share with
"basic" and "diluted" earnings per share.
The reported basic and fully diluted earnings per share is as follows:
<TABLE>
<CAPTION>
For quarter ended June 30, 1998
Weighted
Average
Shares Per
Income Outstanding Share
(Numerator) (Denominator)
------------------------------------------------
<S> <C> <C> <C>
Basic EPS $701,000 2,122,631 $0.33
Income available to stockholders
Effect of dilutive securities 135,095 (.02)
Diluted EPS
Income available to stockholders
plus assumed conversion of
options $701,000 2,257,726 $0.31
</TABLE>
<TABLE>
<CAPTION>
For quarter ended June 30, 1997
Weighted
Average
Shares Per
Income Outstanding Share
(Numerator) (Denominator)
------------------------------------------------
<S> <C> <C> <C>
Basic EPS
Income available to stockholders $673,000 2,153,408 $0.31
Effect of dilutive securities 74,374 (.01)
Diluted EPS
Income available to stockholders
plus assumed conversion of
options $673,000 2,227,782 $0.30
</TABLE>
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of Financial Condition at June 30, 1998 (Unaudited) and September 30,
1997
Total assets of the Company increased $17.5 million or 4.7% from $373.4 million
at September 30, 1997 to $391.0 million at June 30, 1998 primarily due to a
$25.9 million increase in investment securities available for sale combined with
a $6.2 million increase in net loans receivable partially offset by a $2.4
million decrease in cash and cash equivalents, a $9.2 million decrease in
mortgage-related securities available for sale and a $5.0 million decrease in
investment securities held to maturity. The net increase in interest-earning
assets was funded primarily through cash and deposit accounts. The loan growth
was concentrated primarily in single-family and commercial real estate loans and
consumer loans.
Deposits increased $13.9 million or 6.1% from $227.9 million at September 30,
1997 to $241.8 million at June 30, 1998. The increase resulted primarily from
the growth in certificate accounts and a modest increase in core deposits.
Stockholders' equity increased $667,000 is due to the combined effects of
increased net income and in the market valuation, net of taxes, of available for
sale securities offset by the repurchase of shares of common stock and dividends
paid.
Comparison of Results of Operations for the Three and Nine Months Ended June 30,
1998 and 1997
Net Income.
Net income was $701,000 for the three months ended June 30, 1998 as compared to
$673,000 for the same period in 1997 while net income for the nine months ended
June 30, 1998 was $2.1 million as compared to $1.9 million for the same period
in 1997. The $28,000 or 4.2% increase in net income for the three months ended
June 30, 1998 was primarily due to a $429,000 increase in net interest income
after provision for loan losses combined with a $261,000 reduction in income tax
expense offset partially by a $657,000 increase in operating expenses. The
$116,000 or 6.0% increase in net income for the nine months ended June 30, 1998
was primarily due to increases of $1.5 million and $109,000 in net interest
income and other income, respectively, combined with a $243,000 reduction in
income tax expense offset partially by a $1.7 million increase in operating
expenses.
10
<PAGE> 13
Net Interest Income.
Net interest income increased $393,000 or 15.5% to $2.9 million and $1.5 million
or 20.4% to $8.9 million for the three and nine months ended June 30, 1998,
respectively. Such increases were primarily due to a $1.0 million or 17.7% and a
$3.8 million or 23.0% increase in interest income for the three and nine months
ended June 30, 1998, respectively, which were partially offset by a $624,000 or
19.3% and a $2.3 million or 25.2% increase in interest expense during such
respective periods. The interest rate spread and net interest margin amounted to
2.69% and 3.16% for the three months ended June 30, 1998 as compared to 3.16%
and 3.37% for the same period in 1997. The interest rate spread and net interest
margin were 2.78% and 3.24% for the nine months ended June 30, 1998 as compared
to 3.15% and 3.37% for the same periods in 1997.
The $1.0 million increase in interest income was primarily due to a $70.1
million or 23.4% increase in average interest-earning assets for the three
months ended June 30, 1998 as compared to the same period in 1997 offset by a 36
basis points decline in yield to 7.32% during the three months ended June 30,
1998 as compared to 7.68% for the same period in 1997. The $624,000 increase in
interest expense was primarily due to an increase of $46.9 million or 16.4% in
average interest-bearing liabilities and an 11 basis point increase in the
weighted average rate paid thereon for the three months ended June 30, 1998 as
compared to the same period in 1997. For the nine months ended June 30, 1998,
the 3.8 million increase in interest income was primarily due to a $73.7 million
or 25.3% increase in average interest-earning assets for the nine months ended
June 30, 1998 as compared to the same period in 1997. The weighted average yield
earned decreased 14 basis points to 7.44% during the three months ended June 30,
1998 as compared to 7.58% for the same period in 1997. The $2.3 million increase
in interest expense was primarily due to an increase of $51.9 million or 18.8%
in average interest-bearing liabilities and a 24 basis point increase in the
weighted average rate paid thereon for the nine months ended June 30, 1998 as
compared to the same period in 1997.
The increase in the average balances of both interest-earning assets and
interest-bearing liabilities was due to the leveraging of a portion of the $16.2
million received in connection with the issuance of trust preferred securities
in the last quarter of fiscal 1997. The decrease in the net interest rate spread
and net interest margin was primarily due to the leveraging of assets and, to a
lesser extent, the general declines in longer term interest rates resulting in
lower yields on assets and cash flows not entirely offset by decreased borrowing
costs.
Provision for Loan Losses.
The Company's provision for loan losses decreased to $20,000 for the three
months ended June 30, 1998 as compared to $56,000 for the same period in 1997.
For the nine months ended June 30, 1998 and 1997 the provision for loan losses
was $172,000 and $173,000, respectively. The decreases were due to decreases in
the amount of loan charge-offs in fiscal 1998 as compared to fiscal 1997.
Other Income.
Other income decreased $5,000 or 1.5% to $320,000 and increased $109,000 or
11.0% to $1.1 million for the three and nine months ended June 30, 1998,
respectively, as compared to the same periods in 1997. The slight decrease for
the three months ended June 30, 1998 was primarily due to a decrease on service
charges and other fees. The increase during the nine month period ended June 30,
1998 was primarily a result of increases in the net gain on sales of loans
offset by a slight decrease in service charges and other fees.
11
<PAGE> 14
Operating Expenses.
Operating expenses increased $657,000 or 38.5% during the three months ended
June 30, 1998 as compared to the same period in 1997 primarily due to the
issuance of $16.2 million of trust preferred securities in August 1997.
Increases of $133,000, $56,000 and $160,000 were incurred in the salaries and
employee benefits, occupancy and equipment, and other expenses, respectively,
partially offset by reductions in professional fees and advertising expenses.
The expense related to the payment of semi-annual cash distributions on the
trust preferred securities amounted to $393,000 during the third quarter.
Included in the increased operating expenses were general expenses of $43,000
related to the opening of a new branch office during the first quarter of fiscal
1998. For the nine months ended, June 30, 1998, operating expenses increased
$1.7 million or 34.6% primarily due to an expense of $1.2 million for the same
reason set forth above relating to cash distributions on the trust preferred
securities. Increases of $380,000, $126,000 and $221,000 were incurred in
compensation and employee benefits, occupancy and equipment expenses and other
expenses, respectively, partially offset by reductions of $141,000 and $62,000
in professional fees and federal deposit insurance premiums.
Income Tax Expense.
Income tax expense decreased $261,000 to $160,000 and $243,000 to $972,000
during the three and nine months ended June 30, 1998, respectively, as compared
to the same periods in 1997. The decrease for the third quarter of fiscal 1998
reflected the Company's implementation of various tax strategies resulting in a
decrease of $103,000 in income tax expense, reversal of prior accrued state
taxes of $84,000, net of federal income tax, and decreases in income before
income taxes. For the nine months ended June 30, 1998, the decrease in taxes
resulted from a combination of various tax planning strategies and decreases 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 to satisfy
its funding commitments. At June 30, 1998, the Company had short-term
outstanding borrowings consisting of $9.2 million in advances from the FHLB of
Pittsburgh and $5.3 million in short-term securities sold under agreements to
repurchase.
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
12
<PAGE> 15
commitments and maintain a portfolio of mortgage-related and investment
securities. At June 30, 1998, total approved loan commitments outstanding
amounted to $10.6 million, not including loans in process. At the same date,
commitments under unused lines of credit amounted to $6.4 million. Certificates
of deposit scheduled to mature in one year or less at June 30, 1998 totalled
$100.6 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 4% 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 for
June 1998 was 4.59%.
As of June 30, 1998, 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, 1998, the Bank had
tangible capital and core capital equal to 8.6% of adjusted total assets and
total capital equal to 21.1% of risk-weighted assets.
Year 2000 Compliance
The Bank has formed an internal committee which has performed and prioritized an
inventory of the hardware and software systems with respect to their
compatibility with calendar year 2000 and has formulated a plan of action.
However, the Bank is dependent on numerous vendors and third parties who may
incur disruptions as a result of Year 2000 issues. Although, the Bank has
committed a significant level of resources to ensure the success of this effort,
it is not expected that the related costs will have a material effect on the
Company's financial condition and operation.
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> 16
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
Not applicable
Item 6. Exhibits and Reports on Form 8-K
None
14
<PAGE> 17
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, 1998 By: /s/ Donald S. Guthrie
---------------------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: August 13, 1998 By: /s/ Thomas M. Kelly
---------------------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
15
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