-----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, BszcP0Sq1hlfT8DyxuZIUmR8ZPAojkXAbj0WAW1GbHyRAP+17UMheQ3dI3iMhksz FzjeV1AnqMGvIBTUPySPXg== 0000893220-04-001066.txt : 20040517 0000893220-04-001066.hdr.sgml : 20040517 20040517151948 ACCESSION NUMBER: 0000893220-04-001066 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST KEYSTONE FINANCIAL INC CENTRAL INDEX KEY: 0000856751 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 230469351 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25328 FILM NUMBER: 04811988 BUSINESS ADDRESS: STREET 1: 22 WEST STATE ST CITY: MEDIA STATE: PA ZIP: 19063 BUSINESS PHONE: 6105656210 10-Q 1 w97571e10vq.txt FORM 10-Q FOR PERIOD ENDED MARCH 31, 2004 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, 2004 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 [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X] Number of shares of Common Stock outstanding as of May 10, 2004: 1,925,171 FIRST KEYSTONE FINANCIAL, INC. CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION: Item 1. Financial Statements Unaudited Consolidated Statements of Financial Condition as of March 31, 2004 and September 30, 2003 1 Unaudited Consolidated Statements of Income for the Three and Six Months Ended March 31, 2004 and 2003 2 Unaudited Consolidated Statement of Changes in Stockholders' Equity for the Six Months Ended March 31, 2004 3 Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2004 and 2003 4 Notes to Unaudited Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Item 4. Disclosure Controls and Procedures 19 PART II OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22
i FIRST KEYSTONE FINANCIAL, INC. UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except share amounts)
March 31, September 30, 2004 2003 --------- ------------- ASSETS Cash and amounts due from depository institutions $ 9,243 $ 10,439 Interest-bearing deposits with depository institutions 15,455 10,751 -------- -------- Total cash and cash equivalents 24,698 21,190 Investment securities available for sale 67,861 77,700 Mortgage-related securities available for sale 112,846 124,656 Loans held for sale 485 4,498 Investment securities held to maturity- at amortized cost (approximate fair value of $6,464 at March 31, 2004 6,301 6,315 and $6,450 at September 30, 2003 Mortgage-related securities held to maturity - at amortized cost (approximate fair value of $28,782 at March 31, 2004 and $3,560 at September 30, 2003) 28,590 3,487 Loans receivable (net of allowance for loan loss of $2,084 at March 31, 2004 and $1,986 at September 30, 2003) 293,425 286,421 Accrued interest receivable 2,585 2,654 Real estate owned 1,345 1,420 Federal Home Loan Bank stock - at cost 8,783 8,294 Office properties and equipment, net 3,592 3,427 Cash surrender value of life insurance 15,849 15,365 Prepaid expenses and other assets 4,397 4,185 -------- -------- TOTAL ASSETS $570,757 $559,612 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $352,956 $362,605 Advances from Federal Home Loan Bank and other borrowings 153,278 136,272 Junior subordinated debentures 21,575 21,593 Accrued interest payable 1,070 1,111 Advances from borrowers for taxes and insurance 1,920 958 Deferred income taxes 709 581 Accounts payable and accrued expenses 6,158 4,104 -------- -------- Total liabilities 537,666 527,224 -------- -------- 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: 1,924,871 shares at March 31, 2004 and 1,925,337 shares at September 30, 2003 14 14 Additional paid-in capital 13,480 13,443 Employee stock ownership plan (796) (830) Treasury stock at cost: 787,685 shares at March 31, 2004 and 787,219 shares at September 30, 2003 (11,946) (11,378) Accumulated other comprehensive income 3,319 3,069 Retained earnings - partially restricted 29,020 28,070 -------- -------- Total stockholders' equity 33,091 32,388 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $570,757 $559,612 ======== ========
See notes to unaudited consolidated financial statements. - 1 - FIRST KEYSTONE FINANCIAL, INC. UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Three months ended Six months ended March 31, March 31, ----------------- ----------------- 2004 2003 2004 2003 ------ ------ ------- ------- INTEREST INCOME: Interest on: Loans $4,378 $4,783 $ 8,823 $ 9,834 Mortgage-related securities 1,296 1,192 2,525 2,302 Investment securities: Taxable 474 596 1,141 1,202 Tax-Exempt 222 275 435 575 Dividends 52 97 116 192 Interest-bearing deposits 17 30 35 85 ------ ------ ------- ------- Total interest income 6,439 6,973 13,075 14,190 ------ ------ ------- ------- INTEREST EXPENSE: Interest on: Deposits 1,489 1,866 3,076 3,833 Federal Home Loan Bank advances and other borrowings 1,762 1,707 3,502 3,448 Junior subordinated debentures 415 418 828 847 ------ ------ ------- ------- Total interest expense 3,666 3,991 7,406 8,128 ------ ------ ------- ------- NET INTEREST INCOME 2,773 2,982 5,669 6,062 PROVISION FOR LOAN LOSSES 75 195 150 390 ------ ------ ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,698 2,787 5,519 5,672 ------ ------ ------- ------- NON-INTEREST INCOME: Service charges and other fees 258 242 525 514 Net gain on sales of: Loans held for sale 25 75 32 212 Investment and mortgage-related securities 1,060 39 1,465 50 Increase in cash surrender value 196 166 326 333 Other income 630 29 885 67 ------ ------ ------- ------- Total non-interest income 2,169 551 3,233 1,176 ------ ------ ------- ------- NON-INTEREST EXPENSE: Salaries and employee benefits 2,586 1,236 4,116 2,392 Occupancy and equipment 320 328 625 613 Professional fees 253 149 484 364 Federal deposit insurance premium 14 14 27 28 Data processing 125 128 236 248 Advertising 83 78 182 198 Net cost of operation of other real estate 90 17 178 22 Other 623 557 1,180 1,152 ------ ------ ------- ------- Total non-interest expense 4,094 2,507 7,028 5,017 ------ ------ ------- ------- INCOME BEFORE INCOME TAX EXPENSE 773 831 1,724 1,831 INCOME TAX EXPENSE 146 138 355 357 ------ ------ ------- ------- NET INCOME $ 627 $ 693 $ 1,369 $ 1,474 ====== ====== ======= ======= BASIC EARNINGS PER COMMON SHARE $ 0.34 $ 0.36 $ 0.75 $ 0.77 ====== ====== ======= ======= DILUTED EARNINGS PER COMMON SHARE $ 0.32 $ 0.34 $ 0.70 $ 0.73 ====== ====== ======= =======
See notes to unaudited consolidated financial statements. - 2 - FIRST KEYSTONE FINANCIAL, INC. UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (dollars in thousands)
Employee Accumulated Retained Additional stock other earnings- Total Common paid-in ownership Treasury comprehensive partially stockholders' stock capital plan stock income restricted equity -------- ---------- --------- -------- ------------- ---------- ------------- BALANCE AT OCTOBER 1, 2003 $ 14 $ 13,443 $ (830) $(11,378) $ 3,069 $ 28,070 $ 32,388 Net income -- -- -- -- -- 1,369 1,369 Other comprehensive income, net of tax: Net unrealized gain on securities net of reclassification adjustment(1) -- -- -- -- 250 -- 250 -------- -------- -------- -------- -------- -------- -------- Comprehensive income -- -- -- -- -- -- 1,619 -------- -------- -------- -------- -------- -------- -------- Common stock acquired by stock benefit plans -- -- (172) -- -- -- (172) ESOP stock committed to be released -- -- 206 -- -- -- 206 Excess of fair value above cost of ESOP shares committed to be released -- 395 -- -- -- -- 395 Purchase of treasury stock -- -- -- (1,339) -- -- (1,339) Exercise of stock options -- (358) -- 771 -- -- 413 Dividends - $.22 per share -- -- -- -- -- (419) (419) -------- -------- -------- -------- -------- -------- -------- BALANCE AT MARCH 31, 2004 $ 14 $ 13,480 $ (796) $(11,946) $ 3,319 $ 29,020 $ 33,091 ======== ======== ======== ======== ======== ======== ========
(1) Disclosure of reclassification amount, net of tax for the six months ended March 31, 2004: Net unrealized appreciation arising during the period $1,217 Less: reclassification adjustment for net gains included in net income (net of tax of $498) 967 ------ Net unrealized gain on securities $ 250 ======
See notes to unaudited consolidated financial statements. - 3 - FIRST KEYSTONE FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
Six months ended March 31, --------------------- 2004 2003 -------- -------- OPERATING ACTIVITIES: Net income $ 1,369 $ 1,474 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for depreciation and amortization 235 210 Amortization of premiums and discounts 196 309 Increase in cash surrender value of life insurance (484) (371) (Gain) loss on sales of: Loans held for sale (32) (212) Investment securities (1,465) (50) Mortgage-related securities 4 -- Real estate owned -- 1 Provision for loan losses 150 390 Amortization of employee stock ownership plan 601 173 Changes in assets and liabilities which provided (used) cash: Origination of loans held for sale (5,105) (13,621) Loans sold in the secondary market 4,935 13,592 Accrued interest receivable 69 39 Prepaid expenses and other assets (212) (21) Accrued interest payable (41) (136) Accrued expenses 2,054 (2,970) -------- -------- Net cash provided by (used in) operating activities 2,274 (1,193) -------- -------- INVESTING ACTIVITIES: Loans originated (61,244) (71,742) Purchases of: Mortgage-related securities available for sale (9,076) (77,276) Investment securities available for sale (3,668) (6,998) Mortgage-related securities held to maturity (26,221) (3,069) Purchase of FHLB stock (489) (1,200) Proceeds from sales of real estate owned 137 150 Proceeds from sales of investment and mortgage-related securities 9,464 6,543 Principal collected on loans 58,359 71,600 Proceeds from maturities, calls, or repayments of: Investment securities available for sale 7,063 10,453 Mortgage-related securities available for sale 19,403 35,524 Mortgage-related securities held to maturity 1,104 3,972 Purchase of property and equipment (400) (92) -------- -------- Net cash used in investing activities (5,568) (32,135) -------- -------- FINANCING ACTIVITIES: Net (decrease) increase in deposit accounts (9,649) 15,478 Net increase in FHLB advances 17,006 11,283 Common stock acquired by stock benefit plan (172) -- Net increase in advances from borrowers for taxes and insurance 962 1,240 Exercise of stock options 413 182 Purchase of treasury stock (1,339) (1,009) Cash dividend (419) (400) -------- -------- Net cash provided by financing activities 6,802 26,774 -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,508 (6,554) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,190 24,623 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,698 $ 18,069 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for interest on deposits and borrowings $ 7,447 $ 8,264 Transfer of loans held for sale to loan portfolio 4,186 -- Transfers of loans receivable into real estate owned 43 231 Cash payments of income taxes 130 450
See notes to unaudited consolidated financial statements. - 4 - FIRST KEYSTONE FINANCIAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) 1. BASIS OF PRESENTATION The accompanying unaudited 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 accounting principles generally accepted in the United States of America 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 periods. The results of operations for the three and six month period ended March 31, 2004 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2004 or any other period. 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 Form 10-K for the year ended September 30, 2003. 2. INVESTMENT SECURITIES The amortized cost and approximate fair value of investment securities available for sale and held to maturity, by contractual maturities, are as follows:
March 31, 2004 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------- ---------- ---------- ----------- Available for Sale: U.S. Government and agency bonds Less than 1 year $ 3,010 $ 3 $ -- $ 3,013 1 to 5 years 10,000 16 15 10,001 5 to 10 years 3,000 15 -- 3,015 Municipal obligations Over 10 years 12,515 483 -- 12,998 Corporate bonds 1 to 5 years 5,970 650 -- 6,620 5 to 10 years 997 155 -- 1,152 Over 10 years 6,135 492 -- 6,627 Asset-backed securities 5 to 10 years 1,452 8 -- 1,460 Mutual funds 14,009 -- 49 13,960 Preferred stocks 5,474 -- 824 4,650 Other equity investments 1,755 2,610 -- 4,365 ------- ------ ------ ------- Total $64,317 $4,432 $ 888 $67,861 ======= ====== ====== ======= Held to Maturity: Municipal obligations 5 to 10 years $ 2,594 $ 57 $ -- $ 2,651 Over 10 years 667 10 -- 677 Corporate bonds Less than 1 year 2,007 58 -- 2,065 1 to 5 years 1,033 38 -- 1,071 ------- ------ ------ ------- Total $ 6,301 $ 163 $ -- $ 6,464 ======= ====== ====== =======
- 5 - The table below sets forth investment securities which have an unrealized loss position as of March 31, 2004.
Less than 12 Months 12 Months or Longer Total -------------------- -------------------- -------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ------ ------ ------ ------ ------ ------ U.S. Government and Agency Bonds $3,991 $(64) $ -- $ -- $3,991 $ (64) Preferred Securities -- -- 4,128 (824) 4,128 (824) ------ ---- ------ ----- ------ ----- Total $3,991 $(64) $4,128 $(824) $8,119 $(888) ====== ==== ====== ===== ====== =====
For all securities that are in an unrealized loss position for an extended period of time, we perform an evaluation of the specific events attributable to the market decline of the security. We consider the length of time and extent to which the security's market value has been below cost as well as the general market conditions, industry characteristics and the fundamental operating results of the issuer to determine if the decline is due to changes in interest rates, changes relating to a decline in credit quality of the issuer, or general market conditions. We also consider as part of the evaluation our intent and ability to hold the security until its market value has recovered to a level at least equal to the amortized cost. Where we determine that a security's unrealized loss is other than temporary, a realized loss is recognized in the period in which the decline in value is determined to be other than temporary.
September 30, 2003 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------- ---------- ---------- ---------- Available for Sale: U.S. Government and agency bonds 1 to 5 years $13,020 $ 35 $ 51 $13,004 5 to 10 years 4,880 139 31 4,988 Municipal obligations Over 10 years 14,112 503 -- 14,615 Corporate bonds 1 to 5 years 5,584 498 -- 6,082 5 to 10 years 2,932 458 -- 3,390 Over 10 years 9,051 332 332 9,051 Asset-backed securities 5 to 10 years 1,911 11 -- 1,922 Mutual funds 14,009 -- 57 13,952 Preferred stocks 5,474 34 524 4,984 Other equity investments 3,126 2,586 -- 5,712 ------- ------ ---- ------- Total $74,099 $4,596 $995 $77,700 ======= ====== ==== ======= Held to Maturity: Municipal obligations 5 to 10 years $ 1,545 $ 5 $ -- $ 1,550 Over 10 years 1,715 15 -- 1,730 Corporate bonds Less than 1 year 1,007 23 -- 1,030 1 to 5 years 2,048 92 -- 2,140 ------- ------ ---- ------- Total $ 6,315 $ 135 $ -- $ 6,450 ======= ====== ==== =======
- 6 - 3. MORTGAGE-RELATED SECURITIES Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:
March 31, 2004 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value -------- ---------- ---------- ----------- Available for Sale: FHLMC pass-through certificates $ 7,924 $ 156 $ 18 $ 8,062 FNMA pass-through certificates 47,817 593 118 48,292 GNMA pass-through certificates 7,849 441 -- 8,290 Collateralized mortgage obligations 47,772 521 91 48,202 -------- ------ ---- -------- Total $111,362 $1,711 $227 $112,846 ======== ====== ==== ======== Held to Maturity: FHLMC pass-through certificates $ 10,441 $ 49 $ 5 $ 10,485 FNMA pass-through certificates 17,457 147 5 17,599 Collateralized mortgage obligations 692 6 -- 698 -------- ------ ---- -------- Total $ 28,590 $ 202 $ 10 $ 28,782 ======== ====== ==== ========
The table below sets forth mortgage-related securities which have an unrealized loss position as of March 31, 2004.
Less than 12 Months 12 Months or Longer Total --------------------- --------------------- --------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ------- ---------- ------- ---------- ------- ---------- Pass-through certificates $ 9,203 $ (146) $ -- $ -- $ 9,203 $ (146) Collateralized mortgage obligations 11,898 (91) -- -- 11,898 (91) ------- ---------- ------- ---------- ------- ---------- Total $21,101 $ (237) $ -- $ -- $21,101 $ (237) ======= ========== ======= ========== ======= ==========
September 30, 2003 ---------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------- ---------- ---------- ----------- Available for Sale: FHLMC pass-through certificates $ 6,862 $ 126 $ 38 $ 6,950 FNMA pass-through certificates 45,740 412 122 46,030 GNMA pass-through certificates 13,043 596 -- 13,639 Collateralized mortgage obligations 57,961 433 357 58,037 --------- ---------- ---------- ----------- Total $ 123,606 $ 1,567 $ 517 $ 124,656 ========= ========== ========== =========== Held to Maturity: FHLMC pass-through certificates $ 478 $ 22 $ -- $ 500 FNMA pass-through certificates 2,123 40 3 2,160 Collateralized mortgage obligations 886 14 -- 900 --------- ---------- ---------- ----------- Total $ 3,487 $ 76 $ 3 $ 3,560 ========= ========== ========== ===========
- 7 - 4. LOANS RECEIVABLE Loans receivable consist of the following:
March 31, September 30, 2004 2003 --------- ------------- Real estate loans: Single-family $ 162,302 $ 166,042 Construction and land 27,479 28,975 Multi-family and commercial 66,904 59,022 Home equity and lines of credit 38,910 33,459 Consumer loans 1,380 1,438 Commercial loans 9,464 10,161 --------- ------------- Total loans 306,439 299,097 Loans in process (10,883) (10,655) Allowance for loan losses (2,084) (1,986) Deferred loan fees (47) (35) --------- ------------- Loans receivable - net $ 293,425 $ 286,421 ========= =============
The following is an analysis of the allowance for loan losses:
Six Months Ended March 31, --------------------- 2004 2003 ------ ------ Balance beginning of period $1,986 $2,358 Provisions charged to income 150 390 Charge-offs (90) (38) Recoveries 38 10 ------ ------ Total $2,084 $2,720 ====== ======
At March 31, 2004 and September 30, 2003, non-performing loans (which include loans in excess of 90 days delinquent) amounted to approximately $1,557 and $1,556, respectively. At March 31, 2004, non-performing loans primarily consisted of $711 in single-family residential mortgage loans, $374 in commercial real estate loans and $260 in commercial loans. 5. DEPOSITS Deposits consist of the following major classifications:
March 31, September 30, 2004 2003 ------------------- ------------------ Amount Percent Amount Percent -------- ------- -------- ------- Non-interest bearing $ 20,157 5.7% $ 20,917 5.8% NOW 61,856 17.5 60,221 16.6 Passbook 50,604 14.4 47,089 13.0 Money market demand 51,984 14.7 55,889 15.4 Certificates of deposit 168,355 47.7 178,489 49.2 -------- ----- -------- ----- Total $352,956 100.0% $362,605 100.0% ======== ===== ======== =====
- 8 - 6. 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. All dilutive shares consist of options the exercise price of which is lower than the market price of the common stock covered thereby at the dates presented. The calculated basic and diluted earnings per share ("EPS") is as follows:
For the Three Months Ended For the Six Months Ended March 31, March 31, ------------------------------ ------------------------------ 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Numerator $ 627 $ 693 $ 1,369 $ 1,474 Denominators: Basic shares outstanding 1,826,967 1,912,579 1,832,759 1,909,516 Effect of dilutive securities 124,393 131,603 123,002 116,849 ------------ ------------ ------------ ------------ Diluted shares outstanding 1,951,360 2,044,182 1,955,761 2,026,365 ============ ============ ============ ============ EPS: Basic $ 0.34 $ 0.36 $ 0.75 $ 0.77 Diluted $ 0.32 $ 0.34 $ 0.70 $ 0.73
7. STOCK-BASED COMPENSATION The Company applies APB Opinion No. 25 in accounting for stock options and, accordingly, no compensation expense has been recognized in the financial statements. Had the Company determined compensation expense based on the fair value at the grant date for its stock option in accordance with the fair value method in SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below.
Three Months Ended Six Months Ended March 31, March 31, ------------------------------ ------------------------------ 2004 2003 2003 2004 ------------ ------------ ------------ ------------ Net income, as reported $ 627 $ 693 $ 1,369 $ 1,474 Less: Total stock-based employee compensation expense determined under fair value method for all options, net of tax 10 18 20 37 ------------ ------------ ------------ ------------ Pro forma net income $ 617 $ 675 $ 1,349 $ 1,437 ============ ============ ============ ============ Earnings per share: Basic - as reported $ 0.34 $ 0.36 $ 0.75 $ 0.77 Basic - pro forma $ 0.34 $ 0.35 $ 0.74 $ 0.75 Diluted - as reported $ 0.32 $ 0.34 $ 0.70 $ 0.73 Diluted - pro forma $ 0.32 $ 0.33 $ 0.69 $ 0.71
-9- 8. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board ("FASB") issued FIN No. 46, "Consolidation of Variable Interest Entities." In December 2003, the FASB issued a revision of FIN 46 (FIN 46(R)). The Interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company has participated in the issue of trust preferred securities through trusts established for such purpose. These trusts are subject to the requirements of FIN No. 46 and FIN No. 46(R). Effective December 31, 2003, the Company adopted this statement requiring the Company to deconsolidate the trust preferred security trusts. The Company previously classified its trust preferred securities after total liabilities and before stockholders' equity on the Consolidated Statement of Financial Condition. Under the provisions of FIN No. 46 and FIN No. 46(R), these securities were reclassified as borrowed funds effective December 31, 2003. Additionally, the related dividends were reclassified from non-interest expense and included in interest expense in the Consolidated Statement of Income. Reclassifications of prior period amounts were made to conform to this presentation. The adoption of FIN No. 46 and FIN No. 46(R) did not have a material impact on the Company's financial statements. However, the effect of reclassifying dividends from non-interest expense decreased the Company's net interest margin for the second quarter of fiscal 2004 by approximately 17 basis points from 2.33% to 2.16%. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement requires that certain financial instruments, which previously could be designated as equity, now be classified as liabilities on the balance sheet. The adoption of SFAS No. 150 did not have a material impact on the Company's financial statements. In March 2004, the FASB Emerging Issues Task Force reached a consensus regarding EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." The consensus provides guidance for evaluating whether an investment is other-than-temporarily impaired. The EITF 03-1 guidance for determining other-than-temporary impairment will be effective beginning with the third quarter of 2004. The Company is currently evaluating the impact that EITF 03-1 may have on its financial statements. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to historical information, this Quarterly Report on Form 10-Q includes certain "forward-looking statements" based on management's current expectations. The Company's actual results could differ materially, as defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, from management's expectations. Such forward-looking statements include statements regarding management's current intentions, beliefs or expectations as well as the assumptions on which such statements are based. These forward-looking statements are subject to significant business, economic and competitive uncertainties and contingencies, many of which are not subject to the Company's control. Stockholders and potential stockholders are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company's loan and investment portfolios, changes in accounting principles, policies or guidelines, availability and cost of energy resources and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and fees. The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results that occur subsequent to the date such forward-looking statements are made. GENERAL First Keystone Financial, Inc. is a Pennsylvania corporation and sole shareholder of First Keystone Bank, a federally chartered stock savings bank (the "Bank"), which converted to the stock form of organization in January 1995. The Bank is a community oriented bank emphasizing customer service and convenience. The Bank's primary business is attracting deposits from the general public and using those funds together with other available sources of funds, primarily borrowings, to originate loans. The Bank's management remains focused on its long-term strategic plan to continue to shift its loan composition toward commercial business, construction and home equity loans and lines of credit in order to provide a higher yielding portfolio with generally shorter terms. COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND SEPTEMBER 30, 2003 Total assets of the Company increased $11.2 million or 2.0% from $559.6 million at September 30, 2003 to $570.8 million at March 31, 2004. Mortgage-related securities held to maturity increased to $28.6 million from $3.5 million at September 30, 2003 mainly due to the Company's strategy to reinvest the cash flows from the loan and securities portfolio into the held to maturity portfolio in order to minimize the effect of price volatility to the Company's financial statements as interest rates increase. Loans receivable increased to $293.4 million from $286.4 million at September 30, 2003 reflecting the Company's strategy of increasing its investment in higher yielding assets. The increase in loans receivable was primarily the result of increases in multi-family and commercial real estate loans and home equity loans and lines of credit partially offset by a decline in single-family residential loans. Loans held for sale decreased $4.0 million due to management's reevaluation of the Company's asset liability position and decision to retain in its residential loan portfolio $4.2 million of the loans originally intended to be sold in the secondary market. -11- Total liabilities increased $10.4 million or 2.0% from $527.2 million at September 30, 2003 to $537.7 million at March 31, 2004 primarily due to increases in borrowings partially offset by a decrease in deposits. Deposits decreased $9.6 million or 2.7% from $362.6 million at September 30, 2003 to $353.0 million at March 31, 2004. The decrease is attributable to a $10.1 million, or 5.7%, decline in certificates of deposits reflecting the Company's strategy of conservatively pricing the Company certificate of deposits. At March 31, 2004, core deposits (which consist of passbook, money market, NOW and non-interest bearing accounts) slightly increased to $184.6 million or 52.3% of the Company's deposit portfolio from $184.1 million or 50.8% of total deposits at September 30, 2003. Borrowings increased $17.0 million, or 12.5%, as a result of advances from the Federal Home Loan Bank funding asset growth. Stockholders' equity increased by $703,000, or 2.2 %, to $33.1 million due to net income of $1.4 million and an increase in the accumulated other comprehensive income partially offset by the cost of repurchasing 51,092 shares of common stock and dividends paid of $419,000. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2004 AND 2003 NET INCOME. Net income for the quarter ended March 31, 2004 was $627,000, or $.32 per diluted share, a decrease of $66,000, or 9.5%, as compared to net income of $693,000, or $.34 per diluted share, for the quarter ended March 31, 2003. Net income for the six months ended March 31, 2004 was $1.4 million, or $.70 per diluted share, a decrease of $105,000, or 7.1%, as compared to $1.5 million, or $.73 per diluted share, for the same period in 2003. NET INTEREST INCOME. Net interest income decreased $209,000, or 7.0%, to $2.8 million and $393,000, or 6.5%, to $5.7 million for the three and six months ended March 31, 2004, respectively compared to the same periods in 2003. Such decreases were primarily due to decreases in interest income of $534,000, or 7.7%, and $1.1 million, or 7.9%, for the three and six months ended March 31, 2004, respectively, which were partially offset by a $325,000, or 8.1%, and a $722,000, or 8.9%, decrease in interest expense during such periods. The average balance of interest-earning assets increased $32.8 million and $35.8 million for the three and six months ended March 31, 2004, respectively, as compared to the same periods in 2003. Calculated on a tax-equivalent basis, the weighted average yield earned on interest-earning assets for the three months ended March 31, 2004 decreased 75 basis points to 4.93% compared to the 2003 period and 83 basis points to 5.03% for the six months ended March 31, 2004. In addition, net interest expense was affected by an increase in the average balance of interest-bearing liabilities of $35.1 million and $36.6 million for the three and six months ended March 31, 2004, respectively, as compared to the same periods in 2003. For the three months ended March 31, 2004, the weighted average rate paid on such liabilities decreased 46 basis points to 2.81% from 3.27% for the same period in the prior fiscal year and 51 basis points to 2.85% for the six months ended March 31, 2004 as compared to 3.36% for the six months ended March 31, 2003. The decline in net interest income reflected the continued interest rate compression being experienced by the Company as the weighted average yield on interest-earning assets continues to decrease more rapidly than the cost of interest-bearing liabilities The following table presents the average balances for various categories of assets and liabilities, and income and expense related to those assets and liabilities for the three months and six months ended March 31, 2004 and 2003. The adjustment of tax exempt securities to a tax equivalent yield in the table below may be considered to include non-GAAP financial information. Management believes that it is a standard practice in the banking industry to present net interest margin, net interest rate spread and net interest income on a fully tax equivalent basis when a significant proportion of interest-earning assets are tax-free. Therefore, management believes, these measures provide useful information to investors by allowing them to make peer comparisons. A GAAP reconciliation is included below. -12-
FOR THE THREE MONTHS ENDED ----------------------------------------------------------------------------------- MARCH 31, 2004 MARCH 31, 2003 ---------------------------------------- -------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost Balance Interest Cost ---------- ---------- ---------- ---------- ---------- ---------- Interest-earning assets: Loans receivable(1) (2) $ 292,437 $ 4,378 5.99% $ 289,419 $ 4,783 6.61% Mortgage-related securities(2) 136,784 1,296 3.79 109,511 1,192 4.35 Investment securities(2) 87,313 836 3.83 82,547 1,066 5.17 Other interest-earning assets 13,544 17 0.50 15,762 30 0.76 ---------- ---------- ---------- ---------- Total interest-earning assets 530,078 $ 6,527 4.93 497,239 $ 7,071 5.68 ---------- ---------- ---------- ---------- ---------- ---------- Non-interest-earning assets 33,176 29,395 ---------- ---------- Total assets $ 563,254 $ 526,634 ========== ========== Interest-bearing liabilities: Deposits $ 344,826 $ 1,489 1.73 $ 338,640 $ 1,866 2.20 FHLB advances and other borrowings 156,277 1,762 4.51 127,305 1,707 5.36 Junior subordinated debentures 21,581 415 7.69 21,617 418 7.73 ---------- ---------- ---------- ---------- Total interest-bearing liabilities 522,684 3,666 2.81 487,562 3,991 3.27 ---------- ---------- ---------- ---------- ---------- ---------- Interest rate spread 2.12% 2.41% ========== ========== Non-interest-bearing liabilities 8,497 6,068 ---------- ---------- Total liabilities 531,181 493,630 Stockholders' equity 32,073 33,004 ---------- ---------- Total liabilities and stockholders' equity $ 563,254 $ 526,634 ========== ========== Net interest-earning assets $ 7,394 $ 9,677 ========== ========== Net interest income $ 2,861 $ 3,080 ========== ========== Net interest margin(3) 2.16% 2.48% ========== ========== Ratio of average interest-earning assets to average interest-bearing liabilities 101.41% 101.98% ========== ==========
- -------------- (1) Includes non-accrual loans. (2) Includes assets classified as either available for sale or held for sale. (3) Net interest income divided by interest-earning assets. -13-
FOR THE SIX MONTHS ENDED ----------------------------------------------------------------------------------- MARCH 31, 2004 MARCH 31, 2003 ---------------------------------------- -------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost Balance Interest Cost ---------- ---------- ---------- ---------- ---------- ---------- Interest-earning assets: Loans receivable(1) (2) $ 291,577 $ 8,823 6.05% $ 289,690 $ 9,834 6.79% Mortgage-related securities(2) 132,174 2,525 3.82 100,388 2,302 4.59 Investment securities(2) 90,557 1,876 4.14 83,124 2,176 5.24 Other interest-earning assets 12,897 35 0.54 18,157 85 0.94 ---------- ---------- ---------- ---------- Total interest-earning assets 527,205 $ 13,259 5.03 491,359 $ 14,397 5.86 ---------- ---------- ---------- ---------- ---------- ---------- Non-interest-earning assets 33,733 29,997 ---------- ---------- Total assets $ 560,938 $ 521,356 ========== ========== Interest-bearing liabilities: Deposits $ 348,651 $ 3,076 1.76 $ 335,175 $ 3,833 2.29 FHLB advances and other borrowings 149,874 3,502 4.67 126,759 3,448 5.44 Junior subordinated debentures 21,585 828 7.67 21,622 847 7.83 ---------- ---------- ---------- ---------- Total interest-bearing liabilities 520,110 7,406 2.85 483,556 8,128 3.36 ---------- ---------- ---------- ---------- ---------- ---------- Interest rate spread 2.18% 2.50% ========== ========== Non-interest-bearing liabilities 8,962 5,016 ---------- ---------- Total liabilities 529,072 488,572 Stockholders' equity 31,866 32,784 ---------- ---------- Total liabilities and stockholders' equity $ 560,938 $ 521,356 ========== ========== Net interest-earning assets $ 7,095 $ 7,803 ========== ========== Net interest income $ 5,853 $ 6,269 ========== ========== Net interest margin(3) 2.22% 2.55% ========== ========== Ratio of average interest-earning assets to average interest-bearing liabilities 101.36% 101.61% ========== ==========
- ---------------- (1) Includes non-accrual loans. (2) Includes assets classified as either available for sale or held for sale. (3) Net interest income divided by interest-earning assets. -14- Although management believes that the above mentioned non-GAAP financial measures enhance investor's understanding of the Company's business and performance, these non-GAAP financials measures should not be considered an alternative to GAAP. The reconciliation of these non-GAAP financials measures from GAAP to non-GAAP is presented below.
FOR THE THREE MONTHS ENDED ------------------------------------------------------ MARCH 31, 2004 MARCH 31, 2003 ------------------------- ------------------------ AVERAGE AVERAGE (Dollars in thousands) INTEREST YIELD/COST INTEREST YIELD/COST ---------- ---------- ---------- ---------- Investment securities - nontaxable $ 748 3.43% $ 968 4.69% Tax equivalent adjustments 88 98 ---------- ---------- Investment securities - nontaxable to a taxable equivalent yield $ 836 3.83% $ 1,066 5.17% ========== ========== Net interest income $ 2,773 $ 2,982 Tax equivalent adjustment 88 98 ---------- ---------- Net interest income, tax equivalent $ 2,861 $ 3,080 ========== ========== Net interest rate spread, no tax adjustment 2.05% 2.34% Net interest margin, no tax adjustment 2.09% 2.40%
FOR THE SIX MONTHS ENDED ------------------------------------------------------ MARCH 31, 2004 MARCH 31, 2003 ------------------------- ------------------------ AVERAGE AVERAGE (Dollars in thousands) INTEREST YIELD/COST INTEREST YIELD/COST ---------- ---------- ---------- ---------- Investment securities - nontaxable $ 1,692 3.74% $ 1,969 4.74% Tax equivalent adjustments 184 207 ---------- ---------- Investment securities - nontaxable to a taxable equivalent yield $ 1,876 4.14% $ 2,176 5.24% ========== ========== Net interest income $ 5,669 $ 6,062 Tax equivalent adjustment 184 207 ---------- ---------- Net interest income, tax equivalent $ 5,853 $ 6,269 ========== ========== Net interest rate spread, no tax adjustment 2.11% 2.41% Net interest margin, no tax adjustment 2.15% 2.47%
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level believed by management to cover all known and inherent losses in the loan portfolio which are both probable and reasonably estimable. Management's analysis includes consideration of the Company's 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 loans held for sale portfolios. The Company's provision for loan losses decreased to $75,000 for the three months ended March 31, 2004 as compared to $195,000 for the same period in 2003. For the six months ended March 31, 2004 and 2003, the provision for loan losses amounted to $150,000 and $390,000, respectively. -15- At March 31, 2004, non-performing assets decreased slightly to $2.9 million, or ..51% to total assets, from $3.0 million at September 30, 2003. The coverage ratio, which is the ratio of the allowance for loan losses to non-performing assets, was 71.9% and 66.7% at March 31, 2004 and September 30, 2003, respectively. Included in non-performing assets is $1.4 million of real estate owned consisting primarily of a $1.1 million commercial real estate property. This commercial real estate property is a 25% participation interest in an 18-hole golf course and a golf house located in Avondale, Pennsylvania. The golf facility is fully operational and continues to generate revenues. However, in connection with the operations of the facility, the Company incurred its representative share of expenses totaling $75,000 and $150,000 for the three and six months ended March 31, 2004, respectively. In April 2004, the lead lender has agreed on terms to sell the property and is in the process of finalizing an agreement of sale. Presently, the Bank expects no further loss upon the sale of this property. Management continues 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. NON-INTEREST INCOME. Non-interest income increased $1.6 million to $2.2 million for the three months ended March 31, 2004 from the same period last year. The increase was primarily the result of a $1.0 million increase in the gain on sales of investment securities and a $601,000 increase in other non-interest income. The gain on the sales of investment securities reflected primarily the proceeds from the sale of exchange of securities of entities which were acquired in which the Company had an equity interest. The increase in other non-interest income was a result of the Company recognizing income of $550,000 in connection with a repayment of a commercial real estate loan. Under the terms of the loan, certain additional contingent payments were due upon repayment of the loan in full. Non-interest income increased $2.1 million to $3.2 million for the six months ended March 31, 2004 by comparison to the same period last year. Increases in income of $1.4 million and $818,000 were recognized from the sale of investment and mortgage-related securities and other non-interest income, respectively, partially offset by a $180,000 decrease in the gain on sales of loans held for sale. NON-INTEREST EXPENSE. Non-interest expense for the quarter ended March 31, 2004 increased $1.6 million or 63.3%, from the same period last year primarily due to a $1.4 million increase in salaries and employee benefits. The increase in salaries and employee benefits was due to an additional $598,000 benefit expense relating to the funding of a non-qualified supplemental retirement plan for certain executive officers and the prepayment of the outstanding loan balance on the original loan to the Company's employee stock ownership plan ("ESOP") which resulted in an additional $452,000 expense. The partial funding of the retirement benefits and prepayment of the loan for the Company's ESOP will decrease the cost of these benefit plans over the next several years. The increase in salary and employee benefits also reflected merit increases, the hiring of additional personnel and higher employee benefit costs. In addition, the increase in non-interest expense was also due to increases of $104,000, $73,000 and $66,000 in professional fees, real estate operations and other non-interest expense, respectively. Non-interest expense for the six months ended March 31, 2004 increased by $2.0 million, or 40.1%, in comparison to the same period in the prior year. INCOME TAX EXPENSE. Income tax expense increased $8,000 to $146,000 for the three months ended March 31, 2004 compared to the same period in 2003 while decreasing $2,000 to $355,000 for the six months ended March 31, 2004. The increase for the second quarter of fiscal 2004 resulted from the reduction in tax-free income as compared to the same period in 2003. -16- CRITICAL ACCOUNTING POLICIES. The Company has identified the evaluation of the allowance for loan losses as a critical accounting estimate where amounts are sensitive to material variation. Critical accounting estimates are significantly affected by management judgment and uncertainties and there is a likelihood that materially different amounts would be reported under different, but reasonably plausible, conditions or assumptions. The allowance for loan losses is considered a critical accounting estimate because there is a large degree of judgment in (i) assigning individual loans to specific risk levels (pass, special mention, substandard, doubtful and loss), (ii) valuing the underlying collateral securing the loans, (iii) determining the appropriate reserve factor to be applied to specific risk levels for criticized and classified loans (special mention, substandard, doubtful and loss) and (iv) determining reserve factors to be applied to pass loans based upon loan type. To the extent that loans change risk levels, collateral values change or reserve factors change, the Company may need to adjust its provision for loan losses which would impact earnings. Management has discussed the development and selection of this critical accounting estimate with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the Company's disclosure relating to it in this Management's Discussion and Analysis. Management believes the allowance for loan losses at March 31, 2004 was at a level to cover the known and inherent losses in the portfolio that were both probable and reasonable to estimate. In the future, management may adjust the level of its allowance for loan losses as economic and other conditions dictate. Management reviews the allowance for loan losses not less than quarterly. 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, repayments, prepayments 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, 2004, the Company had short-term borrowings (due within one year or currently callable by the Federal Home Loan Bank ("FHLB")) outstanding of $135.0 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 March 31, 2004, total approved loan commitments outstanding amounted to $6.7 million, not including loans in process. At the same date, commitments under unused lines of credit amounted to $30.3 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2004 totaled $110.1 million. Based upon its historical experience, management believes that a significant portion of maturing deposits will remain with the Company. As of March 31, 2004, the Bank had regulatory capital which was in excess of applicable requirements. The Bank is required under applicable federal banking 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 March 31, 2004, the Bank had tangible capital and core capital equal to 8.0% of adjusted total assets and total capital equal to 14.9% of risk-weighted assets. -17- INVESTMENT SECURITIES. The Company reviews the investment and mortgage-related securities portfolios on a periodic basis to specifically review individual securities for any meaningful decline in market value below amortized cost. The analysis addresses all securities whose fair value is significantly below amortized cost at the time of the analysis, with additional emphasis placed on securities whose fair value has been below amortized cost for an extended period of time. As part of the periodic review process, the Company utilizes the expertise of outside professional asset managers who provide an updated assessment of each issuer's current credit situation based on recent issuer activities, such as quarterly earnings announcements or other pertinent financial news for the issuer, recent developments in a particular industry, economic outlook for a particular industry and rating agency actions. In addition to issuer-specific financial information and general economic data, the Company also considers the ability and intent of its operations to hold a particular security to maturity or until the market value of the security recovers to a level in excess of the carrying value. Of the securities in a unrealized loss position, there is only one security in the portfolio with an unrealized loss position longer than 12 months with a fair value of $4.1 million and a cost of $5.0 million. The preferred security is rated AAA with an unrealized loss of $846,000. The preferred security is at a loss because of the low interest rate environment. The Company has no current plans to dispose of this security. The Company believes that all the securities with an unrealized loss are only temporarily impaired. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of the Company's asset and liability management policies, see "Management's Discussion and Analysis of Financial Condition and Results of Operation" in the Company's Form 10-K for the year ended September 30, 2003. The Company utilizes reports prepared by the Office of Thrift Supervision ("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 up and 100 points down, in 100 basis point increments. -18- 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 March 31, 2004.
Net Portfolio Value (Dollars in thousands) - ----------------------------------------------------------------------------------------------- Changes in Net Rates in Dollar Percentage Portfolio Value As Basis Points Amount Change Change a % of Assets Change - ------------ -------- --------- ---------- ------------------ -------- 300 $ 28,013 $ (21,399) (43)% 5.11% (333) bp 200 36,934 (12,478) (25) 6.58 (186) bp 100 44,393 (5,019) (10) 7.74 (70) bp 0 49,412 -- -- 8.44 -- (100) 47,226 (2,186) (4) 8.00 (44) bp
As of March 31, 2004, the Company's NPV was $49.4 million or 8.44% of the market value of assets. Following a 200 basis point increase in interest rates, the Company's "post shock" NPV was $36.9 million or 6.58% of the market value of assets. The change in the NPV ratio or the Company's sensitivity measure was (1.86) %. As of December 31, 2003, the Company's NPV was $51.4 million or 9.02% of the market value of assets. Following a 200 basis point increase in interest rates, the Company's "post shock" NPV was $37.9 million or 6.95% of the market value of assets. The change in the NPV ratio or the Company's sensitivity measure was (2.07) %. ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations and are operating in an effective manner. No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. -19- PART II OTHER INFORMATION Item 1. Legal Proceedings No material changes in the legal proceedings previously disclosed in section Item 3 of the Company's Annual Report on Form 10-K for the year ended September 30, 2003. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities (a) - (d) Not applicable (e) The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of common stock of the Company during the indicated periods.
Total Number of Shares Total Number Average Purchased as Part of Maximum Number of Shares of Shares Price Paid Publicly Announced that May Yet Be Period (1) Purchased per Share Plan Purchased Under the Plan - ------------------- ------------ ---------- ---------------------- ------------------------ January 1-31, 2004 -- -- -- 67,224 February 1-29, 2004 6,932 $ 27.10 6,932 60,292 March 1-31, 2004 3,960 $ 27.10 3,960 56,332 ------ ------- Total 10,892 $ 27.10 10,892 56,332 ====== ========== ======= =======
------------------------- (1) On January 31, 2003, the Company announced its current program to repurchase up to 101,000 of shares of common stock of the Company. The program has an expiration date of July 31, 2004. 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 -20- Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits Exhibit Description 10.17 First Keystone Bank Supplemental Executive Retirement Plan 31.1 Certification of the Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (b) Reports on Form 8-K Date Item and Description ---------- -------------------- 02/03/2004 Item 12. On February 2, 2004, the Company issued a press release reporting its earnings for the quarter ended December 31, 2003. -21- 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 17, 2004 By: /s/ Donald S. Guthrie ------------------------------------ Donald S. Guthrie Chairman and Chief Executive Officer Date: May 17, 2004 By: /s/ Rose M. DiMarco ------------------------------------ Rose M. DiMarco Chief Financial Officer -22- EX-10.17 2 w97571exv10w17.txt FIRST KEYSTONE BANK RETIREMENT PLAN EXHIBIT 10.17 FIRST KEYSTONE BANK SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN This First Keystone Bank ("Bank" or the "Employer") Supplemental Executive Retirement Plan ("Plan") is adopted effective March 31, 2004. The purpose of this Supplemental Executive Retirement Plan (hereinafter referred to as the "Plan") is to provide supplemental retirement and death benefits for certain key employees of the Bank, and any affiliated or subsidiary corporations of the Bank designated by the Board. It is intended that the Plan will aid in retaining and attracting employees of exceptional ability by providing them with these benefits. ARTICLE I - DEFINITIONS For purposes hereof, unless otherwise clearly apparent from the context, the following phrases and terms shall have the indicated meanings: 1.1 Beneficiary. A person or entity designated in accordance with Article IV of this Plan to receive benefits upon the death of a Participant. 1.2 Change in Control of the Corporation. Change in Control of the Corporation shall mean a change in control of a nature that would be required to be reported in response to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not any security of the Corporation is registered under the Exchange Act; provided that, without limitation, such Change in Control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding securities (provided that any of the Employer's benefit plans (including for these purposes, benefit plans of the Corporation) are exempt from the 20% limitation); or (ii) during any period of three consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. 1.3 Corporation. "Corporation" means First Keystone Financial, Inc. the parent holding company of the Bank. 1.4 Early Retirement Date. "Early Retirement Date" means the date on which the Participant terminates employment with the Employer if it occurs after the first day of the month coincident with or next following a Participant's attainment of age fifty (50) and completion of twelve (12) Years of Credited Service, but prior to his Normal Retirement Date. "Early Retirement Date" shall also mean the date on which the Participant terminates employment with the Employer for any reason if at the time of such termination, the sum of the Participant's Years of Credited Service (including partial years) and age equals at least sixty-two (62). 1.5 Employer. For purposes of this Plan, the Employer is First Keystone Bank, a federally chartered savings bank. 1.6 ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.7 Normal Retirement Date. The date on which a Participant has attained sixty-five (65) years of age. 1.8 Participant. An employee of the Employer who is eligible to participate in the Plan and approved by the Board of Directors of the Employer who is a member of a select group of management or highly compensated employees within the meaning of section 201(2) of ERISA. 1.9 Plan. This Supplemental Executive Retirement Plan as adopted by the Employer and as may be hereafter amended. 1.10 Plan Committee. A committee of not less than three (3) members of the Board of Directors of the Employer, which shall be comprised of the compensation committee of the Employer. 1.11 Retirement. Retirement means a Participant's separation from employment with the Employer at the Participant's Early Retirement Date or Normal Retirement Date. 1.12 Year of Credited Service. Year of Credited Service means a year in which an employee works one thousand (1,000) or more hours. ARTICLE II - ELIGIBILITY, PARTICIPATION AND VESTING 2.1 Conditions of Eligibility. Eligibility to become a Participant in this Plan will be determined by the Board of Directors of the Employer. Participants will be chosen from a select group of management or highly compensated employees within the meaning of section 201(2) of ERISA. Such determination shall be conclusive and binding upon all persons. 2.2 Commencement of Participation. The Employer or Plan Committee shall notify each employee of his or her eligibility to participate in this Plan. Eligible employees shall become Participants in this Plan as of the effective date hereof or upon becoming eligible to participate in this Plan, as the case may be. Each employee who becomes a Participant in this Plan shall complete such form(s) as are reasonably required by the Plan Committee for Plan participation. Such form(s) shall include, but not be limited to, information related to the Participant's Account distribution method, death benefit distribution method and Beneficiary designation. Participant shall submit such form(s) to the Plan Committee within thirty (30) days of the date on which the Plan is adopted or the date on which an Employee is first eligible to participate within the Plan. 2.3 Additional Compensation. A Participant shall receive the benefits provided for herein in addition to any compensation paid to or benefits provided to the Participant by the Bank or the Corporation. Except as otherwise provided herein, nothing in this Plan shall be construed as limiting, varying or reducing any provision or benefit to a Participant, a Participant's estate or Beneficiaries pursuant to any employment agreement, any retirement plan, including any qualified pension or profit sharing plan, any health, disability or life insurance policies or any other agreement between the Employer and the Participant. 2.4 Vesting. Upon attainment of Participant's Early Retirement Date or Normal Retirement Date, such Participant shall be one hundred percent (100%) vested in his Early Retirement Benefit or Normal Retirement Benefit, as applicable. Notwithstanding anything to the contrary, any amounts credited to a Participant's Account that are not vested at the time of his or her termination of employment with the Employer shall be forfeited and returned to the Employer. ARTICLE III - RETIREMENT BENEFITS 3.1 Account Establishment. The Administrator shall establish and maintain a bookkeeping account in the name of each Participant. Participant's Account shall be credited with an Employer contribution(s), if any, on a calendar year basis, as provided for below, and a per annum interest rate as determined by the Plan Committee annually. For the initial Plan year the rate shall be five percent (5.0%). Such rate shall remain in effect in the event the Plan Committee fails to elect a subsequent rate for any successive Plan year. The Employer shall notify each Participant within 60 days of their initial plan participation or within 60 days after the calendar year of each Participant's account balances, amounts credited to the account and crediting rate. Each Participant's Account shall be reduced by any completed distributions, any federal, state and/or local tax withholding and any social security withholding tax as may be required by law. 3.2 Employer Contribution. The Employer may make an Employer Contribution to the Account(s) of some or all Employer designated Participants. The Plan Committee, in collaboration with the Employer, will authorize and facilitate the periodic crediting to a Participant's Account of an Employer Contribution and aforementioned annual interest rate, as applicable. Such crediting may fluctuate in both amount and frequency as determined to be appropriate by the Plan Committee and Bank. 3.3 Retirement Benefit. If a Participant retires from full-time employment with the Employer after the Normal Retirement Date or avails himself or herself of the Early Retirement Date option, the Employer shall pay to the Participant an annual retirement benefit, determined pursuant to Paragraph 3.4 hereof and payable pursuant to the provisions of Paragraph 3.5 hereof. 3.4 Determination of Normal Retirement Benefit or Early Retirement Benefit. a) A Participant's Normal Retirement Benefit shall be an amount determined as of such Participant's Normal Retirement Date, representing the Participant's Account balance; or b) A Participant's Early Retirement Benefit shall be an amount determined as of such Participant's Early Retirement Date, representing the Participant's Account balance. 3.5 Payment of Normal Retirement Benefit and Early Retirement Benefit. a) Subject to Participant's single lump sum distribution election, as provided for herein below, the Normal Retirement Benefit or Early Retirement Benefit, as applicable, payable to a Participant upon such Participant's retirement from full time employment with Employer, shall be payable in the form of substantially equal annual payments ("Annual Payments") for a time period not to exceed fifteen (15) consecutive years beginning with the first day of the first full calendar month following such retirement. b) The Normal Retirement Benefit or Early Retirement Benefit distribution, as applicable, pursuant to this section shall be facilitated in the following manner: the amount of the substantially equal payments described above shall be determined by multiplying the Participant's Retirement Account by a fraction, the denominator of which in the first year of payment equals the number of years over which benefits are to be paid, and the numerator of which is one (1). c) The amounts of the payments for each succeeding year shall be determined by multiplying the Participant's Retirement Account as of the applicable anniversary of the Participant's Retirement Date by a fraction, the denominator of which equals the number of remaining years over which benefits are to be paid, and the numerator of which is one (1). Annual interest crediting to the Participant's account shall continue to be credited to Participant's Account during the Participant's continuation of an Account balance. d) Notwithstanding anything to the contrary or a prior election of a Participant, Participant may elect to receive their Normal Retirement Benefit or Early Retirement Benefit, as applicable, in a single lump sum distribution as soon as administratively feasible following the Participant's Retirement through the submission of such election to the Plan Committee at least one (1) full calendar year prior to the Participant's Normal Retirement Date or Early Retirement Date. 3.6 Change in Control Benefit. Upon Participant's cessation from full-time employment with the Employer within two (2) years after the occurrence of a Change in Control of the Corporation and prior to attaining Normal Retirement Date, Employer will pay to Participant an amount equal to five (5) times the Participant's base salary as of the date of cessation of employment, as determined by the Employer, minus, dollar for dollar, the Participant's Account balance as of the effective date of a Change in Control of the Corporation. Payment of benefits under this paragraph shall be made in a single lump sum payment within five (5) days of Participant's cessation of employment. ARTICLE IV-DEATH BENEFITS 4.1 Participant's Death Following Early or Normal Retirement. If a Participant dies following Retirement from full-time employment with the Employer, but prior to the receipt of their final Annual Payment (not to exceed fifteen (15) Annual Payments), the Employer shall pay to the Beneficiary or Beneficiaries designated in writing by such Participant (or to the Participant's estate if the Participant fails to so designate a Beneficiary or Beneficiaries) the remaining retirement benefit Annual Payments until the Participant and such Beneficiary or Beneficiaries or estate have received all remaining Annual Payments (not to exceed fifteen (15) Annual Payments). 4.2 Participant's Death Prior to Early or Normal Retirement. If a Participant dies after the Early or Normal Retirement Date but prior to retirement from full-time employment with the Employer, the Employer shall pay to the Beneficiary or Beneficiaries designated in writing by such Participant (or to the Participant's estate if the Participant fails to so designate a Beneficiary or Beneficiaries) an amount equal to seven (7) times the Participant's base salary, as determined by the Employer, minus, dollar for dollar, the Participant's Account balance as of the date of Participant's death. This pre-retirement death benefit shall be payable in a single lump sum distribution to the Participant's Beneficiary or Beneficiaries (or to the Participant's estate if the Participant fails to so designated a Beneficiary or Beneficiaries) as soon as administratively feasible following Participant's death. 4.3 Death of Beneficiary. In the event of death of a Beneficiary who is receiving an Early or Normal Retirement Benefit in installments pursuant to Paragraph 4.1 or lump sum distribution pursuant to Paragraph 4.2, such benefit to which such Beneficiary was entitled at the time of such Beneficiary's death shall continue to be payable to the Beneficiary or Beneficiaries, designated in writing by such Beneficiary, on a form to be submitted by such Beneficiary to the Plan Committee (or to the Beneficiary's estate if the Beneficiary fails to so designate a beneficiary or beneficiaries). ARTICLE V - BENEFICIARIES 5.1 Beneficiary Designations. A Participant shall designate a beneficiary by filing a written designation with the Plan Committee. A Participant may revoke or modify his or her Beneficiary designation at any time by filing a new designation. However, designations will only be effective if signed by the Participant and received by the Plan Committee during the Participant's lifetime. The Participant's Beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Participant, or if the Participant names a spouse as Beneficiary and the marriage is subsequently dissolved. If the Participant dies without a valid Beneficiary designation, all payments shall be made to the Participant's estate. 5.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Bank may require proof of incompetence, minority or guardianship as it may deem appropriate prior to the distribution of the benefit. Such distribution shall completely discharge the Bank form all liability with respect to such benefit. ARTICLE VI - GENERAL LIMITATIONS All benefits payable under this Plan shall be subject to the following limitations: 6.1 Termination for Cause. Notwithstanding any provision of this Plan to the contrary, the Bank shall not pay any benefit under this Plan, if the Bank terminates a Participant's employment for cause. Termination of a Participant's employment for "Cause" shall mean termination because of personal dishonesty by the Participant in the performance of his duties which results in demonstrable material injury to the Bank, willful misconduct by the Participant which remains uncured 15 days following the giving of written notice thereof to the Participant, breach by the Participant of a fiduciary duty to the Bank involving personal profit, intentional failure to perform stated duties following the giving of written notice thereof to the Participant, willful violation of any law, rule or regulation (other than traffic violations or similar offences) or final cease-and-desist order or material breach of any provision of the Plan. For purposes of this paragraph, no act or failure to act on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant's action or omission was in the best interest of the Bank. 6.2 Removal. Notwithstanding any provision of this Plan to the contrary, the Bank shall not pay any benefit under this Plan if the Participant is subject to a final removal or prohibition order issued by an appropriate federal banking agency pursuant to Section 8(e) of the Federal Deposit Insurance Act ("FDIA"). ARTICLE VII - PLAN ADMINISTRATION 7.1 Plan Committee. This Plan and all matters relating hereto shall be administered by the Plan Committee. The Plan Committee will interpret the provisions of this Plan and shall determine all questions arising in the administration, eligibility, interpretation and application of this Plan. Any such determination by the Plan Committee shall be conclusive and binding on all persons and shall be consistently and uniformly applied to all persons similarly situated. The Plan Committee shall engage the services of such independent actuaries and administrative personnel as it deems appropriate to administer the Plan. 7.2 Claim. Any person claiming a benefit, requesting an interpretation or ruling under this Plan, or requesting information under the Plan shall present the request, in writing, to the Plan Committee which shall respond in writing as soon as practicable. 7.3 Denial of Claim. If the claim or request is denied, the written notice of denial shall state the reason for denial, with specific reference to the Plan provisions on which the denial is based, the claimant's rights, if any under applicable provisions of ERISA and a description of any additional material or information required. 7.4 Review of Claim. Any person whose claim or request is denied or has not received a response within 90 days may (within 60 days thereafter) request review by notice given in writing to the Plan Committee. Such request for review must state the specific reasons, including any Plan provisions, upon which said request for review is based. The claim or request shall be reviewed by the Plan Committee. 7.5 Final Decision. The decision on review shall normally be made within 60 days. If an extension of time is required, the claimant shall be notified and the time limit shall be 120 days. The decision shall be in writing and shall state the reason and the relevant Plan provisions. All decisions on review shall be final and bind all parties concerned subject to the applicable provisions of ERISA. ARTICLE VIII - PARTICIPANT RIGHTS 8.1 Participants Rights. The rights of a Participant or a Participant's Beneficiaries to benefits under this Plan shall be solely those of an unsecured creditor of the Employer. Any insurance policy or other asset acquired or held by, or on behalf of, the Employer or funds allocated by the Employer in connection with the liabilities assumed by the Employer pursuant to the Plan shall not be deemed to be held under any trust for the benefit of a Participant or Participant's Beneficiaries or to be security for the performance of the Employer's obligations pursuant hereto, but shall be and remain a general asset of the Employer. 8.2 Spendthrift Provision. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be non-assignable and non-transferable. No part of the amounts payable shall, prior to actual payments, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor by transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 8.3 Plan Not An Employment Agreement. This Plan shall not be deemed to constitute an employment agreement between the parties hereto nor shall any provision hereof restrict the right of the Employer to discharge a Participant as an employee of the Employer or restrict a Participant's right to terminate his employment. 8.4 Protective Provisions. A Participant will cooperate with the Employer by furnishing any and all information requested by the Employer in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Employer may deem necessary and taking such other action as may be requested by the Employer. If a Participant makes any material misstatement of information or nondisclosure of medical history, then a Participant shall not be considered as having been a Participant in the Plan. ARTICLE IX - MISCELLANEOUS 9.1 Termination of Plan The Employer, upon written notice to a Participant, shall have the right, at any time, to terminate this Plan. Such termination shall become effective when authorized by the Board of Directors of the Employer and written notice given to a Participant. Upon termination of this Plan, those Participants that are fully vested and entitled to or are receiving Normal Retirement Benefits or Early Retirement Benefits pursuant to the provisions of Article III and those Beneficiaries receiving benefits pursuant to the provisions of Article IV shall continue to receive such benefits in accordance with this Plan. The Participants who are not then vested or receiving Normal Retirement Benefits or Early Retirement Benefits will be entitled to no benefits pursuant to this Plan other than their Account balance as calculated on the effective date of the Plan termination. 9.2 Inurement. This Plan shall be binding upon and shall inure to the benefit of the Employer and each Participant hereunder and their respective heirs, executors, administrators, successors and assigns. 9.3 Amendments and Modifications. This Plan may be changed or altered by written instrument signed by the Employer and shall become effective upon written notification to the Participants. 9.4 Governing Law. This Plan is made pursuant to, and shall be governed by, the laws of the Commonwealth of Pennsylvania, in all respects, including matters of construction, validity and performance. 9.5 Notice. Any notice, consent or demand required or permitted to be given under the provisions of this Plan by one party to another shall be in writing, shall be signed by the party giving or making the same, and may be given either by delivering the same to such other party personally, or by mailing the same, by United States certified mail, postage prepaid, to such party, addressed to his or her last known address as shown on the records of the Bank. The date of such mailing shall be deemed the date of such mailed notice, consent or demand. 9.6 Reorganization. The Bank shall not merge or consolidate into or with another company, or reorganize, or sell substantially all of its assets to another company, firm, or person unless such succeeding or continuing company, firm or person agrees to assume and discharge the obligations of the Bank under this Plan. Upon the occurrence of such event, the term "Bank" or "Employer" as used in this Plan shall be deemed to refer to the successor or survivor company. 9.7 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Plan. IN WITNESS WHEREOF, the Employer has adopted this Supplemental Executive Retirement Plan the day and year first written. First Keystone Bank By:_______________________________ EX-31.1 3 w97571exv31w1.txt SECTION 302 CERTIFICATIN OF CEO EXHIBIT 31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934 AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Donald S. Guthrie certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Keystone Financial, Inc. (the "Registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: May 17, 2004 /s/Donald S. Guthrie ------------------------------------ Donald S. Guthrie Chairman and Chief Executive Officer EX-31.2 4 w97571exv31w2.txt SECTION 302 CERTIFICATION OF CFO EXHIBIT 31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934 AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Rose M. DiMarco, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Keystone Financial, Inc. (the "Registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: May 17, 2004 /s/Rose M. DiMarco ------------------------------------ Rose M. DiMarco Chief Financial Officer EX-32.1 5 w97571exv32w1.txt SECTION 906 CERTIFICATION OF CEO EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) The undersigned Chief Executive Officer of First Keystone Financial, Inc. (the "Registrant") hereby certify that the Registrant's Form 10-Q for the quarter ended March 31, 2004 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ Donald S. Guthrie -------------------------------------------- Name: Donald S. Guthrie Title: Chairman and Chief Executive Officer Date: May 17, 2004 A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act has been provided to First Keystone Financial, Inc. and will be retained by First Keystone Financial, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 6 w97571exv32w2.txt SECTION 906 CERTIFICATION OF CFO EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) The undersigned Chief Financial Officer of First Keystone Financial, Inc. (the "Registrant") hereby certify that the Registrant's Form 10-Q for the quarter ended March 31, 2004 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ Rose M. DiMarco ------------------------------ Name: Rose M. DiMarco Title: Chief Financial Officer Date: May 17, 2004 A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act has been provided to First Keystone Financial, Inc. and will be retained by First Keystone Financial, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----