<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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: 000-25328
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 8, 2000: 2,251,716
Transitional Small Business Disclosure Format Yes [ ] No [X]
<PAGE> 2
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2000 (Unaudited) and September 30, 1999 .............................. 1
Consolidated Statements of Income for the Three and Six
Months Ended March 31, 2000 and 1999 (Unaudited)................................ 2
Consolidated Statement of Changes in Stockholders' Equity for the Six
Months Ended March 31, 1999 (Unaudited)......................................... 3
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 (Unaudited)......................................... 4
Notes to Consolidated Financial Statements (Unaudited).......................... 5
Item 2. Managements's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 15
Item 2. Changes in Securities and Use of Proceeds....................................... 15
Item 3. Defaults Upon Senior Securities................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............................. 15
Item 5. Other Information............................................................... 15
Item 6. Exhibits and Reports on Form 8-K................................................ 15
SIGNATURES...................................................................................... 16
</TABLE>
i
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
<TABLE>
<CAPTION>
March 31 September 30
ASSETS 2000 1999
-------- ------------
(Unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 2,792 $ 3,010
Interest-bearing deposits with depository institutions 16,635 17,005
--------- ---------
Total cash and cash equivalents 19,427 20,015
Investment securities available for sale 43,612 44,315
Mortgage-related securities available for sale 115,096 113,046
Loans held for sale 2,653 1,792
Mortgage-related securities held to maturity - at amortized cost (approximate
fair value of $13,130 at March 31, 2000
and $14,100 at September 30, 1999) 13,741 14,497
Loans receivable - net 234,104 226,375
Accrued interest receivable 3,065 3,096
Real estate owned 935 297
Federal Home Loan Bank stock - at cost 6,157 6,157
Office properties and equipment - net 3,654 3,076
Deferred income taxes 3,642 2,749
Prepaid expenses and other assets 14,659 14,711
--------- ---------
TOTAL ASSETS $ 460,745 $ 450,126
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 275,973 $ 260,826
Advances from Federal Home Loan Bank 119,317 123,137
Securities sold under agreements to repurchase 19,300 19,300
Accrued interest payable 2,440 2,321
Advances from borrowers for taxes and insurance 2,104 946
Accounts payable and accrued expenses 1,974 3,492
--------- ---------
Total liabilities 421,108 410,022
--------- ---------
Company-obligated mandatorily redeemable preferred securities of a subsidiary
trust holding solely junior subordinated debentures of the Company 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: 2,251,716 shares at March 31, 2000
and September 30, 1999 14 14
Additional paid-in capital 13,450 13,408
Common stock acquired by stock benefit plans (1,398) (1,531)
Treasury stock at cost: 468,284 shares (5,622) (5,622)
Accumulated other comprehensive loss (4,760) (2,992)
Retained earnings - partially restricted 21,753 20,627
--------- ---------
Total stockholders' equity 23,437 23,904
--------- ---------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY .. $ 460,745 $ 450,126
========= =========
</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
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME:
Interest on:
<S> <C> <C> <C> <C>
Loans $ 4,546 $ 4,394 $ 8,988 $ 8,619
Mortgage-related securities 2,155 1,849 4,258 3,961
Investments 801 732 1,604 1,465
Interest-bearing deposits 118 108 239 204
-------- -------- -------- --------
Total interest income 7,620 7,083 15,089 14,249
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on:
Deposits 2,761 2,551 5,444 5,165
Federal Home Loan Bank advances 1,585 1,320 3,150 2,679
Other borrowings 294 291 591 589
-------- -------- -------- --------
Total interest expense 4,640 4,162 9,185 8,433
-------- -------- -------- --------
NET INTEREST INCOME 2,980 2,921 5,904 5,816
PROVISION FOR LOAN LOSSES 105 75 210 100
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,875 2,846 5,694 5,716
-------- -------- -------- --------
NON-INTEREST INCOME (LOSS):
Service charges and other fees 234 248 452 475
Net gain (loss) on sale of:
Loans 59 99 113 200
Investment and mortgage-related securities 249 249
Real estate owned 2 (8)
Real estate operations (18) (12) (46) (24)
Other income 165 103 348 109
-------- -------- -------- --------
Total non-interest income 442 687 859 1,009
-------- -------- -------- --------
NON-INTEREST EXPENSE:
Salaries and employee benefits 896 920 1,768 1,786
Occupancy and equipment expenses 288 259 546 514
Professional fees 240 140 484 293
Federal deposit insurance premium 14 37 52 73
Bank service charges 127 100 248 203
Data processing 100 96 200 192
Advertising 105 80 194 157
Provision for real estate owned losses 300 350
Minority interest in expense of subsidiary 393 393 786 786
Other 229 269 468 576
-------- -------- -------- --------
Total non-interest expense 2,392 2,594 4,746 4,930
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 925 939 1,807 1,795
INCOME TAX EXPENSE 187 228 366 424
-------- -------- -------- --------
NET INCOME $ 738 $ 711 $ 1,441 $ 1,371
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE $ 0.36 $ 0.35 $ 0.70 $ 0.67
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE $ 0.35 $ 0.33 $ 0.67 $ 0.64
======== ======== ======== ========
</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
stock Accumulated Retained
Additional acquired by other earnings- Total
Common paid-in stock benefit Treasury comprehensive partially stockholders'
stock capital plans stock loss restricted equity
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1999 $ 14 $ 13,408 $ (1,531) $ (5,622) $ (2,992) $ 20,627 $ 23,904
Net income 1,441 1,441
Other comprehensive loss, net of tax (1,768) (1,768)
ESOP stock committed to be released 63 63
Excess of fair value above cost of
ESOP and RRP shares
committed to be released 42 42
RRP amortization 70 70
Dividends - $.14 per share (315) (315)
-------- -------- -------- -------- -------- -------- --------
BALANCE AT MARCH 31, 2000 $ 14 $ 13,450 $ (1,398) $ (5,622) $ (4,760) $ 21,753 $ 23,437
======== ======== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
March 31
--------
2000 1999
-------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,441 $ 1,371
Adjustments to reconcile net income to net
cash used in operating activities:
Provision for depreciation and amortization 214 220
Amortization of premiums and discounts (75) 110
Gain on sales of:
Loans (113) (200)
Investment securities available for sale (249)
Real estate owned 8
Provision for loan losses 210 100
Provision for real estate owned losses 350
Amortization of stock benefit plans 175 229
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (18,906) (33,996)
Loans sold in the secondary market 18,045 32,470
Deferred income taxes 1
Accrued interest receivable 31 113
Prepaid expenses and other assets 52 (7,676)
Accrued interest payable 119 134
Accrued expenses (1,518) 758
-------- --------
Net cash used in operating activities (317) (6,265)
-------- --------
INVESTING ACTIVITIES:
Loans originated (34,307) (50,586)
Purchases of:
Investment securities available for sale (109) (13,750)
Mortgage-related securities available for sale (10,826) (19,135)
Purchase of FHLB stock (987)
Proceeds from sales of real estate owned 188 2,044
Proceeds from sales of investment securities 7,749
Principal collected on loans 25,862 29,623
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 75
Mortgage-related securities available for sale 6,872 30,531
Mortgage-related securities held to maturity 751 2,228
Purchase of property and equipment (792) (282)
Net expenditures on real estate acquired through foreclosure and in development (80) (44)
-------- --------
Net cash used in investing activities (12,441) (12,534)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 15,147 12,927
Net (decrease) increase proceeds from FHLB advances and other borrowings (3,820) 8,743
Net increase in advances from borrowers for taxes and insurance 1,158 1,016
Purchase of treasury stock (831)
Cash dividend (315) (272)
-------- --------
Net cash provided by financing activities 12,170 21,583
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (588) 2,784
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,015 24,126
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,427 $ 26,910
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest on deposits and borrowings $ 4,521 $ 8,299
Transfers of loans receivable into real estate owned 872 1,297
Cash payments of income taxes 100 465
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 7
FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000 (UNAUDITED) AND SEPTEMBER 30, 1999 AND
(UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
(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-Q. 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, 2000 are not necessarily indicative of the results to be
expected for the fiscal year ending September 30, 2000. 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, 1999.
Certain information in this quarterly statement may constitute
forward-looking information (within the meaning of the Private
Securities Litigation Reform Act of 1995) 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; changes in interest rates, deposit flows, loan
demand, real estate values and competition; changes in accounting
principles, policies or guidelines; and the development of an interest
rate environment that adversely affects the interest rate spread or
other income from the Company's investments and operations.
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities are as
follows:
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------------------------
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 $ 5,747 $ 170 $ 5,577
5 to 10 years 6,996 $ 7 330 6,673
Municipal obligations 18,927 2 1,374 17,555
Corporate bonds 4,910 207 4,703
Mutual funds 2,000 30 1,970
Preferred stocks 5,531 714 4,817
Other equity investments 2,500 77 260 2,317
------- ------- ------- -------
Total $46,611 $ 86 $ 3,085 $43,612
======= ======= ======= =======
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------------------------------
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 $ 5,746 $ 94 $ 5,652
5 to 10 years 6,994 214 6,780
Municipal obligations 18,924 $ 1 1,052 17,873
Corporate bonds 4,909 270 4,639
Mutual funds 2,000 28 1,972
Preferred stocks 5,534 286 5,248
Other equity investments 2,390 239 2,151
------- ------- ------- -------
Total $46,497 $ 1 $ 2,183 $44,315
======= ======= ======= =======
</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, 2000
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
Available for Sale:
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $ 10,892 $ 8 $ 331 $ 10,569
FNMA pass-through certificates 31,584 6 1,266 30,324
GNMA pass-through certificates 39,300 1,190 38,110
Collateralized mortgage obligations 37,532 115 1,554 36,093
-------- -------- -------- --------
Total $119,308 $ 129 $ 4,341 $115,096
======== ======== ======== ========
Held to Maturity:
FHLMC pass-through certificates $ 3,015 $ 125 $ 2,890
FNMA pass-through certificates 6,242 312 5,930
Collateralized mortgage obligations 4,484 174 4,310
-------- -------- --------
Total $ 13,741 $ 611 $ 13,130
======== ======== ========
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
Available for Sale:
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $ 11,927 $ 81 $ 174 $ 11,834
FNMA pass-through certificates 32,795 37 877 31,955
GNMA pass-through certificates 34,639 75 755 33,959
Collateralized mortgage obligations 36,054 111 867 35,298
-------- -------- -------- --------
Total $115,415 $ 304 $ 2,673 $113,046
======== ======== ======== ========
Held to Maturity:
FHLMC pass-through certificates $ 3,156 $ 11 $ 67 $ 3,100
FNMA pass-through certificates 6,832 232 6,600
Collateralized mortgage obligations 4,509 109 4,400
-------- -------- -------- --------
Total $ 14,497 $ 11 $ 408 $ 14,100
======== ======== ======== ========
</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 or guaranteed 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>
March 31 September 30
2000 1999
-------- ------------
Real estate loans:
<S> <C> <C>
Single-family $ 164,804 $ 166,802
Construction and land 22,164 18,426
Multi-family and commercial 34,508 31,188
Consumer loans:
Home equity and lines of credit 19,981 18,624
Deposit 218 243
Education 326 365
Other 898 1,080
Commercial loans 5,402 2,190
--------- ---------
Total loans 248,301 238,918
Loans in process (10,779) (9,005)
Allowance for loan losses (1,949) (1,928)
Deferred loan fees (1,469) (1,610)
--------- ---------
Loans receivable - net $ 234,104 $ 226,375
========= =========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Six Months Ended
March 31
----------------------
2000 1999
------- -------
<S> <C> <C>
Balance beginning of period $ 1,928 $ 1,738
Provisions charged to income 210 100
Charge-offs (189) (56)
Recoveries
------- -------
Total $ 1,949 $ 1,782
======= =======
</TABLE>
At March 31, 2000 and September 30, 1999, non-performing loans (which consist of
loans in excess of 90 days delinquent) amounted to approximately $2,085 and
$3,180, respectively.
6. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
March 31 September 30
2000 1999
-------- ---------
Amount Percent Amount Percent
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 7,602 2.8% $ 7,912 3.0%
NOW accounts 40,855 14.8 33,412 12.8
Passbook accounts 40,151 14.5 40,324 15.5
Money market demand accounts 19,955 7.2 19,417 7.4
Certificate accounts 167,410 60.7 159,761 61.3
-------- ----- -------- -----
Total $275,973 100.0% $260,826 100.0%
======== ===== ======== =====
</TABLE>
8
<PAGE> 11
7. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, effective October 1, 1999. The
statement requires disclosure of amounts from transactions and other
events which are currently excluded from the statement of operations
and are recorded directly to stockholders' equity. These transactions
and other events represent foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. Only the last of these
items, however, is currently applicable to the Company.
For the three and six months ended March 31, 2000 and 1999, the
Company's comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
---------- ---------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 738 $ 711 $ 1,441 $ 1,371
Net SFAS 115 adjustment 100 (557) (1,768) (1,196)
------- ------- ------- -------
Total comprehensive income (loss) $ 838 $ 154 $ (327) $ 175
======= ======= ======= =======
</TABLE>
8. EARNINGS PER SHARE
Basic net income per share is based upon the weighted average number of
common shares outstanding, while diluted net income per share is based
upon the weighted average number of common share outstanding and common
share equivalents that would arise from the exercise of dilutive
securities.
The calculated basic and diluted earnings per share ("EPS") is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
March 31, March 31,
----------------------------- -----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator $ 738 $ 711 $ 1,441 $ 1,371
Denominators:
Basic shares outstanding 2,054,313 2,040,333 2,059,531 2,037,551
Effect of dilutive securities 39,143 100,673 80,715 106,611
---------- ---------- ---------- ----------
Diluted shares outstanding 2,093,456 2,141,006 2,140,246 2,144,162
========== ========== ========== ==========
hares outstanding
EPS:
Basic $ 0.36 $ 0.35 $ 0.70 $ 0.67
Diluted $ 0.35 $ 0.33 $ 0.67 $ 0.64
</TABLE>
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND SEPTEMBER 30, 1999
Total assets of the Company increased $10.6 million or 2.4% from $450.1 million
at September 30, 1999 to $460.7 million at March 31, 2000 primarily due to a
$7.7 million increase in loans receivable - net and a $2.0 million increase in
mortgage-related securities available for sale. The increased loan growth was
concentrated primarily in construction, commercial real estate and commercial
loans and funded through deposits and cash flows and reflected the Company's
continued emphasis on originating higher yielding loans.
Deposits increased $15.1 million or 5.8% from $260.8 million at September 30,
1999 to $276.0 million at March 31, 2000. The increase resulted primarily from
the growth in NOW accounts and certificates of deposit.
Stockholders' equity decreased $467,000 due to the combined effects of dividends
paid and a decrease in the market valuation, net of taxes, of securities
available for sale partially offset by the Company's net income for the six
months ended March 31, 2000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 2000 AND 1999
Net Income.
Net income was $738,000 for the three months ended March 31, 2000 as compared to
$711,000 for the same period in 1999. Net income for the six month periods ended
March 31, 2000 and 1999 remained relatively the same at $1.4 million. The
$27,000 or 3.8% increase in net income for the three months ended March 31, 2000
was due to a $29,000 increase in net interest income after provision for loan
losses combined with a $202,000 decrease in non-interest expense partially
offset by a $245,000 decrease in non-interest income. The $70,000 or 5.1%
increase in net income for the six months ended March 31, 2000 compared to the
same period in 1999 was primarily due to $184,000 and $58,000 decreases in
non-interest expense and $58,000 decrease in income tax expense, respectively,
partially offset by a $150,000 decrease in non-interest income together with a
$22,000 decrease in net interest income after provision for loan losses.
10
<PAGE> 13
Net Interest Income.
Net interest income increased $59,000 to $3.0 million and $88,000 to $5.9
million for the three and six months ended March 31, 2000, respectively. Such
increases were primarily due to $537,000 or 7.6% and $800,000 or 8.9% increases
in interest income for the three and six months ended March 31, 2000,
respectively, which were partially offset by $478,000 or 11.5% and $752,000 or
8.9% increases in interest expense during such periods. The average balance of
interest-earning assets increased $7.8 million and $4.6 million for the three
and six months ended March 31, 2000, respectively, as compared to the same
period in 1999. Calculated on a fully taxable equivalent basis, the weighted
average yield earned on interest-earning assets for the three and six months
ended March 31, 2000 increased 39 basis points to 7.52% and 33 basis points to
7.48%, respectively, compared to the 1999 periods. In addition, net interest
income was affected by an increase in the average balance of interest-bearing
liabilities of $23.6 million and $24.2 million for the three and six months
ended March 31, 2000, respectively, as compared to the same period in 1999. The
weighted average rate paid on such liabilities increased 21 basis points to
4.66% and 10 basis points to 4.63% during the three and six months ended March
31, 2000, respectively, as compared to 4.45% and to 4.53%, respectively, during
the three and six months ended March 31, 1999. The interest rate spread amounted
to 2.86% and 2.69% for the three months ended March 31, 2000 and 1999,
respectively, while the net interest margin remained at 3.00%. The interest rate
spread and net interest margin were 2.85% and 2.99%, respectively, for the six
months ended March 31, 2000 as compared to 2.62% and 2.98% for the same periods
in 1999. The increase in the net interest rate spread is primarily due to
improvement in the yield on Company's investment and mortgage-related securities
portfolio during fiscal 2000.
Provision for Loan Losses.
Provisions for loan losses are charged to earnings to bring the total allowance
for loan losses to a level considered appropriate by management based on
historical experience, the volume and type of lending conducted by the Company,
the amount of the Company's classified assets, the status of past due principal
and interest payments, general economic conditions, particularly as they relate
to the Company's primary market area, and other factors related to the
collectibility of the Company's loan and loans held for sale portfolios. For the
three months ended March 31, 2000, the provision for loan losses amounted to
$105,000 as compared to $75,000 for the same period in 1999. For the six months
ended March 31, 2000 and 1999, the provision for loan losses was $184,000 and
$172,000, respectively. The provision in the interim period of fiscal 1999
reflected a $50,000 allocation of expense to real estate owned. The increase in
fiscal 2000 periods is due to allocations for the current loan portfolio in
reflection of its increased investment in construction, multi-family and
commercial real estate loans which are generally deemed to entail greater risk
of loss. At March 31, 2000, non-performing assets totaled $3.0 million or .65%
of total assets, a decrease of $452,000 from September 30, 1999. The Company's
coverage ratio, which is the ratio of the loan loss reserve to non-performing
assets, was 64.4% and 55.1% at March 31, 2000 and September 30, 1999,
respectively.
Management will continue to review its loan portfolio to determine the extent,
if any, to which additional loss provisions may be deemed necessary. There can
be no assurance that the allowance for losses will be adequate to cover losses
which may in fact be realized in the future and that additional provisions for
losses will not be required.
11
<PAGE> 14
Non-interest income.
Non-interest income decreased $245,000 or 35.7% to $442,000 and $150,000 or
14.9% to $859,000 for the three and six months ended March 31, 2000,
respectively, as compared to the same periods in 1999. The decrease was
primarily a result of decreases in service charges and other fees and the net
gain on sales of loans, mortgage-related securities and investment securities
offset by an increase in other income due to income earned from bank owned life
insurance policies.
Non-interest Expense.
Non-interest expenses decreased $202,000 or 7.8% during the three months ended
March 31, 2000 as compared to the same period in 1999. The decrease was
primarily due to a decrease of $300,000 in the provision for real estate owned
losses partially offset by a $100,000 increase in professional fees. For the six
months ended, March 31, 2000, operating expenses decreased $184,000 or 3.7% due
to an decrease of $350,000 in the provision relating to a real estate owned
property and a $108,000 decrease in other non-interest expense offset by
increases of $191,000, $45,000 and $37,000 in professional fees, bank service
changes, and advertising, respectively.
Income Tax Expense.
Income tax expense decreased $41,000 to $187,000 for the three months ended
March 31, 2000 compared to March 31, 1999, while decreasing $58,000 to $366,000
for the six months ended March 31, 2000. The decreases were primarily a result
of the implementation of various tax planning strategies including investment in
tax-exempt securities.
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 March 31, 2000, the Company had short-term
borrowings outstanding of $54.0 million, all of which consisted of advances from
the Federal Home Loan Bank of Pittsburgh.
12
<PAGE> 15
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 At March 31, 2000, the total approved
loan commitments outstanding amounted to $9.7 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$16.0 million. Certificates of deposit scheduled to mature in one year or less
at March 31, 2000 totaled $110.4 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
March 2000 was 7.42%.
As of March 31, 2000, 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 4.0% of its adjusted total assets and total capital
equal to at least 8.0% of its total risk-weighted assets. At March 31, 2000, the
Bank had tangible and core capital equal to 8.1% of adjusted total assets and
total capital equal to 18.0% of risk-weighted assets.
13
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's asset and liability management policies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" in the Company's Annual Report on Form 10-K for the year ended
September 30, 1999.
The Company utilizes reports prepared by the OTS to measure interest rate risk.
Using data from the Bank's quarterly thrift financial reports, the OTS models
the net portfolio value ("NPV") of the Bank over a variety of interest rate
scenarios. The NPV is defined as the present value of expected cash flows from
existing assets less the present value of expected cash flows from existing
liabilities plus the present value of net expected cash inflows from existing
off-balance sheet contracts. The model assumes instantaneous, parallel shifts in
the U.S. Treasury Securities yield curve of 100 to 300 basis points, either up
or down, and in 100 basis point increments.
The interest rate risk analysis used by the OTS include an "Exposure Measure" or
"Post-Shock" NPV ratio and a "Sensitivity Measure". The "Post-Shock" NPV ratio
is the net present value as a percentage of assets over the various yield curve
shifts. A low "Post-Shock" NPV ratio indicates greater exposure to interest rate
risk and can result from a low initial NPV ratio or high sensitivity to changes
in interest rates. The "Sensitivity Measure" is the decline in the NPV ratio, in
basis points, caused by a 2% increase or decrease in rates, whichever produces a
larger decline. The following table sets forth the Bank's NPV as of March 31,
2000.
<TABLE>
<CAPTION>
Net Portfolio Value
Changes in
Rates in Dollar Percentage Net Portfolio Value Change in
Basis Points Amount Change Change As a % of Assets Percentage (1)
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
300 $15,420 (27,250) (63.86) 3.62 (60.95)
200 24,442 (18,228) (42.72) 5.59 (39.70)
100 33,693 (8,976) (21.04) 7.51 (18.99)
0 42,669 9.27
(100) 51,287 8,618 20.20 10.87 17.26
(200) 56,393 13,724 32.16 11.76 26.86
(300) 59,166 16,497 38.66 12.20 31.61
</TABLE>
(1) Based on the portfolio value of the Bank's assets in the base case
scenario
As of March 31, 2000, the Company's NPV was $42.7 million or 9.27% of the market
value of assets. Following a 200 basis point increase in interest rates, the
Company's "post shock" NPV was $24.4 million or 5.59% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(3.68)%.
14
<PAGE> 17
PART II
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
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
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
No. 27 Financial Data Schedule
(b) Reports filed on Form 8-K.
None.
15
<PAGE> 18
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 15, 2000 By: /s/ Donald S. Guthrie
----------------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: May 15, 2000 By: /s/ Thomas M. Kelly
----------------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 2,792
<INT-BEARING-DEPOSITS> 16,635
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 158,708
<INVESTMENTS-CARRYING> 13,741
<INVESTMENTS-MARKET> 13,130
<LOANS> 234,104
<ALLOWANCE> 1,949
<TOTAL-ASSETS> 460,745
<DEPOSITS> 275,973
<SHORT-TERM> 54,000
<LIABILITIES-OTHER> 22,718
<LONG-TERM> 84,617
6,444
0
<COMMON> 0
<OTHER-SE> 16,993
<TOTAL-LIABILITIES-AND-EQUITY> 460,745
<INTEREST-LOAN> 4,546
<INTEREST-INVEST> 2,956
<INTEREST-OTHER> 118
<INTEREST-TOTAL> 7,620
<INTEREST-DEPOSIT> 2,761
<INTEREST-EXPENSE> 4,640
<INTEREST-INCOME-NET> 2,980
<LOAN-LOSSES> 105
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2392
<INCOME-PRETAX> 925
<INCOME-PRE-EXTRAORDINARY> 925
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 738
<EPS-BASIC> .36
<EPS-DILUTED> .35
<YIELD-ACTUAL> 7.52
<LOANS-NON> 2,075
<LOANS-PAST> 10
<LOANS-TROUBLED> 5
<LOANS-PROBLEM> 2,090
<ALLOWANCE-OPEN> 1,858
<CHARGE-OFFS> 14
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,949
<ALLOWANCE-DOMESTIC> 913
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 685
</TABLE>
