-----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, K3bkhBuKb1Ba2meLX3G+8cWTEKGYiyx0piYRvLy9uK+O8hMsFE4Qvt17brShrXs0 Un0lKzC5CJNcyF7mF4o74w== 0000893220-99-000605.txt : 19990518 0000893220-99-000605.hdr.sgml : 19990518 ACCESSION NUMBER: 0000893220-99-000605 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99626552 BUSINESS ADDRESS: STREET 1: 22 WEST STATE ST CITY: MEDIA STATE: PA ZIP: 19063 BUSINESS PHONE: 6105656210 10-Q 1 FORM 10-Q FIRST KEYSTONE FEDERAL SAVINGS BANK 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, 1999 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 May 10, 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 March 31, 1999 (Unaudited) and September 30, 1998 ............................... 1 Consolidated Statements of Income for the Three and Six Months Ended March 31, 1999 and 1998 (Unaudited)................................. 2 Consolidated Statement of Changes in Stockholders' Equity for the Six Months Ended March 31, 1998 (Unaudited).......................................... 3 Consolidated Statements of Cash Flows for the Three and Six Months Ended March 31, 1999 and 1998 (Unaudited)................................. 4 Notes to Consolidated Financial Statements (Unaudited)........................... 5 Item 2. Managements' Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 15 PART II OTHER INFORMATION Item 1. Legal Proceedings............................................................... 16 Item 2. Changes in Securities and Use of Proceeds....................................... 16 Item 3. Defaults Upon Senior Securities................................................. 16 Item 4. Submission of Matters to a Vote of Security Holders............................ 16 Item 5. Other Information............................................................... 16 Item 6. Exhibits and Reports on Form 8-K................................................ 16 SIGNATURES...................................................................................... 17
i 3 FIRST KEYSTONE FINANCIAL, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands)
March 31 September 30 ASSETS 1999 1998 - ------ ---- ---- (Unaudited) Cash and amounts due from depository institutions $ 2,525 $ 2,457 Interest-bearing deposits with depository institutions 24,385 21,669 --------- --------- Total cash and cash equivalents 26,910 24,126 Investment securities available for sale 46,119 40,621 Mortgage-related securities available for sale 102,728 115,486 Loans held for sale 4,325 2,799 Mortgage-related securities held to maturity - at amortized cost (approximate fair value of $16,290 at March 31, 1999 and $18,700 at September 30, 1998) 16,509 18,769 Loans receivable - net 218,305 198,343 Accrued interest receivable 3,004 3,117 Real estate owned 602 1,663 Federal Home Loan Bank stock - at cost 6,066 5,079 Office properties and equipment - net 2,674 2,612 Deferred income taxes 859 283 Prepaid expenses and other assets 10,641 2,965 --------- --------- TOTAL ASSETS $ 438,742 $ 415,863 ========= ========= LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 260,238 $ 247,311 Advances from Federal Home Loan Bank 110,321 101,578 Securities sold under agreements to repurchase 19,300 19,300 Accrued interest payable 1,817 1,683 Advances from borrowers for taxes and insurance 2,052 1,036 Accounts payable and accrued expenses 2,849 2,091 --------- --------- Total liabilities 396,577 372,999 --------- --------- 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: 2,269,216 shares at March 31, 1999 and 2,329,216 shares at September 30, 1998 14 14 Additional paid-in capital 13,306 13,204 Common stock acquired by stock benefit plans (1,662) (1,789) Treasury stock at cost; 450,784 shares at March 31, 1999 (5,406) (4,575) and 390,784 shares at September 30, 1998 Unrealized gain on available for sale securities - net of tax 291 1,487 Retained earnings - partially restricted 19,422 18,323 --------- --------- Total stockholders' equity 25,965 26,664 --------- --------- TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY $ 438,742 $ 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 Six months ended March 31 March 31 -------- -------- 1999 1998 1998 1998 -------- -------- -------- -------- INTEREST INCOME: Interest on: Loans $ 4,394 $ 4,109 $ 8,619 $ 8,195 Mortgage-related securities 1,849 2,057 3,961 4,123 Investments 732 563 1,465 1,009 Interest-bearing deposits 108 107 204 271 -------- -------- -------- -------- Total interest income 7,083 6,836 14,249 13,598 -------- -------- -------- -------- INTEREST EXPENSE: Interest on: Deposits 2,551 2,421 5,165 4,854 Federal Home Loan Bank advances 1,320 1,045 2 679 2,063 Other borrowings 291 368 589 744 -------- -------- -------- -------- Total interest expense 4,162 3,834 8,433 7,661 -------- -------- -------- -------- NET INTEREST INCOME 2,921 3,002 5,816 5,937 PROVISION FOR LOAN LOSSES 75 76 100 151 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,846 2,926 5,716 5,786 -------- -------- -------- -------- OTHER INCOME (LOSS): Service charges and other fees 248 226 475 468 Net gain on sale of: Loans 99 130 200 258 Investment and mortgage-related securities 249 47 249 47 Real estate owned 1 1 Real estate operations (12) (9) (24) (19) Other income 103 13 109 27 -------- -------- -------- -------- Total other income 687 408 1,009 782 -------- -------- -------- -------- OPERATING EXPENSES: Salaries and employee benefits 920 955 1,786 1,819 Occupancy and equipment expenses 259 261 514 497 Professional fees 140 137 293 289 Federal deposit insurance premium 37 37 73 73 Bank service charges 100 100 203 201 Data processing 96 87 192 168 Advertising 80 64 157 146 Provision for real estate owned losses 300 350 Minority interest in expense of subsidiary 393 393 786 786 Other 269 222 576 421 -------- -------- -------- -------- Total operating expenses 2,594 2,256 4,930 4,400 -------- -------- -------- -------- INCOME BEFORE INCOME TAX EXPENSE 939 1,078 1,795 2,168 INCOME TAX EXPENSE 228 394 424 812 -------- -------- -------- -------- NET INCOME $ 711 $ 684 $ 1,371 $ 1,356 ======== ======== ======== ======== BASIC EARNINGS PER COMMON SHARE $ 0.35 $ 0.32 $ 0.67 $ 0.63 ======== ======== ======== ======== DILUTED EARNINGS PER COMMON SHARE $ 0.33 $ 0.30 $ 0.64 $ 0.59 ======== ======== ======== ========
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 Total Common paid-in stock benefit Treasury available for sale Retained stockholders stock capital plans stock (net of tax) earnings equity ----- ------- ----- ----- ------------ -------- ------ BALANCE AT SEPTEMBER 30, 1998 $ 14 $ 13,204 $ (1,789) $ (4,575) $ 1,487 $ 18,323 $ 26,664 ESOP stock committed to be released 57 57 Excess of fair value above cost of ESOP stock committed to be released 102 102 RRP amortization 70 70 Dividends - $.12 per share (272) (272) Net unrealized loss on securities available for sale, net of tax (1,196) (1,196) Purchase of treasury stock (831) (831) Net income 1,371 1,371 -------- -------- -------- -------- -------- -------- -------- BALANCE AT MARCH 31, 1999 $ 14 $ 13,306 $ (1,662) $ (5,406) $ 291 $ 19,422 $ 25,965 ======== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements. 3 6 FIRST KEYSTONE FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
Six months ended March 31 -------- 1999 1998 ---- ---- OPERATING ACTIVITIES: Net income $ 1,371 $ 1,356 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for depreciation and amortization 220 225 Amortization of premiums and discounts 110 (89) Gain on sales of: Loans (200) (258) Mortgage-related securities available for sale (47) Investment securities available for sale (249) Real estate owned (1) Provision for loan losses 100 151 Provision for real estate owned losses 350 Amortization of stock benefit plans 229 317 Changes in assets and liabilities which provided (used) cash: Origination of loans held for sale (33,996) (30,688) Loans sold in the secondary market 32,470 31,939 Deferred income taxes 1 28 Accrued interest receivable 113 (12) Prepaid expenses and other assets (7,676) (125) Accrued interest payable 134 165 Accrued expenses 758 (259) -------- -------- Net cash (used in) provided by operating activities (6,265) 2,702 -------- -------- INVESTING ACTIVITIES: Loans originated (50,586) (27,488) Purchases of: Investment securities available for sale (13,750) (18,157) Mortgage-related securities available for sale (19,135) (21,100) Investment securities held to maturity (2,000) Mortgage-related securities held to maturity (2,687) Purchase of FHLB stock (987) (438) Proceeds from sales of real estate owned 2,044 818 Proceeds from sales of mortgage-related securities 14,295 Proceeds from sales of investment securities 7,749 2,000 Principal collected on loans 29,623 22,850 Proceeds from maturities, calls, or repayments of: Investment securities available for sale 75 1,070 Mortgage-related securities available for sale 30,531 13,201 Investment securities held to maturity 7,000 Mortgage-related securities held to maturity 2,228 2,667 Purchase of property and equipment (282) (397) Net expenditures on real estate acquired through foreclosure and in development (44) (1,056) -------- -------- Net cash used in investing activities (12,534) (9,422) -------- -------- FINANCING ACTIVITIES: Net increase in deposit accounts 12,927 9,616 Net proceeds from FHLB advances 8,743 246 Net increase in advances from borrowers for taxes and insurance 1,016 1,020 Purchase of treasury stock (831) (715) Cash dividend (272) (241) -------- -------- Net cash provided by financing activities 21,583 9,926 -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 2,784 3,206 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,126 21,561 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,910 $ 24,767 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments for interest on deposits and borrowings $ 8,299 $ 7,496 Transfers of loans receivable into real estate owned 1,297 193 Cash payments of income taxes 465 550
See notes to consolidated financial statements. 4 7 FIRST KEYSTONE FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 (UNAUDITED) AND SEPTEMBER 30, 1998 AND (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1999 AND 1998 (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, 1999 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:
March 31, 1999 -------------- 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: 1 to 5 years $ 5,744 $ 5,744 5 to 10 years 10,000 $ 15 10,015 Municipal obligations 18,920 286 $ 2 19,204 Corporate bonds 2,010 79 1,931 Mutual funds 2,000 13 1,987 Preferred stocks 5,000 44 5,044 Other equity investments 2,390 196 2,194 ------- ------ ---- ------- Total $46,064 $345 $290 $46,119 ======= ==== ==== =======
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:
March 31, 1999 -------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ---- ---- ---- ---------- Available for Sale: FHLMC pass-through certificates $ 13,566 $ 214 $ 25 $ 13,755 FNMA pass-through certificates 27,051 153 147 27,057 GNMA pass-through certificates 35,584 182 124 35,642 Collateralized mortgage obligations 26,100 303 129 26,274 -------- -------- -------- -------- Total $102,301 $ 852 $ 425 $102,728 ======== ======== ======== ======== Held to Maturity: FHLMC pass-through certificates $ 3,911 $ 48 $ 19 $ 3,940 FNMA pass-through certificates 7,811 12 143 7,680 Collateralized mortgage obligations 4,787 1 118 4,670 -------- -------- -------- -------- Total $ 16,509 $ 61 $ 280 $ 16,290 ======== ======== ======== ========
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, could be sold in response to changes in interest rates and cash flows or for restructuring purposes. 7 10 5. LOANS RECEIVABLE Loans receivable consist of the following:
March 31 September 30 1999 1998 ---- ---- Real estate loans: Single-family $ 164,753 $ 148,088 Construction and land 17,960 15,858 Multi-family and commercial 24,715 20,563 Consumer loans: Home equity and lines of credit 18,554 19,609 Deposit 155 181 Education 354 449 Other 1,739 1,429 Commercial loans 1,572 1,390 --------- --------- Total loans 229,802 207,567 Loans in process (7,984) (5,781) Allowance for loan losses (1,782) (1,738) Deferred loan fees (1,731) (1,705) --------- --------- Loans receivable - net $ 218,305 $ 198,343 ========= =========
The following is an analysis of the allowance for loan losses:
Six Months Ended March 31 -------- 1999 1998 ---- ---- Balance beginning of period $ 1,738 $ 1,628 Provisions charged to income 100 151 Charge-offs (56) (28) Recoveries 15 ------- ------- Total $ 1,782 $ 1,766 ======= =======
At March 31, 1999 and September 30, 1998, non-performing loans (which include loans in excess of 90 days delinquent) amounted to approximately $2,868 and $2,077, respectively. 6. DEPOSITS Deposits consist of the following major classifications:
March 31 September 30 1999 1998 ---- ---- Amount Percent Amount Percent ------ ------- ------ ------- Non-interest bearing accounts $ 7,545 2.9% $ 8,254 3.3% NOW accounts 37,630 14.5 28,181 11.4 Passbook accounts 40,243 15.5 37,988 15.4 Money market demand accounts 18,066 6.9 16,087 6.5 Certificate accounts 156,754 60.2 156,801 63.4 -------- ----- -------- ----- Total $260,238 100.0% $247,311 100.0% ======== ===== ======== =====
8 11 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. For the three and six months ended March 31, 1999 and 1998, the Company's comprehensive income was as follows:
Three Months Ended Six Months Ended March 31 March 31 ---------- --------- 1999 1998 1999 1998 ---- ---- ---- ---- Net Income $ 711 $ 684 $ 1,371 $ 1,356 Net SFAS 115 Adjustment (557) (108) (1,196) 217 ------- ------- ------- ------- Total comprehensive income $ 154 $ 576 $ 175 $ 1,573 ======= ======= ======= =======
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 For the Six Months Ended March 31, March 31, --------- --------- 1999 1998 1999 1998 ---- ---- ---- ---- Numerator $ 711 $ 684 $ 1,371 $ 1,356 Denominators: Basic shares outstanding 2,040,333 2,141,979 2,037,551 2,153,837 Effect of dilutive securities 100,673 135,405 106,611 133,484 ---------- ---------- ---------- ---------- Dilutive shares outstanding 2,141,006 2,277,384 2,144,162 2,287,321 ========== ========== ========== ========== EPS: Basic $ 0.35 $ 0.32 $ 0.67 $ 0.63 Diluted $ 0.33 $ 0.30 $ 0.64 $ 0.59
9 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF FINANCIAL CONDITION AT MARCH 1999 (UNAUDITED) AND SEPTEMBER 30, 1998 Total assets of the Company increased $22.9 million or 5.5% from $415.9 million at September 30, 1998 to $438.7 million at March 31, 1999 primarily due to a $20.0 million increase in loans receivable - net, and $5.5 million increase in investment securities available for sale and a $7.7 million increase in prepaid expenses and other assets partially offset by a $12.8 million decrease in mortgage-related securities available for sale. The increases in investment securities and loans were funded primarily through deposits and cash flows and, to a lesser extent, advances from the Federal Home Loan Bank of Pittsburgh. The loan growth was concentrated primarily in single-family and commercial real estate loans. The 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 $12.9 million or 5.2% from $247.3 million at September 30, 1998 to $260.2 million at March 31, 1999. The increase resulted primarily from the growth in core deposits which are passbook accounts, NOW accounts, money market accounts and commercial checking. Stockholders' equity decreased $699,000 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 six months ended March 31, 1999. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1999 AND 1998 Net Income. Net income was $711,000 for the three months ended March 31, 1999 as compared to $684,000 for the same period in 1998. Net income for the six month periods ended March 31, 1999 and 1998 was $1.4 million. The $27,000 or 3.9% increase in net income for the three months ended March 31, 1999 was primarily due to a $279,000 increase in other income combined with a $166,000 decrease in income tax expense partially offset by a $81,000 decrease in net interest income together with a $338,000 increase in operating expenses. The $15,000 or 1.1% increase in net income for the six months ended March 31, 1999 compared to the same period in 1998 was primarily due to a $388,000 decrease in income tax expense as well as a $227,000 increase in other income partially offset by a $530,000 increase in operating expenses and a $121,000 decrease in net interest income. 10 13 Net Interest Income. Net interest income decreased $81,000 or 2.7% to $2.9 million and $121,000 or 2.0% to $5.8 million for the three and six months ended March 31, 1999, respectively. Such decreases were primarily due to a $328,000 or 8.6% and a $772,000 or 10.1% increase in interest expense for the three and six months ended March 31, 1999, respectively, which were partially offset by a $247,000 or 3.6% and a $651,000 or 4.8% increase in interest income during such periods. The average balance of interest-earning assets increased $35.8 million and $45.2 million for the three and six months ended March 31, 1999, respectively, as compared to the same period in 1998. Calculated on a fully taxable equivalent basis, the weighted average yield earned thereon for the three and six months ended March 31, 1999 decreased 32 basis points to 7.13% and 43 basis points to 7.15%, respectively, compared to the 1998 periods. In addition, net interest income was affected by an increase in the average balance of interest-bearing liabilities of $44.3 million and $45.4 million for the three and six months ended March 31, 1999, respectively, as compared to the same period in 1998. However, the weighted average rate paid thereon decreased 20 basis points to 4.45 % and 16 basis points to 4.53% during the three and six months ended March 31, 1999, respectively, as compared to 4.65% and to 4.69%, during the three and six months ended March 31, 1998. The interest rate spread and net interest margin amounted to 2.69% and 3.00% for the three months ended March 31, 1999 as compared to 2.80% and 3.27% for the same period in 1998. The interest rate spread and net interest margin were 2.62% and 2.98% for the six months ended March 31, 1999 as compared to 2.89% and 3.31% for the same periods in 1998. The decline in the net interest rate spread and net interest margin is primarily due to the compression of the yield curve, reflecting the movement of market rates of interest. The Bank's yield on interest-earning assets, primarily tied to longer term interest rates, has declined at a more rapid pace than the Bank's funding liabilities, which are primarily tied to shorter term rates. Provision for Loan Losses. The Company's provision for loan losses remained unchanged for the three months ended March 31, 1999 as compared to the same period in 1998. For the six months ended March 31, 1999 and 1998, the provision for loan losses was $100,000 and $151,000, respectively. Other Income. Other income increased $279,000 or 68.4% to $687,000 and $227,000 or 29.0% to $1.0 million for the three and six months ended March 31, 1999, respectively, as compared to the same periods in 1998. The increase was primarily a result of increases in the net gain on sales of mortgage-related securities and increases in fee and other income offset by a decrease in gain on sale of loans. Gain on sales of investment and mortgage-related securities are highly dependent on market conditions and consequently the amount of gains may differ materially in subsequent quarters. 11 14 Operating Expenses. Operating expenses increased $338,000 or 15.0% during the three months ended March 31, 1999 as compared to the same period in 1998. The increase was primarily due to an increase in the provision for losses on real estate owned of $300,000 related to the Company's only real estate under development project which is expected to be completed by the third fiscal quarter. See Note 7 of the Notes to Consolidated Financial Statements in the Annual Report. Small increases in professional fees, advertising, data processing and other expenses were partially offset by reductions in salaries and employee benefits and occupancy and equipment expenses. For the six months ended, March 31, 1999, operating expenses increased $530,000 or 12.0% primarily due to a $350,000 provision relating to the Company's real estate owned. In addition, increases of $17,000, $24,000 and $155,000 were incurred in occupancy and equipment expenses, data processing and other expenses, respectively. Income Tax Expense. Income tax expense decreased $166,000 to $228,000 and $388,000 to $424,000 during the three and six months ended March 31, 1999, respectively, as compared to the same period in 1998. The decreases were primarily a result of decreases in income before income taxes combined with 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 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 12 15 their products and services Year 2000 compliant. Such modifications and conversions and related testing of such systems was 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 will 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 the majority of 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 remaining borrowers have completed their Y2K projects or are in the process of completing their projects. The Year 2000 Committee is continually working with its commercial customers to assess their Year 2000 readiness. 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 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 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 consistent with the Company's normal expenditures for technology upgrades. The Company is being charged $25,000 to participate in the data service processor Year 2000 testing. As of March 31, 1999, the Company has incurred approximately $23,600 of that cost. 13 16 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, 1999, the Company had short-term borrowings outstanding of $19.2 million, all of which were advances from the Federal Home Loan Bank 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 March 31, 1999, the total approved loan commitments outstanding amounted to $45.1 million, not including loans in process. At the same date, commitments under unused lines of credit amounted to $12.8 million. Certificates of deposit scheduled to mature in one year or less at March 31, 1999 totaled $119.5 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 1999 was 6.47%. As of March 31, 1999, 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 to at least 8.0% of its total risk-weighted assets. At March 31, 1999, the Bank had tangible and core capital equal to 8.2% of adjusted total assets and total capital equal to 19.8% of risk-weighted assets. 14 17 QUANTITATIVE AND QUALITATIVE DISCLOSURES DISCLOSURES ABOUT MARKET RISK The Company's balance sheet consists of interest-earning assets and interest-bearing liabilities, and is therefore exposed to interest rate risk. The following additional information is being provided regarding the exposure to this interest rate risk. 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 NAV 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 400 basis points, either up or down, and in 100 basis point increments. The interest rate risk measures 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 sets forth the Bank's NPV as of December 31, 1998. 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) --------------------------------------------------------------------------------------------------- 200 $24,394 $(17,196) (41.35)% 6.02% (38.07)% 100 33,590 (8,000) (19.24) 8.05 (17.18) 0 41,590 9.72 (100) 46,598 5,008 12.04 10.68 9.88 (200) 50,692 9,102 21.89 11.43 17.59
(1) Based on the portfolio value of the Bank's assets in the base case scenario Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV Table presented assumes that the composition of the Bank's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Also, the model does not take into account the Bank's business or strategic plans. Accordingly, although the NPV Table provides an indication of the Bank's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Bank's net interest income and may differ from actual results. Based upon the Company's knowledge as of the date hereof, the Company does not believe that there has been any material change in the Company's asset and liability position or the market value of the Company's portfolio equity since December 31, 1998. 15 18 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 None 16 19 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 14, 1999 By: /s/ Donald S. Guthrie -------------------------------------- Donald S. Guthrie President and Chief Executive Officer Date: May 14, 1999 By: /s/ Thomas M. Kelly -------------------------------------- Thomas M. Kelly Executive Vice-President and Chief Financial Officer 17 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS SEP-30-1999 OCT-01-1998 MAR-31-1999 2,525 24,385 0 0 16,509 16,290 148,847 222,630 0 438,742 260,238 19,200 22,918 110,421 0 0 6,252 19,713 25,965 4,394 2,581 108 7,083 2,551 4,162 2,921 75 249 2,594 939 0 0 0 711 .35 .33 7.13 2,859 9 67 0 1,755 48 0 1,782 1,070 0 712
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