<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 December 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 February 6, 1998: 2,412,838
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
December 31, 1997 (Unaudited) and September 30, 1997 ............................ 1
Consolidated Statements of Income for the Three
Months Ended December 31, 1997 and 1996 (Unaudited).............................. 2
Consolidated Statement of Changes in Stockholders' Equity for the Three
Months Ended December 31, 1997 (Unaudited)....................................... 3
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1997 and 1996 (Unaudited)..................................... 4
Notes to Consolidated Financial Statements (Unaudited)........................... 5
Item 2. Managements's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 12
Item 2. Changes in Securities........................................................... 12
Item 3. Defaults Upon Senior Securities................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............................ 12
Item 5. Other Information............................................................... 12
Item 6. Exhibits and Reports on Form 8-K................................................ 12
SIGNATURES...................................................................................... 13
</TABLE>
i
<PAGE> 3
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
<TABLE>
<CAPTION>
December 31 September 30
ASSETS 1997 1997
- ------ ------------------------------
(Unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 2,736 $ 1,832
Interest-bearing deposits with depository institutions 13,697 19,729
------- ------
Total cash and cash equivalents 16,433 21,561
Investment securities available for sale 19,604 10,211
Mortgage-related securities available for sale 100,498 104,472
Loans held for sale 6,165 4,577
Investment securities held to maturity - at cost
(approximate fair value of
$8,980 at December 31, 1997
and $9,960 at September 30, 1997) 9,000 10,000
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $22,600 at December 31, 1997
and $20,200 at September 30, 1997) 22,970 20,707
Loans receivable - net 189,885 188,289
Accrued interest receivable 2,756 2,565
Real estate owned 1,804 1,672
Federal Home Loan Bank stock - at cost 3,808 3,769
Office properties and equipment - net 2,645 2,552
Deferred income taxes 510 680
Prepaid expenses and other assets 2,449 2,375
------- ------
TOTAL ASSETS $378,527 $373,430
======== ========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $230,355 $227,918
Advances from Federal Home Loan Bank 76,160 75,387
Securities sold under agreements to repurchase 24,600 24,600
Accrued interest payable 1,312 1,575
Advances from borrowers for taxes and insurance 1,973 913
Accounts payable and accrued expenses 2,877 2,085
------- -------
Total liabilities 337,277 332,478
------- -------
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: 2,412,838 shares at December 31, 1997
and 2,456,838 shares at September 30, 1997 14 14
Additional paid-in capital 12,972 12,896
Common stock acquired by stock benefit plans (1,977) (2,038)
Treasury stock at cost; 307,162 shares (3,260) (2,545)
Unrealized gain on available for sale securities - net of tax 733 408
Retained earnings - partially restricted 16,568 16,017
------- -------
Total stockholders' equity 25,050 24,752
------- -------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY $378,527 $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
December 31
---------------------
1997 1996
<S> <C> <C>
INTEREST INCOME:
Interest on:
Loans $4,086 $3,501
Mortgage-related securities 2,066 1,433
Investments 446 303
Interest-bearing deposits 164 68
----- -----
Total interest income 6,762 5,305
----- ------
INTEREST EXPENSE:
Interest on:
Deposits 2,433 2,227
Federal Home Loan Bank advances 1,019 702
Other borrowings 375
----- ------
Total interest expense 3,827 2,929
----- ------
NET INTEREST INCOME 2,935 2,376
PROVISION FOR LOAN LOSSES 75 56
---- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,860 2,320
----- ------
OTHER INCOME (LOSS):
Service charges and other fees 242 250
Net gain on sale of:
Loans 128 57
Real estate owned 8
Real estate operations (3) (6)
Other income 18 8
---- ------
Total other income 385 317
---- -------
OPERATING EXPENSES:
Salaries and employee benefits 864 755
Occupancy and equipment expenses 236 214
Professional fees 152 154
Federal deposit insurance premium 36 100
Bank service charges 102 95
Data processing 81 82
Advertising 82 61
Minority interest in expense of subsidiaries 393
Other 209 177
---- -------
Total operating expenses 2,155 1,638
----- -------
INCOME BEFORE INCOME TAX EXPENSE 1,090 999
INCOME TAX EXPENSE 418 384
---- ------
NET INCOME $672 $ 615
======= =======
DILUTED EARNINGS PER COMMON SHARE $0.29 $ 0.26
======= =======
</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
stock on mortgage-related
Additional acquired by securities
Common paid-in stock benefit Treasury available for sale
stock capital plans stock (net of tax)
-------- -------- ------------- -------- -------------------
<S> > <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1997 $ 14 $ 12,896 $ (2,038) $ (2,545) $ 408
ESOP stock committed
to be released 26
Excess of fair value
above cost of ESOP
stock committed
to be released 76
RRP amortization 35
Dividends - $.05 per share
Net unrealized gain on
securities available for
sale, net of tax 325
Purchase of treasury stock (715)
Net income
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997 $ 14 $ 12,972 $ (1,977) $ (3,260) $ 733
======== ======== ======== ======== ========
<CAPTION>
Total
Retained stockholders'
earnings equity
-------- -------------
<S> <C> <C>
BALANCE AT SEPTEMBER 30, 1997 $ 16,017 $ 24,752
ESOP stock committed
to be released 26
Excess of fair value
above cost of ESOP
stock committed
to be released 76
RRP amortization 35
Dividends - $.05 per share (121) (121)
Net unrealized gain on
securities available for
sale, net of tax 325
Purchase of treasury stock (715)
Net income 672 672
-------- --------
BALANCE AT DECEMBER 31, 1997 $16,568 $ 25,050
======== ========
3
</TABLE>
<PAGE> 6
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
December 31
-------------------------
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 672 $ 615
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization 108 92
Amortization of premiums (91) (244)
Gain on sales of loans (128) (57)
Gain on sales of real estate owned (8)
Provision for loan losses 75 56
Amortization of stock benefit plans 137 87
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (19,470) (8,116)
Loans sold in the secondary market 17,882 7,459
Deferred income taxes (17) 3
Accrued interest receivable (191) 83
Prepaid expenses and other assets (74) 203
Accrued interest payable (263) (216)
Accrued expenses 792 (441)
-------- --------
Net cash used in operating activities (568) (484)
-------- --------
INVESTING ACTIVITIES:
Loans originated or acquired (12,263) (16,730)
Purchases of:
Mortgage-related securities available for sale (10,153)
Investment securities available for sale (10,352)
Mortgage-related securities held to maturity (2,687)
Investment securities held to maturity (2,000)
Purchase of FHLB stock (39) (649)
Proceeds from sales of real estate owned 611 434
Principal collected on loans 10,725 10,652
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 1,070 1,000
Mortgage-related securities available for sale 4,278 2,047
Investment securities held to maturity 3,000
Mortgage-related securities held to maturity 474 597
Purchase of property and equipment (201) (7)
Net expenditures on real estate acquired through foreclosure and in development (610) (286)
-------- --------
Net cash used in investing activities (7,994) (13,095)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 2,437 2,968
Net proceeds from FHLB advances 773 12,975
Net increase in advances from borrowers for taxes and insurance 1,060 954
Common stock acquired by stock benefit plans (756)
Purchase of treasury stock (715)
Cash dividend (121) (66)
-------- --------
Net cash provided by financing activities 3,434 16,075
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,128) 2,496
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,561 11,694
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,433 $ 14,190
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 4,090 $ 3,150
Transfers of loans receivable into real estate owned 143 193
Cash payment of income taxes 30
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 (UNAUDITED)
AND SEPTEMBER 30, 1997 AND (UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 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 month period ended December 31,
1997 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.
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities,
by contractual maturities, are as follows:
<TABLE>
<CAPTION>
December 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 $ 3,000 $ 12 $ 3,012
5 to 10 years 3,000 13 $10 3,003
Municipal obligations 3,068 98 3,166
Mutual funds 6,000 6 5,994
Preferred stocks 3,000 50 3,050
Other equity investments 1,352 27 1,379
------- ---- ---- -------
Total $19,420 $200 $16 $19,604
======= ==== === =======
Held to Maturity:
U.S. Treasury securities and securities
of U.S. Government agencies:
Over 10 years $9,000 $10 $30 $8,980
------ --- --- ------
Total $9,000 $10 $30 $8,980
====== === === ======
</TABLE>
5
<PAGE> 8
<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>
3. MORTGAGE-RELATED SECURITIES
Mortgage-related securities available for sale and mortgage-related
securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
December 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 $16,803 $ 258 $ 17,061
FNMA pass-through certificates 14,186 228 $ 6 14,408
GNMA pass-through certificates 27,780 266 28,046
Collateralized mortgage obligations 40,735 433 185 40,983
------- ----- ---- --------
Total $99,504 $1,185 $191 $100,498
======= ====== ==== ========
Held to Maturity:
FHLMC pass-through certificates $ 5,456 $18 $ 36 $ 5,438
FNMA pass-through certificates 9,786 11 189 9,608
Collateralized mortgage obligations 7,728 12 186 7,554
------- --- ---- -------
Total $22,970 $41 $411 $22,600
======= === ==== =======
</TABLE>
6
<PAGE> 9
<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 consist 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
5. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
December 31 September 30
1997 1997
--------- ---------
<S> <C> <C>
Real estate loans:
Single-family $ 139,086 $ 135,168
Construction and land 16,783 16,400
Multi-family and commercial 18,300 18,305
Consumer loans:
Home equity and lines of credit 22,085 22,964
Deposit 357 348
Education 392 365
Other 1,665 1,690
Commercial loans 1,175 2,000
--------- ---------
Total loans 199,843 197,240
Loans in process (6,604) (5,670)
Allowance for loan losses (1,693) (1,628)
Deferred loan fees (1,661) (1,653)
--------- ---------
Loans receivable - net $ 189,885 $ 188,289
========= =========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Ended
December 31
----------------------
1997 1996
------- -------
<S> <C> <C>
Balance beginning of period $ 1,628 $ 2,624
Provisions charged to income 75 56
Charge-offs (10) (31)
Recoveries 2
------- -------
Total $ 1,693 $ 2,651
======= =======
</TABLE>
At December 31, 1997 and September 30, 1997 non-performing loans (which
include loans in excess of 90 days delinquent) amounted to approximately
$2,247 and $2,077, respectively.
6. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
December 31 September 30
1997 1997
----------------------- -----------------------
Amount Percent Amount Percent
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 6,377 2.8% $ 6,165 2.7%
NOW accounts 29,465 12.8 27,754 12.2
Passbook accounts 37,388 16.2 38,035 16.7
Money market demand accounts 15,833 6.9 16,429 7.2
Certificate accounts 141,292 61.3 139,535 61.2
-------- -------- -------- --------
Total $230,355 100.0% $227,918 100.0%
======== ======== ======== ========
</TABLE>
8
<PAGE> 11
7. 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 December 31, 1997
Weighted
Average
Shares
Income Outstanding Per
(Numerator) (Denominator) Share
-------------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to stockholders 672,000 2,165,439 0.31
Effect of dilutive securities 130,437
DILUTED EPS
Income available to stockholders
plus assumed conversion of
options 672,000 2,295,876 0.29
</TABLE>
<TABLE>
<CAPTION>
For quarter ended December 31, 1996
Weighted
Average
Shares
Income Outstanding Per
(Numerator) (Denominator) Share
---------------------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to stockholders 615,000 2,312,487 0.27
Effect of dilutive securities 51,275
DILUTED EPS
Income available to stockholders
plus assumed conversion of
options 615,000 2,363,762 0.26
</TABLE>
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 (UNAUDITED) AND SEPTEMBER
30, 1997
Total assets of the Company increased $5.1 million or 1.4% from $373.4 million
at September 30, 1997 to $378.4 million at December 31, 1997 primarily due to a
$9.4 million increase in investment securities available for sale combined with
a $1.6 million increase in loans receivable-net offset by a $5.1 million
decrease in cash and cash equivalents. The increase in investment securities and
loans was funded primarily through cash and, to a lesser extent, deposits. The
loan growth was concentrated primarily in single-family and commercial real
estate loans and consumer loans.
Deposits increased $2.4 million or 1.1% from $227.9 million at September 30,
1997 to $230.3 million at December 31, 1997. The increase resulted primarily
from the growth in certificate accounts and a modest increase in core deposits.
Stockholders' equity increased $298,000 is due to the combined effects of
increased net income and in the market valuation, net of taxes, of available for
sale securities partially offset by the repurchase of shares of common stock and
dividends paid.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
AND 1996
Net Income.
Net income was $672,000 for the three months ended December 31, 1997 as compared
to $615,000 for the same period in 1996. The $57,000 or 9.3% increase in net
income for the three months ended December 31, 1997 was due to a $559,000 or
23.5% increase in net interest income offset by a $517,000 or 31.6% increase in
operating expenses and a $34,000 or 8.9% increase in income taxes.
Net Interest Income.
Net interest income increased $559,000 or 23.5% to $2.9 million for the three
months ended December 31, 1997 as compared to the same period in 1996. The
increase was due to a $1.5 million or 27.5% increase in interest income which
was offset, in part, by a $898,000 or 30.7% increase in interest expense for the
1997 period. The interest rate spread and net interest margin were 2.81% and
3.27%, respectively, for the three months ended December 31, 1997 as compared to
3.10% and 3.36%, respectively, for the same period in 1996. The $1.5 million
increase in interest income was primarily due to a $75.7 million or 26.8%
increase in average interest-earning assets and a 4 basis point increase in
yield. The $898,000 increase in interest expense was primarily due to an
increase of $57.0 million or 21.4% in the average balance of interest-bearing
liabilities and a 33 basis point increase in the weighted average rate paid
thereon for the three months ended December 31, 1997, as compared to the same
period in 1996.
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 upon the issuance of trust preferred securities in the last
quarter of fiscal 1997. The decrease in the net interest rate spread was due to
this leveraging of assets while the smaller decline in the net interest margin
was primarily due to higher funding costs.
10
<PAGE> 13
Provision for Loan Losses.
The Company's provision for loan losses increased to $75,000 for the three
months ended December 31, 1997 as compared to $56,000 for the same period in
1996. The increase was primarily due to the growth in the loan portfolio. Total
non-performing assets, which primarily consist of residential loans, at December
31, 1997 were $4.1 million or 1.1% of total assets, an increase of $302,000 from
September 30, 1997. The Company's coverage ratio, which is the loan loss reserve
to non-performing assets, was 41.8% at December 31, 1997.
Other Income.
Other income increased $68,000 or 21.5% to $385,000 for the three months ended
December 31, 1997 as compared to the same period in 1996. The increase was
primarily a result of an increase of $71,000 increase in the net gain on sales
of loans partially offset by a small decrease in service charges and other fees
of $8,000. The increase in gain on sales of loans was due to increased
originations and sales of loans with servicing released to credit impaired
borrowers as part of management's strategy of diversifying product mix.
Operating Expenses.
Operating expenses increased $517,000 or 31.6% during the three months ended
December 31, 1997 as compared to the same period in 1996 primarily due to the
issuance of trust preferred securities in August 1997. Increases of $109,000,
$22,000, $21,000 and $32,000 were incurred in the salaries and employee
benefits, occupancy and equipment, advertising and other expenses, respectively.
The expense related to the trust preferred securities amounted to $393,000
during the 1997 quarter. Offsetting the above expense increases was a reduction
in federal deposit insurance premiums of $64,000 reflecting lower deposit
insurance charges assessed on SAIF insured deposits.
Income Tax Expense.
Income tax expense increased $34,000 to $418,000 during the three months ended
December 31, 1997 as compared to the same period in 1996. The increase was
primarily a result of an increase 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 December 31, 1997, the Company had short-term
outstanding borrowings of $40.2 million in advances from the FHLB of Pittsburgh
and $5.3 million in short-term securities sold
11
<PAGE> 14
under agreement 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 commitments and maintain a portfolio of
mortgage-related and investment securities. At December 31, 1997, the total
approved loan commitments outstanding amounted to $7.0 million, not including
loans in process. At the same date, commitments under unused lines of credit
amounted to $7.3 million. Certificates of deposit scheduled to mature in one
year or less at December 31, 1997 totalled $80.7 million. Based upon its
historical experience, management believes that a significant portion of
maturing deposits will remain with the Company.
The Bank 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 December 1997 was 6.3% and
5.2%, respectively.
As of December 31, 1997, the Bank had regulatory capital which was 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 December 31, 1997, the
Bank had tangible capital equal to 8.4% of adjusted total assets, core capital
equal to 8.4% of adjusted total assets and total capital equal to 20.5% 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
On January 28, 1998, the Annual Meeting of stockholders of the
Company was held to elect management's nominees for director and to
ratify the appointment of the Company's independent auditors. With
respect to the election of directors, the results were as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Edward Calderoni 1,075,280 9,200
Silvio F. D'Ignazio 1,077,380 7,100
Joan G. Taylor 1,074,780 9,700
</TABLE>
With respect to the ratification of Deloitte & Touche LLP as the
Company's independent certified accountants, the results were as
follows: 1,067,209 Votes For, 14,061 Votes Against, and 3,210 Votes
Abstaining.
Item 5. Other Information
None
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: February 13, 1998 By: /s/ Donald S. Guthrie
----------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: February 13, 1998 By: /s/ Thomas M. Kelly
--------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,736
<INT-BEARING-DEPOSITS> 13,697
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 120,102
<INVESTMENTS-CARRYING> 31,970
<INVESTMENTS-MARKET> 31,580
<LOANS> 196,050
<ALLOWANCE> 1,693
<TOTAL-ASSETS> 378,527
<DEPOSITS> 230,355
<SHORT-TERM> 45,500
<LIABILITIES-OTHER> 6,162
<LONG-TERM> 71,460
0
0
<COMMON> 7,749
<OTHER-SE> 17,301
<TOTAL-LIABILITIES-AND-EQUITY> 378,527
<INTEREST-LOAN> 4,086
<INTEREST-INVEST> 2,512
<INTEREST-OTHER> 164
<INTEREST-TOTAL> 6,762
<INTEREST-DEPOSIT> 2,433
<INTEREST-EXPENSE> 3,827
<INTEREST-INCOME-NET> 2,935
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,155
<INCOME-PRETAX> 1,090
<INCOME-PRE-EXTRAORDINARY> 672
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 672
<EPS-PRIMARY> .31
<EPS-DILUTED> .29
<YIELD-ACTUAL> 7.54
<LOANS-NON> 2,247
<LOANS-PAST> 0
<LOANS-TROUBLED> 303
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,628
<CHARGE-OFFS> 10
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,693
<ALLOWANCE-DOMESTIC> 1,013
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 680
</TABLE>
