-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cv1YE8TYHs/KATfulmUVs1U2jDsbeFKetf0Kuwk+dfmvvRF/isYfoqKTT/XOUTUI 0mRsFvvW/dfCqDZABMj/ZQ== 0000893220-99-000177.txt : 19990217 0000893220-99-000177.hdr.sgml : 19990217 ACCESSION NUMBER: 0000893220-99-000177 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST KEYSTONE FINANCIAL INC CENTRAL INDEX KEY: 0000856751 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 232576479 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25328 FILM NUMBER: 99540553 BUSINESS ADDRESS: STREET 1: 22 WEST STATE ST CITY: MEDIA STATE: PA ZIP: 19063 BUSINESS PHONE: 6105656210 10-Q 1 FORM 10-Q 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 December 31, 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 February 3, 1999: 2,269,216 Transitional Small Business Disclosure Format Yes / / No /X/ 2 FIRST KEYSTONE FINANCIAL, INC. CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Statements of Financial Condition as of December 31, 1998 (Unaudited) and September 30, 1998 .......... 1 Consolidated Statements of Income for the Three Months Ended December 31, 1998 and 1997 (Unaudited)............ 2 Consolidated Statement of Changes in Stockholders' Equity for the Three Months Ended December 31, 1998 (Unaudited)..................... 3 Consolidated Statements of Cash Flows for the Three Months Ended December 31, 1998 and 1997 (Unaudited)................... 4 Notes to Consolidated Financial Statements (Unaudited)......... 5 Item 2. Managements's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 10 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
i 3 FIRST KEYSTONE FINANCIAL, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands)
December 31 September 30 ASSETS 1998 1998 ----------- ------------ (Unaudited) Cash and amounts due from depository institutions $ 2,102 $ 2,457 Interest-bearing deposits with depository institutions 14,586 21,669 --------- --------- Total cash and cash equivalents 16,688 24,126 Investment securities available for sale 45,071 40,621 Mortgage-related securities available for sale 110,820 115,486 Loans held for sale 4,437 2,799 Mortgage-related securities held to maturity - at amortized cost (approximate fair value of $17,140 at December 31, 1998 and $18,700 at September 30, 1998) 17,364 18,769 Loans receivable - net 208,916 198,343 Accrued interest receivable 2,951 3,117 Real estate owned 2,433 1,663 Federal Home Loan Bank stock - at cost 5,294 5,079 Office properties and equipment - net 2,623 2,612 Deferred income taxes 613 283 Prepaid expenses and other assets 9,865 2,965 --------- --------- TOTAL ASSETS $ 427,075 $ 415,863 ========= ========= LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 254,495 $ 247,311 Advances from Federal Home Loan Bank 104,350 101,578 Securities sold under agreements to repurchase 19,300 19,300 Accrued interest payable 1,648 1,683 Advances from borrowers for taxes and insurance 2,158 1,036 Accounts payable and accrued expenses 3,088 2,091 --------- --------- Total liabilities 385,039 372,999 --------- --------- 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: 2,269,216 shares at December 31, 1998 and 2,329,216 shares at September 30, 1998 14 14 Additional paid-in capital 13,259 13,204 Common stock acquired by stock benefit plans (1,726) (1,789) Treasury stock at cost; 450,784 shares (5,406) (4,575) Unrealized gain on available for sale securities - net of tax 848 1,487 Retained earnings - partially restricted 18,847 18,323 --------- --------- Total stockholders' equity 25,836 26,664 --------- --------- TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY $427,075 $ 415,863 ========= =========
See notes to consolidated financial statements. 1 4 FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except per share data)
Three months ended December 31 ------------------- 1998 1997 ------ ------ INTEREST INCOME: Interest on: Loans $4,224 $4,086 Mortgage-related securities 2,112 2,066 Investments 733 446 Interest-bearing deposits 96 164 ------ ------ Total interest income 7,165 6,762 ------ ------ INTEREST EXPENSE: Interest on: Deposits 2,614 2,433 Federal Home Loan Bank advances 1,359 1,019 Other borrowings 297 375 ------ ------ Total interest expense 4,270 3,827 ------ ------ NET INTEREST INCOME 2,895 2,935 PROVISION FOR LOAN LOSSES 25 75 ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,870 2,860 ------ ------ OTHER INCOME (LOSS): Service charges and other fees 227 242 Net gain on sale of loans 101 128 Real estate operations (12) (3) Other income 6 18 ------ ------ Total other income 322 385 ------ ------ OPERATING EXPENSES: Salaries and employee benefits 866 864 Occupancy and equipment expenses 255 236 Professional fees 153 152 Federal deposit insurance premium 35 36 Bank service charges 103 102 Data processing 97 81 Advertising 77 82 Minority interest in expense of subsidiaries 393 393 Other 357 209 ------ ------ Total operating expenses 2,336 2,155 ------ ------ INCOME BEFORE INCOME TAX EXPENSE 856 1,090 INCOME TAX EXPENSE 196 418 ------ ------ NET INCOME $ 660 $ 672 ====== ====== BASIC EARNINGS PER COMMON SHARE $ 0.32 $ 0.31 ====== ====== DILUTED EARNINGS PER COMMON SHARE $ 0.31 $ 0.29 ====== ======
See notes to consolidated financial statements. 2 5 FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (dollars in thousands)
Common Unrealized stock gain (loss) Additional acquired by on securities Common paid-in stock benefit Treasury available for sale stock capital plans stock (net of tax) -------- ---------- ------------- -------- ------------------ BALANCE AT SEPTEMBER 30, 1998 $ 14 $ 13,204 $(1,789) $(4,575) $1,487 ESOP stock committed to be released 28 Excess of fair value above cost of ESOP stock committed to be released 55 RRP amortization 35 Dividends - $.06 per share Net unrealized loss on securities available for sale, net of tax (639) Purchase of treasury stock (831) Net income ----- -------- ------- ------- ------ BALANCE AT DECEMBER 31, 1998 $ 14 $ 13,259 $(1,726) $(5,406) $ 848 ===== ======== ======= ======= ======
Total Retained stockholders' earnings equity --------- ------------- BALANCE AT SEPTEMBER 30, 1998 $18,323 $26,664 ESOP stock committed to be released 28 Excess of fair value above cost of ESOP stock committed to be released 55 RRP amortization 35 Dividends - $.06 per share (136) (136) Net unrealized loss on securities available for sale, net of tax (639) Purchase of treasury stock (831) Net income 660 660 ------- ------- BALANCE AT DECEMBER 31, 1998 $18,847 $25,836 ======= =======
See notes to consolidated financial statements. 3 6 FIRST KEYSTONE FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
Three months ended December 31 1998 1997 -------- -------- OPERATING ACTIVITIES: Net income $ 660 $ 672 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for depreciation and amortization 109 108 Amortization of premiums and discounts 82 (91) Gain on sales of loans (101) (128) Provision for loan losses 25 75 Provision for real estate owned losses 50 Amortization of stock benefit plans 118 137 Changes in assets and liabilities which provided (used) cash: Origination of loans held for sale (15,725) (19,470) Loans sold in the secondary market 14,087 17,882 Deferred income taxes 1 (17) Accrued interest receivable 166 (191) Prepaid expenses and other assets (6,900) (74) Accrued interest payable (35) (263) Accounts payable and accrued expenses 997 792 -------- -------- Net cash used in operating activities (6,466) (568) -------- -------- INVESTING ACTIVITIES: Loans originated (30,883) (12,263) Purchases of: Mortgage-related securities available for sale (10,016) Investment securities available for sale (5,000) (10,352) Mortgage-related securities held to maturity (2,687) Investment securities held to maturity (2,000) Purchase of FHLB stock (215) (39) Proceeds from sales of real estate owned 624 611 Principal collected on loans 19,370 10,725 Proceeds from maturities, calls, or repayments of: Investment securities available for sale 75 1,070 Mortgage-related securities available for sale 13,935 4,278 Investment securities held to maturity 3,000 Mortgage-related securities held to maturity 1,387 474 Purchase of property and equipment (120) (201) Net expenditures on real estate acquired through foreclosure and in development (240) (610) -------- -------- Net cash used in investing activities (11,083) (7,994) -------- -------- FINANCING ACTIVITIES: Net increase in deposit accounts 7,184 2,437 Net proceeds from FHLB advances 2,772 773 Net increase in advances from borrowers for taxes and insurance 1,122 1,060 Purchase of treasury stock (831) (715) Cash dividend (136) (121) -------- -------- Net cash provided by financing activities 10,111 3,434 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (7,438) (5,128) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,126 21,561 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,688 $ 16,433 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for interest on deposits and borrowings $ 4,305 $ 4,090 Transfers of loans receivable into real estate owned 1,212 143
See notes to consolidated financial statements. 4 7 FIRST KEYSTONE FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 (UNAUDITED) AND SEPTEMBER 30, 1998 AND (UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31, 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-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 month period ended December 31, 1998 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 1999. 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, 1998. 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 investments and operations. 2. INVESTMENT SECURITIES The amortized cost and approximate fair value of investment securities, by contractual maturities, are as follows:
December 31, 1998 ------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ---------- ---------- ---------- ----------- Available for Sale: U.S. Treasury securities and securities of U.S. Government agencies: 5 to 10 years $12,000 $ 52 $12,052 Over 10 years 3,769 61 3,830 Municipal obligations 18,919 302 $ 2 19,219 Mutual funds 2,000 14 1,986 Preferred stocks 5,500 227 5,727 Other equity investments 2,390 133 2,257 ------- ---- ------- ------- Total $44,578 $642 $ 149 $45,071 ======= ==== ======= =======
5 8
September 30, 1998 ------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------- ---------- ---------- ----------- Available for Sale: U.S. Treasury securities and securities of U.S. Government agencies: 5 to 10 years $12,000 $109 $12,109 Municipal obligations 18,993 484 19,477 Mutual funds 2,000 $ 8 1,992 Preferred stocks 5,500 263 5,763 Other equity investments 1,390 110 1,280 ------- ------ ---- ------- Total $39,883 $856 $118 $40,621 ======= ==== ==== =======
3. MORTGAGE-RELATED SECURITIES Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:
December 31, 1998 ------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------- ---------- ---------- ----------- Available for Sale: FHLMC pass-through certificates $ 14,673 $ 204 $ 14,877 FNMA pass-through certificates 28,629 280 $ 63 28,846 GNMA pass-through certificates 38,589 259 14 38,834 Collateralized mortgage obligations 28,137 276 150 28,263 -------- ----- ---- -------- Total $110,028 $1,019 $227 $110,820 ======== ====== ==== ======== Held to Maturity: FHLMC pass-through certificates $ 4,188 $20 $ 8 $ 4,200 FNMA pass-through certificates 8,207 13 110 8,110 Collateralized mortgage obligations 4,969 139 4,830 ------- ---- ---- ------- Total $17,364 $33 $257 $17,140 ======= === ==== =======
6 9
September 30, 1998 ------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ---------- ---------- ---------- ----------- Available for Sale: FHLMC pass-through certificates $ 10,968 $ 197 $ 11,165 FNMA pass-through certificates 25,600 503 26,103 GNMA pass-through certificates 41,379 562 41,941 Collateralized mortgage obligations 36,022 327 $72 36,277 -------- ------ --- -------- Total $113,969 $1,589 $72 $115,486 ======== ====== === ======== Held to Maturity: FHLMC pass-through certificates $ 4,698 $33 $ 1 $ 4,730 FNMA pass-through certificates 8,747 46 103 8,690 Collateralized mortgage obligations 5,324 1 45 5,280 ------ --- ---- ------ Total $18,769 $80 $149 $18,700 ======= === ==== =======
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, may be sold in response to changes in interest rates and cash flows or for restructuring purposes. 5. LOANS RECEIVABLE Loans receivable consist of the following:
December 31 September 30 1998 1998 ----------- ------------ Real estate loans: Single-family $157,052 $148,088 Construction and land 16,018 15,858 Multi-family and commercial 23,866 20,563 Consumer loans: Home equity and lines of credit 19,287 19,609 Deposit 159 181 Education 489 449 Other 1,383 1,429 Commercial loans 1,370 1,390 --------- --------- Total loans 219,624 207,567 Loans in process (7,205) (5,781) Allowance for loan losses (1,755) (1,738) Deferred loan fees (1,748) (1,705) --------- --------- Loans receivable - net $208,916 $198,343 ======== ========
7 10 The following is an analysis of the allowance for loan losses:
Three Months Ended ---------------------- December 31 1998 1997 ------- ------- Balance beginning of period $ 1,738 $ 1,628 Provisions charged to income 25 75 Charge-offs (8) (10) ------- ------- Total $ 1,755 $ 1,693 ======= =======
At December 31, 1998 and September 30, 1998, non-performing loans (which include loans in excess of 90 days delinquent) amounted to approximately $2,554 and $3,704, respectively. 6. DEPOSITS Deposits consist of the following major classifications:
December 31 September 30 1998 1998 ----------------------- ----------------------- Amount Percent Amount Percent -------- -------- -------- -------- Non-interest bearing accounts $ 7,745 3.0% $ 8,254 3.3% NOW accounts 35,073 13.8 28,181 11.4 Passbook accounts 38,404 15.1 37,988 15.4 Money market demand accounts 17,281 6.8 16,087 6.5 Certificate accounts 155,992 61.3 156,801 63.4 -------- -------- -------- -------- Total $254,495 100.0% $247,311 100.0% ======== ======== ======== ========
7. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", effective October 1, 1998. 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. Total comprehensive income for the three month periods ended December 31, 1998 and 1997 amounted to $21,000 and $1.7 million, respectively. 8 11 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 is as follows:
For the Three Months Ended December 31, ---------------------------- 1998 1997 ---------- ---------- Numerator $ 660 $ 672 Denominators: Basic shares outstanding 2,034,945 2,165,439 Effect of dilutive securities 113,294 130,437 ---------- ---------- Dilutive shares outstanding 2,148,239 2,295,876 ---------- ---------- EPS: Basic $ 0.32 $ 0.31 Diluted $ 0.31 $ 0.29
9 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 (UNAUDITED) AND SEPTEMBER 30, 1998 Total assets of the Company increased $11.2 million or 2.7% from $415.9 million at September 30, 1998 to $427.1 million at December 31, 1998 primarily due to a $10.6 million increase in loans receivable - net, and $4.5 million increase in investment securities available for sale and a $6.9 million increase in prepaid expenses and other assets partially offset by a $7.4 million decrease in cash and cash equivalents. The increases in investment securities and loans were funded primarily through interest-bearing deposits and, to a lesser extent, deposits. The loan growth was concentrated primarily in single-family and commercial real estate loans. Increase in prepaid expenses and other assets was due to the purchase of $7.0 million of bank owned life insurance policies in order to fund ongoing costs of employee benefit and retirement plans. Deposits increased $7.2 million or 2.9% from $247.3 million at September 30, 1998 to $254.5 million at December 31, 1998. The increase resulted primarily from the growth in core deposits. Stockholders' equity decreased $828,000 due to the combined effects of the repurchase of shares of common stock, 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 quarter. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 Net Income. Net income was $660,000 for the three months ended December 31, 1998 as compared to $672,000 for the same period in 1997. The $12,000 or 1.8% decrease in net income for the three months ended December 31, 1998 was due to a $63,000 or 16.4% decrease in other income and a $181,000 or 8.4% increase in operating expenses partially offset by a $222,000 or 53.1% decrease in income taxes. Net Interest Income. Net interest income decreased $40,000 or 1.4% to $2.9 million for the three months ended December 31, 1998 as compared to the same period in 1997. The decrease was due to a $443,000 or 11.6% increase in interest expense which was offset, in part, by a $403,000 or 6.0% increase in interest income for the 1998 period. The interest rate spread and net interest margin, on a fully tax equivalent basis, were 2.56% and 2.96%, respectively, for the three months ended December 31, 1998 as compared to 2.82% and 3.29%, respectively, for the same period in 1997. The $403,000 increase in interest income was primarily due to a $46.7 million or 13.0% increase in average interest-earning assets offset by a 38 basis point decrease in the yield on such assets. The $443,000 increase in interest expense was primarily due to an increase of $46.9 million or 14.5% in the average balance of interest-bearing liabilities combined with a 12 basis point decrease in the weighted average rate paid thereon for the three months ended December 31, 1998, as compared to the same period in 1997. The decrease in the net interest rate spread was due to the general decline in market rates of interest reducing the yields on interest-earning assets at a more rapid pace than the reduction of rates paid on interest-bearing liabilities. 10 13 Provision for Loan Losses. For the three months ended December 31, 1998, the provision for loan losses amounted to $25,000 as compared to $75,000 for the same period in 1997. At December 31, 1998, non-performing assets totalled $5.3 million or 1.2% of total assets, a decrease of $190,000 from September 30, 1998. The Company's coverage ratio, which is the loan loss reserve to non-performing assets, was 33.9% and 32.4% at December 31, 1998 and September 30, 1998, respectively. Other Income. Other income decreased $63,000 or 16.4% to $322,000 for the three months ended December 31, 1998 as compared to the same period in 1997. The decrease was primarily a result of a $27,000 decrease in the net gain on sales of loans partially offset by a small decrease in service charges and other fees of $12,000. The decrease in gain on sales of loans was due to decreased originations and sales of loans with servicing released to credit impaired borrowers. Operating Expenses. Operating expenses increased $181,000 or 8.4% during the three months ended December 31, 1998 as compared to the same period in 1997. Increases of $19,000, $16,000, and $148,000 were incurred in the occupancy and equipment, data processing and other expenses, respectively. Income Tax Expense. Income tax expense decreased $222,000 to $196,000 during the three months ended December 31, 1998 as compared to the same period in 1997. The decrease was primarily a result of an decrease in income before income taxes and the implementation of various tax planning strategies including investment in tax-exempt securities. Year 2000 Compliance The Year 2000 Issue is the result of computer programs which were written using two digits rather than four to define the applicable year. As a result, such programs may recognize a date using "00" as the year 1900 instead of the year 2000 which could result in system failures or miscalculations. In order to be ready for the year 2000, the Company has developed a Year 2000 Policy (the "Policy") which was presented to the Board of Directors during June 1997. The Policy was developed using the guidelines outlined in the Federal Financial Institutions Examination's Council's "The Effect of Year 2000 on Computer Systems". The Board of Directors and its Executive Committee assigned responsibility for the Policy to the Year 2000 Committee, which reports to the Board of Directors on a monthly basis. The Policy recognizes that the Company's operating, processing and accounting operations are computer reliant and could be affected by the Year 2000 Issue. The Company is primarily reliant on third party vendors for its computer output and processing, as well as other significant functions and services (i.e., securities safekeeping services, securities pricing information, etc.). The Year 2000 Committee is continually working with these third party vendors to assess their year 2000 readiness. Based upon the initial assessment, management presently believes that with planned modifications to existing software and hardware and planned conversions to new software and hardware, the Company's third party vendors are taking the appropriate steps to ensure critical systems will 11 14 function properly. The Company has identified 73 priority 1 (directly effects customers) and 66 priority 2 (effects employee's ability to service customers) third party vendors. Of such priority 1 and priority 2 vendors, as of December 31, 1998, the Company has been informed that 59% are already Year 2000 compliant. The Company's data service processing vendor, which is its major software provider, has informed the Company that it expects to complete testing of its updated systems (in which testing the Company has been involved) by the end of April 1999. The initial phase of testing of the data service processor's updated system was successfully completed in January 1999. Substantially all of the Company's vendors of its priority 1 and priority 2 applications (discussed below) have provided assurances, written or oral, that they are working to make their products and services Year 2000 compliant. The majority of such modifications and conversions and related testing of such systems was completed by December 31, 1998 and the Company expects any remaining ones to be completed by March 31, 1999. While the Company has received assurances from such vendors as to compliance, such assurances are not guarantees and may not be enforceable. The Company's existing older contracts with such vendors do not include Year 2000 certifications or warranties. Thus, in the event such vendor's products and/or services are not Year 2000 compliant, the Company's recourse in the event of such failure may be limited. If the required modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 Issue could have a material impact on the operations of the Company. There can be no assurance that potential system interruptions or unanticipated additional expense incurred to obtain Year 2000 compliance would not have a material adverse effect on the Company's business, financial condition, results of operations and business prospects. Nevertheless, the Company does not believe that the cost of addressing the Year 2000 issues will be a material event or uncertainty that would cause reported financial information not to be necessarily indicative of future operating results or financial conditions, nor does it believe that the costs or the consequences of incomplete or untimely resolution of its Year 2000 issues represents a known material event or uncertainty that is reasonably likely to affect its future financial results, or cause its reported financial information not to be necessarily indicative of future operating results or future financial condition. The Year 2000 issues also affect certain of the Company's customers, particularly in the areas of access to funds and additional expenditures to achieve compliance. As of February 28, 1998, the Company had contacted all of its commercial credit customers (19 borrowers with loans outstanding aggregating $10.0 million) regarding the customers awareness of the Year 2000 Issue. While no assurance can be given that the customers will be Year 2000 compliant, management believes, based on representations of such customers and reviews of their operations (including assessments of the borrowers' level of sophistication and data and record keeping requirements), that the customers are either addressing the appropriate issues to insure compliance or that they are not faced with material Year 2000 issues. In substantially all cases the credit extended to such borrowers is collateralized by real estate which inherently minimizes the Company's exposure in the event that such borrowers do experience problems becoming Year 2000 compliant. The Company has completed its own company-wide Year 2000 contingency plan. Individual contingency plans concerning specific software and hardware issues and operational plans for continuing operations were completed by December 1998. The Year 2000 Committee has reviewed substantially all mission critical test plans and contingency plans to ensure the reasonableness of the plans. Testing began on mission critical systems in August 1998 with a majority of such systems completed by December 1998 with the remainder by March 31, 1999. The Company has developed contingency plans for substantially all priority 1 and priority 2 applications which address operational policies and procedures in the event of data processing, electric power supply and/or telephone service failures associated with the Year 2000. Such contingency plans provide documented actions to allow the Company to maintain and/or resume normal operations in the event of the failure of priority 1 and priority 2 applications. Such plans identify participants, processes and equipment that will be necessary to permit the Company to continue operations. The plans include providing off-line system processing, back-up electrical and telephone 12 15 systems and other methods to ensure the Company's ability to continue to operate. The costs of modifications to the existing software is being primarily absorbed by the third party vendors. The Company recognizes that the need exists to purchase new hardware and software regardless of year 2000 implications. Based upon current estimates, the Company has identified the hardware and software that would have to be replaced, and have found the amounts to not be material and in line with normal expenditures for technology upgrades. The Company is being charged $25,000 to participate in the data service processor Year 2000 testing. As of December 31, 1998, the Company has incurred approximately $18,000 of that cost. 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, 1998, the Company had short-term borrowings outstanding of $23.1 million, all of which were advances from the FHLB of Pittsburgh. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer term basis, the Company maintains a strategy of investing in various lending products, mortgage-related securities and investment securities. The Company uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a portfolio of mortgage-related and investment securities. At December 31, 1998, the total approved loan commitments outstanding amounted to $11.5 million, not including loans in process. At the same date, commitments under unused lines of credit amounted to $9.1 million. Certificates of deposit scheduled to mature in one year or less at December 31, 1998 totalled $118.7 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 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 liquidity ratio was 6.33% for the quarter ended December 31, 1998. 13 16 As of December 31, 1998, 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 4.0% of its adjusted total assets and total capital to at least 8.0% of its risk-weighted assets. At December 31, 1998, the Bank had tangible capital equal to 8.2% of adjusted total assets, core capital equal to 8.2% of adjusted total assets and total capital equal to 20.0% 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. 14 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 On January 27, 1999, 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:
Nominee For Withheld ------- --- -------- Donald S. Guthrie 2,063,606 11,678 Edmund Jones 2,060,697 14,587 Willard F. Letts 2,060,597 14,687
With respect to the proposal to adopt the 1998 Stock Option Plan, the results were as follows: 1,971,906 Votes For, 76,422 Votes Against, 23,466 Votes Abstaining, and 3,489 Votes Non-voting. With respect to the ratification of Deloitte & Touche LLP as the Company's independent certified accountants, the results were as follows: 1,939,652 Votes For, 128,753 Votes Against, and 6,878 Votes Abstaining. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K None 15 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: February 12, 1999 By: /s/ Donald S. Guthrie ------------------------------------------- Donald S. Guthrie President and Chief Executive Officer Date: February 12, 1999 By: /s/ Thomas M. Kelly ----------------------------------------- Thomas M. Kelly Executive Vice-President and Chief Financial Officer 16 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS SEP-30-1999 OCT-01-1998 DEC-31-1998 2,102 14,586 0 0 155,981 17,364 17,140 208,916 1,755 427,075 254,495 23,125 23,094 100,525 0 0 6,141 19,695 427,075 4,224 2,845 96 7,165 2,614 4,270 2,895 25 0 2,336 856 0 0 0 660 0.32 0.31 7.17 2,554 0 83 0 1,738 8 0 1,755 990 0 765
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