months ago to invest in midsize banks and thrifts is turning up the heat on a Pennsylvania thrift. Stephen H. Gordon, a former Sandler O'Neill & Partners principal, is demanding that management of First Keystone Financial Inc. take steps to improve its financial performance, especially its lackluster efficiency ratios, or consider a sale of the $275 million-asset institution. Mr. Gordon, who founded and controls Genesis Financial Partners, fired off a letter to management in late October calling for the company to cut expenses by 25%, restructure its balance sheet, and reduce excess capital to bring return on equity above 15%. Genesis, whose general partner is a company wholly owned by Mr. Gordon, owns 5.6% of First Keystone stock. Media, Pa.-based First Keystone reported a lackluster second-quarter return on equity of only 5.44%. The company, which converted in January to stock form, has a tangible equity capital ratio of 8.74%. "We believe that the value of First Keystone could be enhanced dramatically through a combination of expense management, balance sheet management, and capital management," Mr. Gordon wrote. But Donald S. Guthrie, president and chief executive of First Keystone, said the thrift has already been looking at ways to improve earnings since late spring. Mr. Gordon criticized the company in his letter for spending about 80 cents for every dollar it earned, calling that "indicative of the chronic inefficiency of the institution." He urged thrift officials to reclassify securities as "available for sale" and sell some of them, while investing excess capital in higher- yielding assets. He also recommended repurchasing 10% of First Keystone's stock and issuing a 30% dividend. That would help First Keystone to raise its return on equity to 15.7%, while earning $3.05 per share, for the 12 months through next June. Without any changes, Mr. Gordon said, First Keystone would achieve only an 8.25% return on equity and earnings per share of only $1.60. Mr. Gordon claims that he just wants management to improve the company so the stock price would be equivalent to what the thrift could fetch in a sale. "We have no problem with their remaining independent if they generate the type of earnings we believe the company is capable of earning," Mr. Gordon said. " If they are not prepared to do that, then we'd be an advocate of the sale of the company."

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