-----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, Utgm/BhUBgfzRmzTOsJWCiSfptuAg1KSqixKX3bcPHbwj5gsAobdHKSLvae75EQ4 mvzYV+SCmjTkyrfO//5V1g== 0000893220-04-001731.txt : 20040816 0000893220-04-001731.hdr.sgml : 20040816 20040816111515 ACCESSION NUMBER: 0000893220-04-001731 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 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: 04976860 BUSINESS ADDRESS: STREET 1: 22 WEST STATE ST CITY: MEDIA STATE: PA ZIP: 19063 BUSINESS PHONE: 6105656210 10-Q 1 w00596e10vq.txt FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 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 June 30, 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 August 6, 2004: 1,926,384 FIRST KEYSTONE FINANCIAL, INC. CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION: Item 1. Financial Statements Unaudited Consolidated Statements of Financial Condition as of June 30, 2004 and September 30, 2003 1 Unaudited Consolidated Statements of Income for the Three and Nine Months Ended June 30, 2004 and 2003 2 Unaudited Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended June 30, 2004 3 Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 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 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Disclosure Controls and Procedures 20 PART II OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23
i FIRST KEYSTONE FINANCIAL, INC. UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except share amounts)
June 30, September 30, 2004 2003 -------- ------------- ASSETS Cash and amounts due from depository institutions $ 4,152 $ 10,439 Interest-bearing deposits with depository institutions 13,890 10,751 -------- -------- Total cash and cash equivalents 18,042 21,190 Investment securities available for sale 63,397 77,700 Mortgage-related securities available for sale 107,470 124,656 Loans held for sale 160 4,498 Investment securities held to maturity- at amortized cost (approximate fair value of $6,277 at June 30, 2004 6,293 6,315 and $6,450 at September 30, 2003 Mortgage-related securities held to maturity - at amortized cost (approximate fair value of $35,311 at June 30, 2004 and $3,560 at September 30, 2003) 35,968 3,487 Loans receivable (net of allowance for loan losses of $2,129 at June 30, 2004 and $1,986 at September 30, 2003) 297,600 286,421 Accrued interest receivable 2,596 2,654 Real estate owned 1,270 1,420 Federal Home Loan Bank stock - at cost 8,964 8,294 Office properties and equipment, net 3,697 3,427 Deferred income taxes 919 -- Cash surrender value of life insurance 16,012 15,365 Prepaid expenses and other assets 2,565 4,185 -------- -------- TOTAL ASSETS $564,953 $559,612 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $349,864 $362,605 Advances from Federal Home Loan Bank and other borrowings 157,784 136,272 Junior subordinated debentures 21,566 21,593 Accrued interest payable 1,054 1,111 Advances from borrowers for taxes and insurance 2,973 958 Deferred income taxes -- 581 Accounts payable and accrued expenses 3,532 4,104 -------- -------- Total liabilities 536,773 527,224 -------- -------- 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: 1,926,384 shares at June 30, 2004 and 1,925,337 shares at September 30, 2003 14 14 Additional paid-in capital 13,484 13,443 Employee stock ownership plan (2,976) (830) Treasury stock at cost: 786,172 shares at June 30, 2004 and 787,219 shares at September 30, 2003 (11,934) (11,378) Accumulated other comprehensive income 157 3,069 Retained earnings - partially restricted 29,435 28,070 -------- -------- Total stockholders' equity 28,180 32,388 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $564,953 $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 Nine months ended June 30, June 30, ------------------ ------------------ 2004 2003 2004 2003 ------- ------ ------- ------- INTEREST INCOME: Interest on: Loans $ 4,332 $4,574 $13,155 $14,407 Mortgage-related securities 1,327 1,152 3,852 3,454 Investment securities: Taxable 525 544 1,680 1,746 Tax-exempt 220 239 641 814 Dividends 84 86 200 278 Interest-bearing deposits 17 20 52 105 ------- ------ ------- ------- Total interest income 6,505 6,615 19,580 20,804 ------- ------ ------- ------- INTEREST EXPENSE: Interest on: Deposits 1,405 1,822 4,481 5,655 Federal Home Loan Bank advances and other borrowings 1,763 1,754 5,265 5,201 Junior subordinated debentures 418 417 1,246 1,264 ------- ------ ------- ------- Total interest expense 3,586 3,993 10,992 12,120 ------- ------ ------- ------- NET INTEREST INCOME 2,919 2,622 8,588 8,684 PROVISION FOR LOAN LOSSES 75 195 225 585 ------- ------ ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,844 2,427 8,363 8,099 ------- ------ ------- ------- NON-INTEREST INCOME: Service charges and other fees 287 249 812 763 Net gain on sales of: Loans held for sale 11 155 43 367 Investment and mortgage-related securities 6 208 1,471 258 Increase in cash surrender value 159 350 628 683 Other income 112 46 854 113 ------- ------ ------- ------- Total non-interest income 575 1,008 3,808 2,184 ------- ------ ------- ------- NON-INTEREST EXPENSE: Salaries and employee benefits 1,357 1,436 5,472 3,828 Occupancy and equipment 297 299 923 912 Professional fees 195 162 679 527 Federal deposit insurance premium 13 14 40 41 Data processing 120 110 356 358 Advertising 92 74 274 273 Net cost of operation of other real estate 2 7 179 29 Other 570 520 1,751 1,671 ------- ------ ------- ------- Total non-interest expense 2,646 2,622 9,674 7,639 ------- ------ ------- ------- INCOME BEFORE INCOME TAX EXPENSE 773 813 2,497 2,644 INCOME TAX EXPENSE 146 148 501 505 ------- ------ ------- ------- NET INCOME $ 627 $ 665 $ 1,996 $ 2,139 ======= ====== ======= ======= BASIC EARNINGS PER COMMON SHARE $ 0.34 $ 0.35 $ 1.09 $ 1.12 ======= ====== ======= ======= DILUTED EARNINGS PER COMMON SHARE $ 0.32 $ 0.33 $ 1.02 $ 1.05 ======= ====== ======= =======
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 -- -- -- -- -- 1,996 1,996 Other comprehensive income, net of tax: Net unrealized loss on securities net of reclassification adjustment(1) -- -- -- -- (2,912) -- (2,912) ------ ---------- --------- -------- ------------- ---------- ------------- Comprehensive loss -- -- -- -- -- -- (916) ----- ---------- --------- -------- ------------- ---------- ------------- Common stock acquired by stock benefit plans -- -- (2,359) -- -- -- (2,359) ESOP shares committed to be released -- -- 213 -- -- -- 213 Excess of fair value above cost of ESOP shares committed to be released -- 407 -- -- -- -- 407 Purchase of treasury stock -- -- -- (1,339) -- -- (1,339) Exercise of stock options -- (366) -- 783 -- -- 417 Dividends - $.33 per share -- -- -- -- -- (631) (631) ------ ---------- --------- -------- ------------- ---------- ------------- BALANCE AT JUNE 30, 2004 $ 14 $ 13,484 $ (2,976) $(11,934) $ 157 $ 29,435 $ 28,180 ====== ========== ========= ======== ============= ========== =============
(1) Disclosure of reclassification amount, net of tax for the nine months ended June 30, 2004: Net unrealized depreciation arising during the period $ (3,883) Less: reclassification adjustment for net gains included in net income (net of tax of $500) 971 -------- Net unrealized loss on securities $ (2,912) ========
See notes to unaudited consolidated financial statements. - 3 - FIRST KEYSTONE FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
Nine months ended June 30, --------------------- 2004 2003 -------- ---------- OPERATING ACTIVITIES: Net income $ 1,996 $ 2,139 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for depreciation and amortization 361 316 Amortization of premiums and discounts 418 770 Increase in cash surrender value of life insurance (647) (726) (Gain) loss on sales of: Loans held for sale (43) (367) Investment securities available for sale (1,475) (219) Mortgage-related securities available for sale 4 (39) Real estate owned -- 1 Provision for loan losses 225 585 Amortization of employee stock ownership plan 620 260 Changes in assets and liabilities which provided (used) cash: Origination of loans held for sale (7,577) (20,744) Loans sold in the secondary market 7,732 20,273 Accrued interest receivable 58 201 Prepaid expenses and other assets 1,620 215 Accrued interest payable (57) (152) Accrued expenses (572) (2,770) -------- ---------- Net cash provided by (used in) operating activities 2,663 (257) -------- ---------- INVESTING ACTIVITIES: Loans originated (96,600) (119,742) Purchases of: Mortgage-related securities available for sale (20,210) (108,199) Investment securities available for sale (3,716) (15,313) Mortgage-related securities held to maturity (34,991) (3,069) Purchase of FHLB stock (670) (1,314) Proceeds from sales of real estate owned 335 150 Proceeds from sales of investment and mortgage-related securities 9,474 8,751 Principal collected on loans 89,353 117,985 Proceeds from maturities, calls, or repayments of: Investment securities available for sale 9,277 19,624 Mortgage-related securities available for sale 33,222 57,512 Mortgage-related securities held to maturity 2,472 4,653 Purchase of property and equipment (631) (244) -------- ---------- Net cash used in investing activities (12,685) (39,206) -------- ---------- FINANCING ACTIVITIES: Net (decrease) increase in deposit accounts (12,741) 22,930 Net increase in FHLB advances 21,512 13,025 Common stock acquired by ESOP (2,359) -- Net increase in advances from borrowers for taxes and insurance 2,015 2,313 Exercise of stock options 417 267 Purchase of treasury stock (1,339) (1,009) Cash dividend (631) (599) -------- ---------- Net cash provided by financing activities 6,874 36,927 -------- ---------- DECREASE IN CASH AND CASH EQUIVALENTS (3,148) (2,536) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,190 24,623 -------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,042 $ 22,087 ======== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for interest on deposits and borrowings $ 11,049 $ 10,856 Transfer of loans held for sale to loan portfolio 4,186 -- Transfers of loans receivable into real estate owned 153 231 Cash payments of income taxes 130 600
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 nine month period ended June 30, 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 Annual Report on 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:
June 30, 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 $ 3,005 $ -- $ 1 $ 3,004 1 to 5 years 10,000 -- 345 9,655 5 to 10 years 3,000 -- 67 2,933 Municipal obligations 5 to 10 years 2,790 72 -- 2,862 Over 10 years 9,176 163 2 9,337 Corporate bonds Less than 1 year 997 89 -- 1,086 1 to 5 years 5,967 451 -- 6,418 Over 10 years 5,182 149 66 5,265 Asset-backed securities 5 to 10 years 1,293 8 -- 1,301 Mutual funds 5 to 10 years 5,000 -- 71 4,929 Over 10 years 9,009 -- 168 8,841 Preferred stocks 4,974 -- 974 4,000 Other equity investments 1,755 2,011 -- 3,766 ------- -------- -------- ------- Total $62,148 $ 2,943 $ 1,694 $63,397 ======= ======== ======== =======
- 5 - Held to Maturity: Municipal obligations 5 to 10 years $ -- $ -- $ -- $ -- Over 10 years 3,260 -- 62 3,198 Corporate bonds Less than 1 year 1,004 30 -- 1,034 1 to 5 years 1,029 15 -- 1,044 Over 10 years 1,000 1 -- 1,001 ------- -------- -------- ------- Total $ 6,293 $ 46 $ 62 $ 6,277 ======= ======== ======== =======
The table below sets forth investment securities which have an unrealized loss position as of June 30, 2004.
Loss Position Loss Position Less than 12 Months 12 Months or Longer Total ---------------------------- ------------------------- ---------------------- Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses ---------- ------ ---------- ------ ---------- ------- U.S. Government and agency bonds $15,593 $(412) $ -- $ -- $15,593 $(412) Municipal bonds 3,928 (65) -- -- 3,928 (65) Corporate bonds 3,192 (66) -- -- 3,192 (66) Mutual fund 13,771 (239) -- -- 13,771 (239) Preferred securities -- -- 4,000 (974) 4,000 (974) ------- ----- ------- ----- ------- ------- Total $36,484 $(782) $ 4,000 $(974) $40,484 $(1,756) ======= ===== ======= ===== ======= =======
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 its 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. - 6 -
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 ========= ========== ========== ===========
3. MORTGAGE-RELATED SECURITIES Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:
June 30, 2004 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------- ---------- ---------- ----------- Available for Sale: FHLMC pass-through certificates $ 7,150 $ 80 $ 157 $ 7,073 FNMA pass-through certificates 45,756 135 791 45,100 GNMA pass-through certificates 6,715 355 4 7,066 Collateralized mortgage obligations 48,863 132 764 48,231 --------- ---------- ---------- ----------- Total $ 108,484 $ 702 $ 1,716 $ 107,470 ========= ========== ========== =========== Held to Maturity: FHLMC pass-through certificates $ 13,877 $ 16 $ 287 $ 13,606 FNMA pass-through certificates 21,490 27 414 21,103 Collateralized mortgage obligations 601 1 -- 602 --------- ---------- ---------- ----------- Total $ 35,968 $ 44 $ 701 $ 35,311 ========= ========== ========== ===========
- 7 - The table below sets forth mortgage-related securities which have an unrealized loss position as of June 30, 2004.
Loss Position Loss Position Less than 12 Months 12 Months or Longer Total ---------------------------- ------------------------- ---------------------- Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses ---------- ------ ---------- ------ ---------- ------- Pass-through certificates $ 80,754 $ (1,652) $ 81 $ (1) $ 80,835 $ (1,653) Collateralized mortgage obligations 37,820 (705) 1,742 (59) 39,562 (764) ---------- ---------- ---------- ---------- ---------- ---------- Total $ 118,574 $ (2,357) $ 1,823 $ (60) $ 120,397 $ (2,417) ========== ========== ========== ========== ========== ==========
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 ======== ======= ======== ========
- 8 - 4. LOANS RECEIVABLE Loans receivable consist of the following:
June 30, September 30, 2004 2003 -------- ------------- Real estate loans: Single-family $160,351 $166,042 Construction and land 31,916 28,975 Multi-family and commercial 64,805 59,022 Home equity and lines of credit 41,457 33,459 Consumer loans 1,468 1,438 Commercial loans 11,866 10,161 -------- -------- Total loans 311,863 299,097 Loans in process (12,037) (10,655) Allowance for loan losses (2,129) (1,986) Deferred loan fees (97) (35) -------- -------- Loans receivable - net $297,600 $286,421 ======== ========
The following is an analysis of the allowance for loan losses:
Nine Months Ended June 30, --------------------- 2004 2003 -------- ------ Balance beginning of period $ 1,986 $2,358 Provisions charged to income 225 585 Charge-offs (150) (89) Recoveries 68 15 -------- ------ Total $ 2,129 $2,869 ======== ======
At June 30, 2004 and September 30, 2003, non-performing loans (which include loans in excess of 90 days delinquent) amounted to approximately $1,828 and $1,556, respectively, or 0.32% and 0.28% of total assets at such dates, respectively. At June 30, 2004, non-performing loans primarily consisted of $652 in single-family residential mortgage loans, $698 in commercial real estate loans and $255 in commercial loans. 5. DEPOSITS Deposits consist of the following major classifications:
June 30, September 30, 2004 2003 ---------------------- ----------------- Amount Percent Amount Percent -------- -------- -------- ------- Non-interest bearing $ 19,902 5.7% $ 20,917 5.8% NOW 58,987 16.9 60,221 16.6 Passbook 53,287 15.2 47,089 13.0 Money market demand 51,608 14.8 55,889 15.4 Certificates of deposit 166,080 47.5 178,489 49.2 -------- ----- -------- ----- Total $349,864 100.0% $362,605 100.0% ======== ===== ======== =====
- 9 - 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 shares 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 Nine Months Ended June 30, June 30, -------------------------- ----------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Numerator $ 627 $ 665 $ 1,996 $ 2,139 Denominators: Basic shares outstanding 1,835,609 1,899,265 1,831,822 1,906,099 Effect of dilutive securities 120,546 147,333 121,281 127,117 ---------- ---------- ---------- ---------- Diluted shares outstanding 1,956,155 2,046,598 1,953,103 2,033,216 ========== ========== ========== ========== EPS: Basic $ 0.34 $ 0.35 $ 1.09 $ 1.12 Diluted $ 0.32 $ 0.33 $ 1.02 $ 1.05
7. STOCK-BASED COMPENSATION The Company applies APB Opinion No. 25 in accounting for stock options. Since the exercise price of the options equaled the fair value of the common stock covered thereby at the date of grant, 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 set forth 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 Nine Months Ended June 30, June 30, ------------------ -------------------- 2004 2003 2004 2003 ----- ----- ------ ------ Net income, as reported $ 627 $ 665 $1,996 $2,139 Less: Total stock-based employee compensation expense determined under fair value method for all options, net of tax 5 18 15 55 ----- ----- ------ ------ Pro forma net income $ 622 $ 647 $1,981 $2,084 ===== ===== ====== ====== Earnings per share: Basic - as reported $0.34 $0.35 $ 1.09 $ 1.12 Basic - pro forma $0.34 $0.34 $ 1.08 $ 1.09 Diluted - as reported $0.32 $0.33 $ 1.02 $ 1.05 Diluted - pro forma $0.32 $0.32 $ 1.01 $ 1.02
- 10 - 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. 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 ("EITF") reached a consensus regarding EITF 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. Disclosures about unrealized losses that have not been recognized as other-than-temporary impairments that were required under an earlier EITF 03-1 consensus remain in effect. The EITF 03-1 guidance for determining other-than-temporary impairment is effective for the Company's fiscal year ending September 30, 2004. The determination of whether a decline in market value is other-than-temporary is necessarily a matter of subjective judgment. The timing and amount of any realized losses reported in the Company's financial statements could vary if management's conclusions were to change as to whether an other-than-temporary impairment exists. The Company's management is still in the process of evaluating the impact of applying EITF 03-1 on the Company's financial statements. - 11 - 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, changes in 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, the demand for loan products, the 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 stockholder 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 JUNE 30, 2004 AND SEPTEMBER 30, 2003 Total assets of the Company increased $5.3 million from $559.6 million at September 30, 2003 to $564.9 million at June 30, 2004. Investments and mortgage-related securities held to maturity increased in the aggregate to $42.3 million from $9.8 million at September 30, 2003 mainly due to the Company's strategy to reinvest the cash flows from the securities available for sale portfolio into the securities held to maturity portfolio in order to minimize the effect of price volatility on the Company's financial statements resulting from available for sale securities. As a result, the available for sale portfolio decreased by $31.5 million to $170.9 million at June 30, 2004. Loans receivable increased to $297.6 million from $286.4 million at September 30, 2003 resulting from 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 $4.3 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. - 12 - Total liabilities increased $9.5 million, or 1.8%, from $527.2 million at September 30, 2003 to $536.8 million at June 30, 2004 primarily due to increases in borrowings partially offset by a decrease in deposits. Deposits decreased $12.7 million, or 3.5%, from $362.6 million at September 30, 2003 to $349.9 million at June 30, 2004. The decrease is attributable to a $12.4 million, or 7.0%, decline in certificates of deposits reflecting the Company's strategy of conservatively pricing the Company certificate of deposits resulting in increased disintermediation at maturity. At June 30, 2004, core deposits (which consist of passbook, money market, NOW and non-interest bearing accounts) slightly decreased to $183.8 million, or 52.5%, of the Company's deposit portfolio from $184.1 million or 50.8% of total deposits at September 30, 2003. Borrowings increased $21.5 million, or 15.8%, as a result of advances from the Federal Home Loan Bank. Stockholders' equity decreased by $4.2 million, or 13.0 %, to $28.2 million due to a combination of a $2.9 million decrease in the accumulated other comprehensive income, the cost of repurchasing 51,092 shares of common stock as part of the Company's buyback program, the purchasing of 86,658 shares for the Company's employee stock ownership plan and the payment of dividends totaling $631,000, partially offset by net income of $2.0 million. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2004 AND 2003 NET INCOME. Net income for the quarter ended June 30, 2004 was $627,000, or $.32 per diluted share, a decrease of $38,000, or 5.7%, as compared to net income of $665,000, or $.33 per diluted share, for the quarter ended June 30, 2003. Net income for the nine months ended June 30, 2004 was $2.0 million, or $1.02 per diluted share, a decrease of $143,000, or 6.7%, as compared to $2.1 million, or $1.05 per diluted share, for the same period in 2003. NET INTEREST INCOME. Net interest income increased $297,000, or 11.3%, to $2.9 million for the three months ended June 30, 2004 compared to the same period in 2003 primarily due to a decrease in interest expense of $407,000, or 10.2% for the three months ended June 30, 2004 which was partially offset by an $110,000, or 1.7%, decrease in interest income during such period. Calculated on a tax-equivalent basis, the decrease in interest expense was affected by a 44 basis point decrease in the average rate paid on interest-bearing liabilities offset, in part, by an increase of $22.1 million, or 4.4%, in the average balance of such liabilities. The decrease in interest income was primarily due to a 25 basis point (on a tax-equivalent basis) decrease in the weighted yield earned on the Company's interest-earning assets, partially offset by a $16.1 million, or 3.1%, increase in the average balance of interest-earning assets. The increase in net interest income reflected the slowdown of prepayment speeds of mortgage-related securities as market rates of interest increased resulting in lower premium amortizations combined with the Company's weighted average cost of interest-bearing liabilities continuing to decrease more rapidly than the yield on interest-earning assets. Net interest income decreased $96,000, or 1.1%, to $8.6 million for the nine months ended June 30, 2004 compared to the same period in 2003. The decrease was primarily due to a decrease in interest income of $1.2 million, or 5.9%, for the nine months ended June 30, 2004 partially offset by a $1.1 million, or 9.3%, decrease in interest expense during such period. Calculated on a tax-equivalent basis, the decrease in interest income was attributable to a 61 basis point decrease in the weighted yield earned on Company's interest-earning assets offset, in part, by an increase of $27.1 million, or 5.4%, in the average balance of such assets. The decrease in interest expense was primarily due to a 49 basis point (on a tax-equivalent basis) decrease in the weighted average rate paid on the Company's interest-bearing liabilities, partially offset by a $31.2 million, or 6.5%, increase in the average balance of such liabilities. - 13 - 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 common 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.
FOR THE THREE MONTHS ENDED --------------------------------------------------------- JUNE 30, 2004 JUNE 30, 2003 --------------------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost Balance Interest Cost ------ -------- ---- ------- -------- ---- Interest-earning assets: Loans receivable(1) (2) $296,824 $4,331 5.84% $291,305 $4,574 6.28% Mortgage-related securities(2) 141,377 1,327 3.75 128,550 1,152 3.58 Investment securities(2) 80,378 917 4.56 82,291 970 4.71 Other interest-earning assets 11,091 17 0.61 11,436 20 0.70 -------- ------ -------- ------ Total interest-earning assets 529,670 $6,592 4.98 513,582 $6,716 5.23 -------- ------ ------ -------- ------ ------ Non-interest-earning assets 34,104 29,808 -------- -------- Total assets $563,774 $543,390 ======== ======== Interest-bearing liabilities: Deposits $347,979 $1,405 1.62 $347,310 $1,822 2.10 FHLB advances and other borrowings 156,429 1,763 4.51 134,957 1,754 5.20 Junior subordinated debentures 21,572 418 7.75 21,608 417 7.72 -------- ------ -------- ------ Total interest-bearing liabilities 525,980 3,586 2.73 503,875 3,993 3.17 -------- ------ ------ -------- ------ ------ Interest rate spread 2.25% 2.06% ====== ====== Non-interest-bearing liabilities 6,715 6,463 -------- -------- Total liabilities 532,695 510,338 Stockholders' equity 31,079 33,052 -------- -------- Total liabilities and stockholders' equity $563,774 $543,390 ======== ======== Net interest-earning assets $ 3,690 $ 9,707 ======== ======== Net interest income $3,006 $2,723 ====== ====== Net interest margin(3) 2.27% 2.12% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities 100.70% 101.93% ====== ======
- -------------------- (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 -
FOR THE NINE MONTHS ENDED --------------------------------------------------------- JUNE 30, 2004 JUNE 30, 2003 --------------------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost Balance Interest Cost ------ -------- ---- ------- -------- ---- Interest-earning assets: Loans receivable(1) (2) $293,283 $13,154 5.98% $290,178 $14,407 6.62% Mortgage-related securities(2) 135,129 3,852 3.80 109,627 3,454 4.20 Investment securities(2) 84,992 2,793 4.38 82,845 3,146 5.06 Other interest-earning assets 12,304 52 0.56 15,922 105 0.88 -------- ------- -------- ------- Total interest-earning assets 525,708 $19,851 5.04 498,572 $21,112 5.65 -------- ------- ------ -------- ------- ------ Non-interest-earning assets 31,592 30,061 -------- -------- Total assets $557,300 $528,633 ======== ======== Interest-bearing liabilities: Deposits $348,451 $ 4,481 1.71 $339,209 $ 5,655 2.22 FHLB advances and other borrowings 151,941 5,265 4.62 129,451 5,201 5.36 Junior subordinated debentures 21,581 1,246 7.70 21,618 1,264 7.80 -------- ------- -------- ------- Total interest-bearing liabilities 521,973 10,992 2.81 490,278 12,120 3.30 -------- ------- ------ -------- ------- ------ Interest rate spread 2.23% 2.35% ====== ====== Non-interest-bearing liabilities 3,730 5,480 -------- -------- Total liabilities 525,703 495,758 Stockholders' equity 31,597 32,875 -------- -------- Total liabilities and stockholders' equity $557,300 $528,633 ======== ======== Net interest-earning assets $ 3,735 $ 8,294 ======== ======== Net interest income $ 8,859 $ 8,992 ======= ======= Net interest margin(3) 2.25% 2.40% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities 100.72% 101.69% ====== ======
- ------------------ (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. - 15 - 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 financial measures should not be considered an alternative to GAAP. The reconciliation of these non-GAAP financial measures from GAAP to non-GAAP is presented below.
FOR THE THREE MONTHS ENDED --------------------------------------------------- JUNE 30, 2004 JUNE 30, 2003 ----------------------- ------------------------ AVERAGE AVERAGE (Dollars in thousands) INTEREST YIELD/COST INTEREST YIELD/COST -------- ---------- -------- ---------- Investment securities - nontaxable $ 829 4.13% $ 869 4.22% Tax equivalent adjustments 88 101 ------ ------ Investment securities - nontaxable to a taxable equivalent yield $ 917 4.56% $ 970 4.71% ====== ====== Net interest income $2,918 $2,622 Tax equivalent adjustment 88 101 ------ ------ Net interest income, tax equivalent $3,006 $2,723 ====== ====== Net interest rate spread, no tax adjustment 2.18% 1.98% Net interest margin, no tax adjustment 2.20% 2.04%
FOR THE NINE MONTHS ENDED --------------------------------------------------- JUNE 30, 2004 JUNE 30, 2003 ----------------------- ------------------------ AVERAGE AVERAGE (Dollars in thousands) INTEREST YIELD/COST INTEREST YIELD/COST -------- ---------- -------- ---------- Investment securities - nontaxable $2,521 3.95% $2,838 4.57% Tax equivalent adjustments 272 308 ------ ------ Investment securities - nontaxable to a taxable equivalent yield $2,793 4.38% $3,146 5.06% ====== ====== Net interest income $8,587 $8,684 Tax equivalent adjustment 272 308 ------ ------ Net interest income, tax equivalent $8,859 $8,992 ====== ====== Net interest rate spread, no tax adjustment 2.16% 2.27% Net interest margin, no tax adjustment 2.18% 2.32%
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 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 June 30, 2004 as compared to $195,000 for the same period in 2003. For the nine months ended June 30, 2004 and 2003, the provision for loan losses amounted to $225,000 and $585,000, respectively. The decreases in the provision were due to the Company's overall asset quality. - 16 - At June 30, 2004, non-performing assets increased slightly to $3.1 million, or 0.55% to total assets, from $3.0 million at September 30, 2003. Included in non-performing assets is $1.3 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. In April 2004, the lead lender has agreed on terms to sell the property and property is currently scheduled for August settlement. Presently, the Bank expects no further loss upon the sale of this property. The coverage ratio, which is the ratio of the allowance for loan losses to non-performing loans, was 116.49% and 127.63% at June 30, 2004 and September 30, 2003, respectively. 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 decreased $433,000 to $575,000 for the three months ended June 30, 2004 as compared to the same period last year. The decrease was primarily the result of a $202,000 decrease in the gain on sales of investment securities. The Company's sales activity was significantly higher in 2003 due to favorable market conditions which existed in such year. In addition, the cash surrender value of certain insurance policies held by the Bank decreased $191,000 due to a decline in the values in the underlying investment of equity securities compared to the same period last year. With the slowdown in the refinance market, the gain on sales of loans held for sale decreased $144,000 compared to the same period last year. Non-interest income increased $1.6 million to $3.8 million for the nine months ended June 30, 2004 in comparison to the same period last year. Increases in income of $1.2 million and $741,000 were recognized from the sale of investment and mortgage-related securities and other non-interest income, respectively, partially offset by a $324,000 decrease in the gain on sales of loans held for sale. The gain on the sales of investment securities reflected primarily the proceeds from the sale or exchange of the securities held by the Company issued by entities which were acquired. 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 EXPENSE. Non-interest expense for the quarter ended June 30, 2004 increased $24,000, or 0.92% from the same period last year primarily due to increases of $33,000, or 20.4%, in professional fees, $18,000, or 24.3%, in advertising and $50,000, or 9.6%, in other non-interest expenses offset by a $79,000 decrease in compensation and employee benefit expense. Non-interest expense for the nine months ended June 30, 2004 increased $2.0 million, or 26.6%, by comparison to the same period in the prior year primarily due to an increase in compensation and employee benefit expense. The increase in compensation and employee benefit expenses was primarily due to an additional $598,000 expense relating to the funding of a non-qualified supplemental retirement plan for certain executive officers as well as to the prepayment of the outstanding loan balance on the original loan to the Company's employee stock ownership plan ("ESOP") which resulted in $453,000 of expense. To a lesser degree, the increase in compensation and benefit expense was due to additional personnel and merit increases. In addition, the increase in non-interest expense was also due to increases of $152,000 and $150,000 in professional fees and real estate operations, respectively. INCOME TAX EXPENSE. Income tax expense decreased $2,000 to $146,000 for the three months ended June 30, 2004 compared to the same period in 2003 while decreasing $4,000 to $501,000 for the nine months ended June 30, 2004. The decreases for the three and nine months ended June 30, 2004 resulted from the reduction in tax-free income as compared to the same period in 2003 as well as a reduced net income. - 17 - 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 June 30, 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 short-term borrowings to satisfy its funding commitments. At June 30, 2004, the Company had short-term borrowings (due within one year or currently callable by the Federal Home Loan Bank ("FHLB")) outstanding of $142.2 million, primarily consisting 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 June 30, 2004, total approved loan commitments outstanding amounted to $8.8 million, not including loans in process. At the same date, commitments under unused lines of credit amounted to $35.2 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2004 totaled $105.5 million. Based upon its historical experience, management believes that a significant portion of maturing deposits will remain with the Company. As of June 30, 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 equal to at least 8.0% of its risk-weighted assets. At June 30, 2004, the Bank had tangible capital and core capital equal to 8.1% of adjusted total assets and total capital equal to 15.5% of risk-weighted assets. - 18 - INVESTMENT AND MORTGAGE-RELATED 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, the 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 an unrealized loss position, there are three securities in the portfolio with an unrealized loss position longer than 12 months. Two securities are mortgage-related with a fair value of $1.8 million and a cost of $1.9 million. The third security is a preferred security with a fair value of $4.0 million and a cost of $5.0 million. The preferred security is rated AAA with an unrealized loss of $974,000. 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 Annual Report on 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. - 19 - 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 June 30, 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 $33,783 $(24,163) (42)% 6.20% (376)bp 200 42,785 (15,161) (27) 7.68 (228)bp 100 51,031 (6,915) (12) 8.96 (100)bp 0 57,946 -- -- 9.96 -- (100) 59,897 1,951 3 10.15 (19)bp
As of June 30, 2004, the Company's NPV was $57.9 million or 9.96% of the market value of assets. Following a 200 basis point increase in interest rates, the Company's "post shock" NPV was $42.8 million or 7.68% of the market value of assets. The change in the NPV ratio or the Company's sensitivity measure was (2.28) %. 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) %. 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. - 20 - PART II OTHER INFORMATION Item 1. Legal Proceedings No material changes in the legal proceedings previously disclosed in 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 Total Number of Maximum Number of Number Average Shares Purchased as Shares that May Yet Be of Shares Price Paid Part of Publicly Purchased Under the Period (1) Purchased per Share Announced Plan Plan - ------------------------------------------------------------------------------------------------- April 1-30, 2004 -- -- -- 56,332 May 1-31, 2004 -- -- -- 56,332 June 1-30, 2004 -- -- -- 56,332 ---- ---- ---- Total -- -- -- 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, unless extended. The table above does not include 86,658 shares purchased at an average cost per share of $27.23 by the Company's ESOP. The number of shares purchased in each of three periods set forth above was 0, 78,200 and 2,184, respectively, at an average cost per share of $0, $27.28 and $24.88, respectively. The ESOP has been authorized to purchase up to 100,000 shares. 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 - 21 - Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits
Exhibit Description - ------- ----------- 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 ---- -------------------- 05/06/2004 Item 12. On May 5, 2004, the Company issued a press release reporting its earnings for the quarter ended March 31, 2004.
- 22 - 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: August 13, 2004 By: /s/ Donald S. Guthrie --------------------------------- Donald S. Guthrie Chairman and Chief Executive Officer Date: August 13, 2004 By: /s/ Rose M. DiMarco --------------------------------- Rose M. DiMarco Chief Financial Officer - 23 - EX-31.1 2 w00596exv31w1.txt CEO CERTIFICATION PURSUANT TO SECTION 302 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: August 13, 2004 /s/Donald S. Guthrie -------------------------------------- Donald S. Guthrie Chairman and Chief Executive Officer EX-31.2 3 w00596exv31w2.txt CFO CERTIFICATION PURSUANT TO SECTION 302 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: August 13, 2004 /s/Rose M. DiMarco ------------------------------ Rose M. DiMarco Chief Financial Officer EX-32.1 4 w00596exv32w1.txt CEO CERTIFICATION PURSUANT TO SECTION 906 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 June 30, 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: August 13, 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 5 w00596exv32w2.txt CFO CERTIFICATION PURSUANT TO SECTION 906 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 June 30, 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: August 13, 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-----