-----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, MTqI1fqKzTtWDFakMkIeI2CbtT0mbfpZfpJdUoDjwKUx+6FOKEzRtmzrjxW/tDwJ +egIdcgsz8LA3OTxVKKc3g== 0000893220-00-000207.txt : 20000221 0000893220-00-000207.hdr.sgml : 20000221 ACCESSION NUMBER: 0000893220-00-000207 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000218 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: 549000 BUSINESS ADDRESS: STREET 1: 22 WEST STATE ST CITY: MEDIA STATE: PA ZIP: 19063 BUSINESS PHONE: 6105656210 10-Q 1 FIRST KEYSTONE FINANCIAL, INC. 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, 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: 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 February 10, 2000: 2,251,716 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, 1999 (Unaudited) and September 30, 1999 ............ 1 Consolidated Statements of Income for the Three Months Ended December 31, 1999 and 1998 (Unaudited) ............. 2 Consolidated Statement of Changes in Stockholders' Equity for the Three Months Ended December 31, 1999 (Unaudited) ..................................................... 3 Consolidated Statements of Cash Flows for the Three Months Ended December 31, 1999 and 1998 (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 i 3 FIRST KEYSTONE FINANCIAL, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - -------------------------------------------------------------------------------- (dollars in thousands)
December 31 September 30 ASSETS 1999 1999 - ------ ----------- ------------ (Unaudited) Cash and amounts due from depository institutions $ 4,282 $ 3,010 Interest-bearing deposits with depository institutions 21,514 17,005 -------- -------- Total cash and cash equivalents 25,796 20,015 Investment securities available for sale 43,259 44,315 Mortgage-related securities available for sale 107,544 113,046 Loans held for sale 2,260 1,792 Mortgage-related securities held to maturity - at amortized cost (approximate fair value of $13,550 at December 31, 1999 and $14,100 at September 30, 1999) 14,146 14,497 Loans receivable - net 226,288 226,375 Accrued interest receivable 2,866 3,096 Real estate owned 939 297 Federal Home Loan Bank stock - at cost 6,157 6,157 Office properties and equipment - net 3,460 3,076 Deferred income taxes 3,710 2,749 Prepaid expenses and other assets 14,423 14,711 -------- -------- TOTAL ASSETS $450,848 $450,126 ======== ======== LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY Liabilities: Deposits $263,153 $260,826 Advances from Federal Home Loan Bank 122,107 123,137 Securities sold under agreements to repurchase 19,300 19,300 Accrued interest payable 2,587 2,321 Advances from borrowers for taxes and insurance 2,043 946 Accounts payable and accrued expenses 2,785 3,492 -------- -------- Total liabilities 411,975 410,022 -------- -------- 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 December 31, 1999 and September 30, 1999 14 14 Additional paid-in capital 13,433 13,408 Common stock acquired by stock benefit plans (1,465) (1,531) Treasury stock at cost: 468,284 shares (5,622) (5,622) Accumulated other comprehensive loss (4,860) (2,992) Retained earnings - partially restricted 21,173 20,627 -------- -------- Total stockholders' equity 22,673 23,904 -------- -------- TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY $450,848 $450,126 ======== ========
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 ------------------- 1999 1998 ------ ------ INTEREST INCOME: Interest on: Loans $4,442 $4,224 Mortgage-related securities 2,104 2,112 Investments 803 733 Interest-bearing deposits 121 96 ------ ------ Total interest income 7,470 7,165 ------ ------ INTEREST EXPENSE: Interest on: Deposits 2,683 2,614 Federal Home Loan Bank advances 1,566 1,359 Other borrowings 297 297 ------ ------ Total interest expense 4,546 4,270 ------ ------ NET INTEREST INCOME 2,924 2,895 PROVISION FOR LOAN LOSSES 105 25 ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,819 2,870 ------ ------ NON-INTEREST INCOME: Service charges and other fees 218 227 Net gain (loss) on sales of: Loans 54 101 Real estate owned (11) Real estate operations (28) (12) Other 183 6 ------ ------ Total non-interest income 416 322 ------ ------ NON-INTEREST EXPENSE: Salaries and employee benefits 872 866 Occupancy and equipment expenses 258 255 Professional fees 153 244 Federal deposit insurance premium 38 35 Bank service charges 121 103 Data processing 100 97 Advertising 89 77 Minority interest in expense of subsidiaries 393 393 Other 239 357 ------ ------ Total non-interest expense 2,354 2,336 ------ ------ INCOME BEFORE INCOME TAX EXPENSE 881 856 INCOME TAX EXPENSE 178 196 ------ ------ NET INCOME $ 703 $ 660 ====== ====== BASIC EARNINGS PER COMMON SHARE $ 0.34 $ 0.32 ====== ====== DILUTED EARNINGS PER COMMON SHARE $ 0.33 $ 0.31 ====== ======
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 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 ------ ---------- ------------- -------- ------------- ---------- ------------- BALANCE AT SEPTEMBER 30, 1999 $14 $13,408 $(1,531) $(5,622) $(2,992) $20,627 $23,904 Net income 703 703 Other comprehensive loss, net of tax (1,868) (1,868) ESOP stock committed to be released 31 31 Excess of fair value above cost of ESOP and RRP shares committed to be released 25 25 RRP amortization 35 35 Dividends - $.07 per share (157) (157) --- ------- ------- ------- ------- ------- ------- BALANCE AT DECEMBER 31, 1999 $14 $13,433 $(1,465) $(5,622) $(4,860) $21,173 $22,673 === ======= ======= ======= ======= ======= =======
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 ----------------------- 1999 1998 -------- -------- OPERATING ACTIVITIES: Net income $ 703 $ 660 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for depreciation and amortization 101 109 Amortization (accretion) of premiums and discounts (35) 82 Gain (loss) on sales of: Loans (54) (101) Real estate owned 11 Provision for loan losses 105 25 Provision for real estate owned losses 50 Amortization of stock benefit plans 91 118 Changes in assets and liabilities which provided (used) cash: Origination of loans held for sale (11,038) (15,725) Loans sold in the secondary market 10,570 14,087 Deferred income taxes 1 Accrued interest receivable 230 166 Prepaid expenses and other assets 288 (6,900) Accrued interest payable 266 (35) Accounts payable and accrued expenses (707) 997 -------- -------- Net cash provided by (used in) operating activities 531 (6,466) -------- -------- INVESTING ACTIVITIES: Loans originated (14,411) (30,883) Purchases of: Mortgage-related securities available for sale (10,016) Investment securities available for sale (5,000) Purchase of FHLB stock (215) Proceeds from sales of real estate owned 37 624 Principal collected on loans 13,909 19,370 Proceeds from maturities, calls, or repayments of: Investment securities available for sale 75 Mortgage-related securities available for sale 3,694 13,935 Mortgage-related securities held to maturity 348 1,387 Purchase of property and equipment (485) (120) Net expenditures on real estate acquired through foreclosure and in development (79) (240) -------- -------- Net cash provided by (used in) investing activities 3,013 (11,083) -------- -------- FINANCING ACTIVITIES: Net increase in deposit accounts 2,327 7,184 Net (decrease) increase in FHLB advances (1,030) 2,772 Net increase in advances from borrowers for taxes and insurance 1,097 1,122 Purchase of treasury stock (831) Cash dividend (157) (136) -------- -------- Net cash provided by financing activities 2,237 10,111 -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,781 (7,438) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,015 24,126 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,796 $ 16,688 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for interest on deposits and borrowings $ 4,280 $ 4,305 Cash payments of income taxes 217 Transfers of loans receivable into real estate owned 729 1,212
See notes to consolidated financial statements. 4 7 FIRST KEYSTONE FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 (UNAUDITED) AND SEPTEMBER 30, 1999 AND (UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 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 month period ended December 31, 1999 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 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, 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 $ 5,746 $ 149 $ 5,597 5 to 10 years 6,995 $5 331 6,669 Municipal obligations 18,925 1,622 17,303 Corporate bonds 4,910 338 4,572 Mutual funds 2,000 30 1,970 Preferred stocks 5,532 592 4,940 Other equity investments 2,390 182 2,208 ------- -- ------ ------- Total $46,498 $5 $3,244 $43,259 ======= == ====== =======
5 8
September 30, 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 $ 5,746 $ 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 ======= == ====== =======
3. MORTGAGE-RELATED SECURITIES Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:
December 31, 1999 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------- ---------- ---------- ----------- Available for Sale: FHLMC pass-through certificates $ 11,261 $ 26 $ 260 $ 11,027 FNMA pass-through certificates 32,159 22 1,302 30,879 GNMA pass-through certificates 33,444 2 1,115 32,331 Collateralized mortgage obligations 34,819 72 1,584 33,307 -------- ---- ------ -------- Total $111,683 $122 $4,261 $107,544 ======== ==== ====== ======== Held to Maturity: FHLMC pass-through certificates $ 3,137 $ 1 $ 108 $ 3,030 FNMA pass-through certificates 6,525 275 6,250 Collateralized mortgage obligations 4,484 214 4,270 -------- ---- ------ -------- Total $ 14,146 $ 1 $ 597 $ 13,550 ======== ==== ====== ========
6 9
September 30, 1999 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------- ---------- ---------- ----------- Available for Sale: 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 ======== ==== ====== ========
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 1999 1999 ----------- ------------ Real estate loans: Single-family $163,864 $166,802 Construction and land 18,833 18,426 Multi-family and commercial 30,378 31,188 Consumer loans: Home equity and lines of credit 18,431 18,624 Deposit 263 243 Education 276 365 Other 1,001 1,080 Commercial loans 5,453 2,190 -------- -------- Total loans 238,499 238,918 Loans in process (8,922) (9,005) Allowance for loan losses (1,858) (1,928) Deferred loan fees (1,431) (1,610) -------- -------- Loans receivable - net $226,288 $226,375 ======== ========
7 10 The following is an analysis of the allowance for loan losses:
Three Months Ended December 31 ---------------------- 1999 1998 ------ ------ Balance beginning of period $1,928 $1,738 Provisions charged to income 105 25 Charge-offs (175) (8) ------ ------ Total $1,858 $1,755 ====== ======
At December 31, 1999 and September 30, 1999, non-performing loans (which include loans in excess of 90 days delinquent) amounted to approximately $2,480 and $3,180, respectively. 6. DEPOSITS Deposits consist of the following major classifications:
December 31 September 30 1999 1999 ----------------- ------------------ Amount Percent Amount Percent -------- ------- -------- ------- Non-interest bearing $ 5,649 2.1% $ 7,912 3.0% NOW 37,608 14.3 33,412 12.8 Passbook 38,710 14.7 40,324 15.5 Money market demand 17,248 6.6 19,417 7.4 Certificates of deposit 163,938 62.3 159,761 61.3 -------- ----- -------- ----- Total $263,153 100.0% $260,826 100.0% ======== ===== ======== =====
7. COMPREHENSIVE INCOME In 1999, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This 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 is currently applicable to the Company. For the three months ended December 31, 1999 and 1998, the Company's comprehensive income (loss) was as follows:
Three Months Ended December 31 -------------------- 1999 1998 ------- ----- Net income $ 703 $ 660 Net SFAS 115 adjustment (1,868) (639) ------- ----- Total comprehensive income (loss) $(1,165) $ 21 ======= =====
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 (stock options). The calculated basic and diluted earnings per share is as follows:
Three Months Ended December 31 -------------------- 1999 1998 ------- ----- Numerator $ 703 $ 660 Denominators: Basic shares outstanding 2,054,236 2,034,945 Effect of dilutive securities 64,171 113,294 --------- --------- Dilutive shares outstanding 2,118,407 2,148,239 ========= ========= Earnings per share: Basic $0.34 $0.32 Diluted $0.33 $0.31
9 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 (UNAUDITED) AND SEPTEMBER 30, 1999 Total assets of the Company remained relatively unchanged at $450.8 million at December 31, 1999 as compared to $450.1 million at September 30, 1999. Cash and cash equivalents increased by $5.8 million or 28.9% from $20.0 million at September 30, 1999 to $25.8 million at December 31, 1999 in accordance with the Company's liquidity plan for the year 2000 rollover. Deposits increased $2.3 million or .9% from $260.8 million at September 30, 1999 to $263.1 million at December 31, 1999. The increase resulted primarily from the growth in certificates of deposit. Stockholders' equity decreased $1.2 million primarily due to a decrease in the market valuation, net of taxes, of securities available for sale as well as dividends paid partially offset by the Company's net income for the quarter. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998 Net Income. Net income was $703,000 for the three months ended December 31, 1999 as compared to $660,000 for the same period in 1998. The $43,000 or 6.5% increase in net income for the three months ended December 31, 1999 was due to a $94,000 or 29.2% increase in other income offset by a $51,000 or 1.8% decrease in net interest income after provision for loan losses. Net Interest Income. Net interest income increased $29,000 or 1.0% to $2.9 million for the three months ended December 31, 1999 as compared to the same period in 1998. The increase was due to a $305,000 or 4.3% increase in interest income which was partially offset by a $276,000 or 6.5% increase in interest expense for the 1998 period. The $305,000 increase in interest income was primarily due to a $8.7 million or 2.2% increase in the average balance of interest-earning assets and by a 14 basis point increase in the yield earned thereon. The $276,000 increase in interest expense was primarily due to an increase of $24.7 million or 6.7% in the average balance of interest-bearing liabilities combined however, with, by comparison, only a 1 basis point decrease in the weighted average rate paid thereon for the three months ended December 31, 1999, as compared to the same period in 1998. The interest rate spread and net interest margin, on a fully tax equivalent basis, were 2.71% and 2.92%, respectively, for the three months ended December 31, 1999 as compared to 2.56% and 2.96%, respectively, for the same period in 1998. 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 amount of the Company's primary market area, and other factors related to the collectibility of the Company's loan and 10 13 loans held for sale portfolios. For the three months ended December 31, 1999, the provision for loan losses amounted to $105,000 as compared to $25,000 for the same period in 1998. The provision in fiscal 1999 reflected a $50,000 allocation of expense to real estate owned. The remaining increase is due to normal allocations for the current loan portfolio. At December 31, 1999, non-performing assets totaled $3.4 million or .76% of total assets, a decrease of $64,000 from September 30, 1999. The Company's coverage ratio, which is the loan loss reserve to non-performing assets, was 54.1% and 55.1% at December 31, 1999 and September 30, 1999, respectively. Management will continue to review its loan portfolio to determine the extent, if any, to which further 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. Other Income. Other income increased $94,000 or 29.2% to $416,000 for the three months ended December 31, 1999 as compared to the same period in 1998. The increase was primarily a result of a $177,000 increase in the other non-interest income due to the purchase of bank owned life insurance product and was partially offset by a decrease in the gain on sale of loans of $47,000, loss on sale of real estate owned of $28,000, and a small decrease in service charges and other fees of $9,000. Operating Expenses. Operating expenses had a modest overall increase of $18,000 or .8% during the three months ended December 31, 1999 as compared to the same period in 1998. The increase was primarily due to a $91,000 increase in professional fees, $18,000 increase in bank service charges, and a $12,000 in advertising offset by a $118,000 decrease in other non-interest expenses. Income Tax Expense. Income tax expense decreased $18,000 to $178,000 during the three months ended December 31, 1999 as compared to the same period in 1998. The decrease was primarily a result of the implementation of various tax planning strategies including investment in tax-exempt securities. The Year 2000 Issue. 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 causing disruptions of operation. While lingering concern exists about certain dates during Year 2000, the most significant date, January 1, 2000, has passed without material incident. The Company is pleased to report as a result of its diligent efforts, no interruptions of business or financial losses resulting from Year 2000 issues. 11 14 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, 1999, the Company had short-term borrowings outstanding of $46.0 million, all of which consisted of 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 fund maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a portfolio of mortgage-related and investment securities. At December 31, 1999, total approved loan commitments outstanding amounted to $9.1 million, not including loans in process. At the same date, commitments under unused lines of credit amounted to $13.0 million. Certificates of deposit scheduled to mature in one year or less at December 31, 1999 totaled $113.8 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 monthly liquidity ratio for December 31, 1999 was 7.29%. As of December 31, 1999, 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, 1999, the Bank had tangible capital and core capital equal to 8.3% of adjusted total assets and total capital equal to 18.7% of risk-weighted assets. 12 15 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. 13 16 QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 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, 1999.
Net Portfolio Value (Dollars in thousands) ------------------------------------------------------------------------------------------------------- Changes in Rates in Dollar Percentage Net Portfolio Value Change in Basis Points Amount Change Change As a % of Assets Percentage (1) ------------------------------------------------------------------------------------------------------- 300 $13,519 $(27,702) (67.20)% 3.25% (64.44)% 200 22,857 (18,364) (44.55) 5.34 (41.58) 100 32,343 (8,878) (21.53) 7.35 (19.58) 0 41,221 9.14 (100) 49,194 7,974 19.34 10.65 16.52 (200) 53,271 12,050 29.23 11.37 24.40 (300) 55,947 14,726 35.72 11.81 29.21
(1) Based on the portfolio value of the Bank's assets in the base case scenario As of December 31, 1999, the Company's NPV was $41.2 million or 9.14% of the market value of assets. Following a 200 basis point increase in interest rates, the Company's "post shock" NPV was $22.9 million or 5.34% of the market value of assets. The change in the NPV ratio or the Company's sensitivity measure was (3.80)%. 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 26, 2000, 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. No other nominations for directors were submitted. With respect to the election of directors, the results were as follows: Nominee For Withheld ------- --- -------- Olive J. Faulkner 1,694,397 187,931 Thomas M. Kelly 1,695,597 186,731 Donald A. Purdy 1,694,321 188,006 With respect to the ratification of Deloitte & Touche LLP as the Company's independent auditors, the results were as follows: 1,753,338 votes for, 124,149 votes against, and 4,840 votes abstaining for the fiscal year ending September 30, 2000. 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 16, 2000 By: /s/ Donald S. Guthrie ------------------------------------- Donald S. Guthrie President and Chief Executive Officer Date: February 16, 2000 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-30-2000 OCT-01-1999 DEC-31-1999 4,282 21,514 0 0 150,803 14,146 13,550 226,288 1,858 450,848 263,153 41,028 7,415 100,379 6,360 0 0 16,313 22,673 4,442 2,907 121 7,470 2,683 4,546 2,924 105 0 2,354 881 0 0 0 703 .34 .33 7.31 2,460 20 18 0 1,928 175 0 1,858 1,252 0 606
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