-----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, HC+zO4jO3ybK9flSDzluXuXJV5pAvzpWMAd/wuaVESRZOeKcwL++AsBTEfPZB+xk 5tA3JGuhA58hjheVytqOUw== 0000893220-05-001988.txt : 20050815 0000893220-05-001988.hdr.sgml : 20050815 20050815165748 ACCESSION NUMBER: 0000893220-05-001988 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050815 DATE AS OF CHANGE: 20050815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST KEYSTONE FINANCIAL INC CENTRAL INDEX KEY: 0000856751 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 232576479 FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25328 FILM NUMBER: 051027573 BUSINESS ADDRESS: STREET 1: 22 WEST STATE ST CITY: MEDIA STATE: PA ZIP: 19063 BUSINESS PHONE: 610 565-6210 MAIL ADDRESS: STREET 1: 22 WEST STATE ST CITY: MEDIA STATE: PA ZIP: 19063 10-Q 1 w12002e10vq.txt FIRST KEYSTONE FINANCIAL INC FORM 10-Q 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, 2005 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 23-2576479 - --------------------------------- ---------------------- (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 8, 2005: 2,023,534 FIRST KEYSTONE FINANCIAL, INC. CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION: Item 1. Condensed Financial Statements Unaudited Consolidated Statements of Financial Condition as of June 30, 2005 and September 30, 2004 1 Unaudited Consolidated Statements of Income for the Three and Nine Months Ended June 30, 2005 and 2004 2 Unaudited Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended June 30, 2005 and 2004 3 Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2005 and 2004 4 Notes to Unaudited Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Item 4. Controls and Procedures 22 PART II OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits 23 SIGNATURES 26
FIRST KEYSTONE FINANCIAL, INC. UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except share amounts)
June 30, September 30, 2005 2004 --------- ------------- ASSETS Cash and amounts due from depository institutions $ 4,780 $ 5,185 Interest-bearing deposits with depository institutions 12,418 12,790 --------- ------------ Total cash and cash equivalents 17,198 17,975 Investment securities available for sale 47,380 63,615 Mortgage-related securities available for sale 113,371 97,620 Loans held for sale 24 172 Investment securities held to maturity- at amortized cost (approximate fair value of $4,337 at June 30, 2005 4,271 5,287 and $5,370 at September 30, 2004) Mortgage-related securities held to maturity - at amortized cost (approximate fair value of $49,280 at June 30, 2005 and $37,312 at September 30, 2004) 49,682 37,363 Loans receivable (net of allowance for loan losses of $3,471 at June 30, 2005 and $2,039 at September 30, 2004) 303,558 304,248 Accrued interest receivable 2,589 2,577 Real estate owned 920 1,229 Federal Home Loan Bank stock - at cost 8,718 9,827 Office properties and equipment, net 4,862 4,275 Deferred income taxes 1,052 657 Cash surrender value of life insurance 16,676 16,110 Prepaid expenses and other assets 3,280 10,964 --------- ------------ TOTAL ASSETS $ 573,581 $ 571,919 ========= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 358,360 $ 344,880 Advances from Federal Home Loan Bank and other borrowings 155,505 171,149 Junior subordinated debentures 21,529 21,557 Accrued interest payable 1,211 1,095 Advances from borrowers for taxes and insurance 3,086 815 Accounts payable and accrued expenses 4,457 2,725 --------- ------------ Total liabilities 544,148 542,221 --------- ------------ Commitments and contingencies 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 2,712,556 shares; outstanding at June 30, 2005 and September 30, 2004, 2,022,378 and 1,927,744 shares, respectively 14 14 Additional paid-in capital 12,895 13,622 Employee stock ownership plan (3,208) (3,189) Treasury stock at cost: 690,178 shares at June 30, 2005 and 787,219 shares at September 30, 2004 (10,608) (11,913) Accumulated other comprehensive income 966 1,734 Retained earnings - partially restricted 29,374 29,430 --------- ------------ Total stockholders' equity 29,433 29,698 --------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 573,581 $ 571,919 ========= ============
See notes to unaudited consolidated financial statements. 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, -------------------- ------------------- 2005 2004 2005 2004 --------- -------- --------- -------- INTEREST INCOME: Interest and fees on loans $ 4,446 $ 4,332 $ 13,317 $ 13,155 Interest and dividends on: Mortgage-related securities 1,662 1,327 4,615 3,852 Investment securities: Taxable 339 525 1,117 1,680 Tax-Exempt 195 220 568 641 Dividends 105 84 462 200 Interest-bearing deposits 41 17 122 52 --------- -------- --------- -------- Total interest income 6,788 6,505 20,201 19,580 --------- -------- --------- -------- INTEREST EXPENSE: Interest on: Deposits 1,625 1,405 4,551 4,481 Federal Home Loan Bank advances and other borrowings 1,888 1,763 5,716 5,265 Junior subordinated debentures 450 418 1,328 1,246 --------- -------- --------- -------- Total interest expense 3,963 3,586 11,595 10,992 --------- -------- --------- -------- NET INTEREST INCOME 2,825 2,919 8,606 8,588 PROVISION FOR LOAN LOSSES 1,645 75 1,735 225 --------- -------- --------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,180 2,844 6,871 8,363 --------- -------- --------- -------- NON-INTEREST INCOME: Service charges and other fees 379 287 1,176 812 Net gain on sales of: Loans held for sale 29 11 66 43 Investment and mortgage-related securities 15 6 539 1,471 Increase in cash surrender value of life insurance 155 159 565 628 Other real estate fees -- -- -- 550 Other income 105 112 337 304 --------- -------- --------- -------- Total non-interest income 683 575 2,683 3,808 --------- -------- --------- -------- NON-INTEREST EXPENSE: Salaries and employee benefits 1,398 1,357 4,639 5,472 Occupancy and equipment 405 297 1,150 923 Professional fees 260 195 789 679 Federal deposit insurance premium 12 13 37 40 Data processing 138 120 402 356 Advertising 106 92 289 274 Net cost of operation of other real estate 4 2 10 179 Deposit processing 158 157 474 462 Other 465 413 1,406 1,289 --------- -------- --------- -------- Total non-interest expense 2,946 2,646 9,196 9,674 --------- -------- --------- -------- (LOSS) INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE (1,083) 773 358 2,497 INCOME TAX (BENEFIT) EXPENSE (470) 146 (190) 501 --------- -------- --------- -------- NET (LOSS) INCOME $ (613) $ 627 $ 548 $ 1,996 ========= ======== ========= ======== BASIC EARNINGS (LOSS) PER COMMON SHARE $ (0.33) $ 0.34 $ 0.30 $ 1.09 ========= ======== ========= ======== DILUTED EARNINGS (LOSS) PER COMMON SHARE $ ( 0.32) $ 0.32 $ 0.30 $ 1.02 ========= ======== ========= ========
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, 2004 $ 14 $ 13,622 $ (3,189) $ (11,913) $ 1,734 $ 29,430 $ 29,698 Net income -- -- -- -- -- 548 548 Other comprehensive income, net of tax: Net unrealized loss on securities net of reclassification adjustment(1) -- -- -- -- (768) -- (768) -------- ---------- --------- --------- ------------- ---------- ------------- Comprehensive loss -- -- -- -- -- -- (220) -------- ---------- --------- --------- ------------- ---------- ------------- Common stock acquired by stock benefit plans -- -- (72) -- -- -- (72) ESOP stock committed to be released -- -- 53 -- -- -- 53 Excess of fair value above cost of ESOP shares committed to be released -- 40 -- -- -- -- 40 Purchase of treasury stock -- -- -- (110) -- -- (110) Exercise of stock options -- (767) -- 1,415 -- -- 648 Dividends - $.33 per share -- -- -- -- -- (604) (604) -------- ---------- --------- --------- ------------- ---------- ------------- BALANCE AT JUNE 30, 2005 $ 14 $ 12,895 $ (3,208) $ (10,608) $ 966 $ 29,374 $ 29,433 ======== ========== ========= ========= ============= ========== ============= 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:
June 30, --------------------- 2005 2004 -------- --------- Net unrealized depreciation arising during the period $ (1,124) $ (3.883) Less: reclassification adjustment for net gains included in net income (net of tax of $183 and $500, respectively) 356 971 -------- --------- Net unrealized loss on securities $ (768) $ (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, ---------------------- 2005 2004 -------- -------- OPERATING ACTIVITIES: Net income $ 548 $ 1,996 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for depreciation and amortization 398 361 Amortization of premiums and discounts 395 418 Increase in cash surrender value of life insurance (566) (647) (Gain) loss on sales of: Loans held for sale (66) (43) Investment securities (539) (1,475) Mortgage-related securities -- 4 Real estate owned 3 -- Provision for loan losses 1,735 225 Amortization of ESOP 93 620 Changes in assets and liabilities which provided (used) cash: Origination of loans held for sale (10,659) (7,577) Loans sold in the secondary market 10,807 7,732 Accrued interest receivable (12) 58 Prepaid expenses and other assets 7,684 1,620 Accrued interest payable 116 (57) Accounts payable and accrued expenses 1,732 (572) -------- -------- Net cash provided by operating activities 11,669 2,663 -------- -------- INVESTING ACTIVITIES: Loans originated (96,703) (96,600) Purchases of: Mortgage-related securities available for sale (38,890) (20,210) Investment securities available for sale (7,700) (3,716) Mortgage-related securities held to maturity (18,591) (34,991) Redemption (purchase) of FHLB stock 1,109 (670) Insurance proceeds on real estate owned 29 -- Proceeds from sales of real estate owned 252 335 Proceeds from sales of investment and mortgage-related securities 26,523 9,474 Principal collected on loans 95,806 89,353 Proceeds from maturities, calls, or repayments of: Investment securities available for sale 687 9,277 Mortgage-related securities available for sale 18,912 33,222 Mortgage-related securities held to maturity 6,136 2,472 Investment securities held to maturity 1,000 -- Purchase of property and equipment (985) (631) -------- -------- Net cash used in investing activities (12,415) (12,685) -------- -------- FINANCING ACTIVITIES: Net increase (decrease) in deposit accounts 13,480 (12,741) Net (decrease) increase in FHLB advances (15,644) 21,512 Common stock acquired by ESOP (72) (2,359) Net increase in advances from borrowers for taxes and insurance 2,271 2,015 Exercise of stock options 648 417 Purchase of treasury stock (110) (1,339) Cash dividends (604) (631) -------- -------- Net cash (used in) provided by financing activities (31) 6,874 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (777) (3,148) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 17,975 21,190 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,198 $ 18,042 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION: Cash payments for interest on deposits and borrowings $ 11,479 $ 11,049 Transfer of loans held for sale to loan portfolio -- 4,186 Transfers of loans receivable into real estate owned -- 153 Cash payments of income taxes 300 130
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 periods ended June 30, 2005 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2005 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, 2004. 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, 2005 ------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ------------- ---------- ---------- ----------- Available for Sale: U.S. Government bonds Less than 1 year $ 1,699 $ -- $ (5) $ 1,694 5 -10 years 1,997 1 -- 1,998 Municipal obligations 5 to 10 years 130 4 -- 134 Over 10 years 12,632 445 -- 13,077 Corporate bonds Less than 1 year 1,000 5 -- 1,005 1 to 5 years 1,000 93 -- 1,093 5 to 10 years 2,000 -- (19) 1,981 Over 10 years 7,998 377 (19) 8,356 Asset-backed securities 1 to 5 years 731 4 -- 735 Mutual funds 14,009 -- (329) 13,680 Other equity investments 1,756 1,902 (31) 3,627 ------------- ---------- ---------- ----------- Total $ 44,952 $ 2,831 $ (403) $ 47,380 ============= ========== ========== =========== Held to Maturity: Municipal obligations 5 to 10 years $ 3,259 $ 70 $ (--) $ 3,329 Corporate bonds Less than 1 year 1,012 -- (4) 1,008 ------------- ---------- ---------- ----------- Total $ 4,271 $ 70 $ (4) $ 4,337 ============= ========== ========== ===========
5 The table below sets forth investment securities which have an unrealized loss position as of June 30, 2005.
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 $ 1,694 $ (5) $ -- $ -- $ 1,694 $ (5) Municipal obligations -- -- -- -- -- -- Corporate bonds 4,090 (42) -- -- 4,090 (42) Mutual funds -- -- 13,680 (329) 13,680 (329) Equity investments 546 (31) -- -- 546 (31) ------- ---------- ------- ---------- -------- ---------- Total $ 6,330 $ (78) $13,680 $ (329) $ 20,010 $ (407) ------- ---------- ------- ========== ======== ==========
At June 30, 2005, investment securities in a gross unrealized loss position for twelve months or longer consisted of shares in mutual funds that at such date had an aggregate depreciation of 2.4% from the Company's amortized cost basis. Management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates. The Company has the ability and intent to hold these securities until the anticipated recovery of fair value occurs. Management does not believe any individual unrealized loss as of June 30, 2005 represents an other-than-temporary impairment. The amortized cost and approximate fair value of investment securities available for sale and held to maturity, by contractual maturities, are as follows:
September 30, 2004 -------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------- ---------- ---------- ----------- Available for Sale: U.S. Government and agency bonds 1 to 5 years $ 14,694 $ -- $ (199) $ 14,495 Municipal obligations 5 to 10 years 130 6 -- 136 Over 10 years 11,833 412 -- 12,245 Corporate bonds Less than 1 year 1,000 43 -- 1,043 1 to 5 years 4,968 479 -- 5,447 5 to 10 years 2,000 -- (5) 1,995 Over 10 years 5,341 248 -- 5,589 Asset-backed securities 1 to 5 years 1,189 8 -- 1,197 Mutual funds 14,009 -- (205) 13,804 Preferred stocks 3,900 -- -- 3,900 Other equity investments 1,755 2,009 -- 3,764 --------- ---------- ---------- ----------- Total $ 60,819 $ 3,205 $ (409) $ 63,615 ========= ========== ========== =========== Held to Maturity: Municipal obligations 5 to 10 years $ 3,260 $ 50 $ -- $ 3,310 Corporate bonds Less than 1 year 1,002 21 -- 1,023 1 to 5 years 1,025 12 -- 1,037 --------- ---------- ---------- ----------- Total $ 5,287 $ 83 $ -- $ 5,370 ========= ========== ========== ===========
6 3. MORTGAGE-RELATED SECURITIES Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:
June 30, 2005 -------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------- ---------- ---------- ----------- Available for Sale: FHLMC pass-through certificates $ 4,926 $ 5 $ (79) $ 4,852 FNMA pass-through certificates 48,683 165 (460) 48,388 GNMA pass-through certificates 4,262 15 (34) 4,243 Collateralized mortgage obligations 56,464 66 (642) 55,888 --------- ---------- ---------- ----------- Total $ 114,335 $ 251 $ (1,215) $ 113,371 ========= ========== ========== =========== Held to Maturity: FHLMC pass-through certificates $ 18,193 $ 17 $ (188) $ 18,022 FNMA pass-through certificates 31,131 26 (254) 30,903 Collateralized mortgage obligations 358 -- (3) 355 --------- ---------- ---------- ----------- Total $ 49,682 $ 43 $ (445) $ 49,280 ========= ========== ========== ===========
The table below sets forth mortgage-related securities which have an unrealized loss position as of June 30, 2005.
Less than 12 Months 12 Months or Longer Total -------------------- ------------------- -------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses -------- ---------- ------- ---------- -------- ---------- Pass-through certificates $ 66,649 $ (663) $17,276 $ (352) $ 83,925 $ (1,015) Collateralized mortgage obligations 34,421 (346) 13,421 (299) 47,842 (645) -------- ---------- ------- ---------- -------- ---------- Total $101,070 $ (1,009) $30,697 $ (651) $131,767 $ (1,660) ======== ========== ======= ========== ======== ==========
At June 30, 2005, mortgage-related securities in a gross unrealized loss position for twelve months or longer consist of 18 securities having an aggregate depreciation of 2.1% from the Company's amortized cost basis. Management does not believe any individual unrealized loss as of June 30, 2005 represents an other-than-temporary impairment. The unrealized losses reported for mortgage-related securities relate primarily to securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and private institutions. The majority of the unrealized losses associated with mortgage-related securities are primarily attributable to changes in interest rates and not from the deterioration of the creditworthiness of the issuer. 7 Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:
September 30, 2004 -------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value --------- ---------- ---------- ----------- Available for Sale: FHLMC pass-through certificates $ 5,838 $ 15 $ (42) $ 5,811 FNMA pass-through certificates 42,805 259 (203) 42,861 GNMA pass-through certificates 1,250 20 -- 1,270 Collateralized mortgage obligations 47,895 141 (358) 47,678 ---------- ---------- ---------- ----------- Total $ 97,788 $ 435 $ (603) $ 97,620 ========== ========== ========== =========== Held to Maturity: FHLMC pass-through certificates $ 16,226 $ 85 $ (101) $ 16,210 FNMA pass-through certificates 20,613 74 (106) 20,581 Collateralized mortgage obligations 524 -- (3) 521 ---------- ---------- ---------- ----------- Total $ 37,363 $ 159 $ (210) $ 37,312 ========== ========== ========== ===========
4. LOANS RECEIVABLE Loans receivable consist of the following: June 30, September 30, 2005 2004 ---------- ---------- Real estate loans: Single-family $ 153,164 $ 163,907 Construction and land 35,380 38,078 Multi-family and commercial 72,469 64,509 Home equity and lines of credit 46,082 43,621 Consumer loans 1,490 1,471 Commercial loans 11,395 10,624 ---------- ----------- Total loans 319,980 322,210 Loans in process (12,766) (15,807) Allowance for loan losses (3,471) (2,039) Deferred loan fees (185) (116) ---------- ----------- Loans receivable - net $ 303,558 $ 304,248 ========== =========== At June 30, 2005 and September 30, 2004, non-performing loans (which include loans in excess of 90 days delinquent) amounted to approximately $4,796 and $2,033, respectively. At June 30, 2005, non-performing loans primarily consisted of single-family residential mortgage loans aggregating $767, commercial real estate loans aggregating $3,837 and home equity lines of credit totaling $167. At June 30, 2005 and September 30, 2004, the Company had impaired loans with a total recorded investment of $3,837 and $0, respectively. Interest income of $39 was recognized on these impaired loans during the nine months ended June 30, 2005. Interest income of approximately $227 was not recognized as interest income due to the non-accrual status of loans for the nine months ended June 30, 2005. 8 The following is an analysis of the allowance for loan losses:
Nine Months Ended June 30, ------------------------ 2005 2004 ---------- ---------- Balance beginning of period $ 2,039 $ 1,986 Provisions charged to income 1,735 225 Charge-offs (303) (150) Recoveries -- 68 ---------- ---------- Total $ 3,471 $ 2,129 ========== ==========
The Company has identified the evaluation of the allowance for loan losses as a critical accounting estimate where amounts are sensitive to material variation. The Company is constantly challenging the methodology, conducting assessments and redefining the process to determine the appropriate level of allowance for loan losses. Critical accounting estimates are significantly affected by management's judgment and uncertainties and there is a likelihood that materially different amounts would be reported under different, but reasonable, 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. Management reviews the allowance for loan losses generally on a monthly basis, but at least quarterly. 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. In this framework, a series of qualitative factors are used in a methodology as a measurement of how current circumstances are affecting the loan portfolio. Included, among other things, in these qualitative factors are past loss experience, type and volume of loans, changes in lending policies and procedures, underwriting standards, collections, charge-offs and recoveries, national and local economic conditions, concentrations of credit, and the effect of external factors on the level of estimated credit losses in the current portfolio. The determination of the allowance for loan losses requires management to make significant estimates with respect to the amounts and timing of losses and market and economic conditions. Accordingly, a decline in the economy could increase loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss allowances in future periods. The Company will continue to monitor and adjust its allowance for loan losses through the provision for loan losses as economic conditions and other factors dictate. Although the Company maintains its allowance for loan losses at levels considered adequate to provide for the amount of known and inherent loss in its loan portfolio, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, the Company's determination as to the amount of its allowance for loan losses is subject to review by the Bank's primary regulator, the Office of Thrift Supervision (the "OTS"), as part of its examination process, which may require the recognition of an adjustment to the allowance for loan losses based on its judgment of information available to it at the time of its examination. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods. For the three and nine months ended June 30, 2005, the Company recorded a provision of $1,645 and $1,735, respectively. 9 5. DEPOSITS Deposits consist of the following major classifications:
June 30, September 30, 2005 2004 ------------------- ------------------- Amount Percent Amount Percent -------- ------- -------- ------- Non-interest bearing $ 19,825 5.5% $ 21,046 6.1% Interest bearing: NOW 70,345 19.6 55,864 16.2 Passbook 50,891 14.2 51,371 14.9 Money market demand 50,262 14.0 51,682 15.0 Certificates of deposit 167,037 46.7 164,917 47.8 -------- ----- -------- ----- Total $358,360 100.0% $344,880 100.0% ======== ===== ======== =====
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. At June 30, 2005, anti-dilutive shares consisted of options covering 408 shares. No anti-dilutive shares existed at June 30, 2004. 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, ---------------------------- --------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Numerator - Net (loss) income $ (613) $ 627 $ 548 $ 1,996 Denominators: Basic shares outstanding 1,874,143 1,835,609 1,827,849 1,831,822 Effect of dilutive shares 38,636 120,546 18,472 121,281 ------------ ------------ ------------ ------------ Diluted shares outstanding 1,912,779 1,956,155 1,846,321 1,953,103 ============ ============ ============ ============ EPS: Basic $ (0.33) $ 0.34 $ 0.30 $ 1.09 Diluted $ (0.32) $ 0.32 $ 0.30 $ 1.02
10 7. STOCK-BASED COMPENSATION The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations 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 options in accordance with the fair value method in SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net (loss) 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, ------------------------ ----------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Net (loss) income, as reported $ (613) $ 627 $ 548 $ 1,996 Less: Total stock-based employee compensation expense determined under fair value method for all options, net of tax 4 5 12 15 ---------- ---------- ---------- ---------- Pro forma net (loss) income $ (617) $ 622 $ 536 $ 1,981 ========== ========== ========== ========== (Loss) earnings per share: Basic - as reported $ (0.33) $ 0.34 $ 0.30 $ 1.09 Basic - pro forma $ (0.33) $ 0.34 $ 0.29 $ 1.08 Diluted - as reported $ (0.32) $ 0.32 $ 0.30 $ 1.02 Diluted - pro forma $ (0.32) $ 0.32 $ 0.29 $ 1.01
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (Revised 2004), "Share-Based Payment" (SFAS 123(R)). This Statement revises SFAS No. 123 by eliminating the option to account for employee stock options under APB No. 25 and generally requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (the "fair-value-based" method). The provisions of SFAS 123(R) were to be effective for the Company's financial statements issued for the first interim period beginning after June 15, 2005. However, the SEC in April 2005 amended the compliance dates such that SFAS 123(R) becomes effective at the beginning of the fiscal year that begins after June 15, 2005. Accordingly, the Company will adopt SFAS 123(R) on October 1, 2005 and plans to use the modified prospective method. In management's opinion, the impact of adopting SFAS 123(R) will be generally consistent with the impact disclosed above pursuant to the pro forma disclosure requirements of SFAS No. 123. 11 8. RECENT ACCOUNTING PRONOUNCEMENTS 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 and was effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. However, the guidance contained in paragraphs 10-20 of this Issue has been delayed by FASB Staff Position ("FSP") EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," posted September 30, 2004. On June 29, 2005, the Board decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed the staff to issue proposed FSP EITF 03-1-a, "Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1," as final. The final FSP will supersede EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," and EITF Topic No. D-44, "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value." The final FSP (retitled FSP FAS 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments") will replace the guidance set forth in paragraphs 10-18 of Issue 03-1 with references to existing other-than-temporary impairment guidance, such as FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities", SEC Staff Accounting Bulletin No. 59, "Accounting for Noncurrent Marketable Equity Securities", and APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." FSP FAS 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made. The Board decided that FSP FAS 115-1 would be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The Board directed the staff to proceed to a draft of a final FSP for vote by written ballot. 12 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 actual results of First Keystone Financial, Inc. (the "Company") 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 The Company 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 composition of its loan portfolio towards commercial and multi-family real estate, commercial business, construction and home equity loans and lines of credit in order to provide a higher yielding portfolio with generally shorter terms and/or bearing adjustable interest rates. 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. The Company is constantly challenging the methodology, conducting assessments and redefining the process to determine the appropriate level of allowance for loan losses. Critical accounting estimates are significantly affected by management's judgment and uncertainties and there is a likelihood that materially different amounts would be reported under different, but reasonable, 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. Management reviews the allowance for loan losses generally on a monthly basis, but at least quarterly. 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. In this framework, a series of qualitative factors are used in a methodology as a measurement of how current circumstances are affecting the loan portfolio. Included, among other things, in these qualitative factors are past loss experience, type and volume of loans, changes in lending policies and procedures, underwriting standards, collections, charge-offs and recoveries, national and local economic conditions, concentrations of credit, and the effect of external factors on the level of estimated credit losses in the current portfolio. 13 The determination of the allowance for loan losses requires management to make significant estimates with respect to the amounts and timing of losses and market and economic conditions. Accordingly, a decline in the economy could increase loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss allowances in future periods. The Company will continue to monitor and adjust its allowance for loan losses through the provision for loan losses as economic conditions and other factors dictate. Although the Company maintains its allowance for loan losses at levels considered adequate to provide for the amount of known and inherent loss in its loan portfolio, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, the Company's determination as to the amount of its allowance for loan losses is subject to review by the Bank's primary regulator, the Office of Thrift Supervision (the "OTS"), as part of its examination process, which may require the recognition of an adjustment to the allowance for loan losses based on its judgment of information available to it at the time of its examination. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2005 AND SEPTEMBER 30, 2004 Total assets of the Company increased $1.7 million from $571.9 million at September 30, 2004 to $573.6 million at June 30, 2005. The mortgage-related securities held to maturity increased by $12.3 million from $37.3 million at September 30, 2004 mainly due to implementation of the Company's asset-liability strategy of reinvesting a portion of the proceeds from the sale of investment securities available for sale into the held to maturity portfolio in order to minimize volatility of the Company's equity in the future as market rates of interest shift. In addition, mortgage-related securities available for sale increased $15.8 million, or 16.1%, from $97.6 million mainly due to the reinvestment of cash flows from the loan portfolio. Although loans receivable decreased slightly to $303.6 million at June 30, 2005, the Company continued to increase its percentage of its portfolio consisting of commercial real estate loans and home equity loans and lines of credit, partially offset by a decrease in single-family residential loans. Prepaid expenses and other assets decreased $7.7 million primarily due to funds received for settlement of sales of securities. Deposits increased $13.5 million, or 3.9%, from $344.9 million at September 30, 2004 to $358.4 million at June 30, 2005, while borrowings decreased $15.6 million, or 9.1%, from $171.1 million at September 30, 2004. The increase in deposits resulted from an increase of $11.4 million, or 6.3%, in core deposits (which consist of passbook, money market, NOW and non-interest bearing accounts) combined with an increase of $2.1 million, or 1.3%, in certificates of deposit. The growth in deposits was attributable to the Company's commitment to focus on business development and aggressively pursue those relationships. Stockholders' equity decreased $265,000 to $29.4 million at June 30, 2005 primarily due to the reduction in accumulated other comprehensive income of $768,000, the cost of repurchasing 4,900 shares of common stock and dividend payments totaling $604,000, partially offset by net income of $548,000 as well as a $648,000 increase in equity resulting from the exercise of stock options during the nine months ended June 30, 2005. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2005 AND 2004 NET (LOSS) INCOME. The Company incurred a net loss for the quarter ended June 30, 2005 of $(613,000), or $(0.32) per diluted share, as compared to net income of $627,000, or $.32 per diluted share, for the quarter ended June 30, 2004. Net income for the nine months ended June 30, 2005 was $548,000, or $.30 per diluted share, a decrease of $1.4 million as compared to $2.0 million, or $1.02 per diluted share, for the same period in 2004. The primary reason for the significant decline in the 2005 periods was the $1.6 million provision for loan losses during the third quarter of fiscal 2005. See "- Provision for Loan Losses." 14 NET INTEREST INCOME. Net interest income decreased slightly by $94,000, or 3.2%, to $2.8 million and increased slightly by $18,000, or 0.2%, to $8.6 million for the three and nine months ended June 30, 2005, respectively, compared to the same periods in 2004. The decrease for the third quarter of 2005 was primarily due to a $377,000, or 10.5%, increase in interest expense which was partially offset by an increase in interest income of $283,000, or 4.4%, for the three months ended June 30, 2005, respectively. The $18,000 increase in net interest income for the nine months ended June 30, 2005, was primarily due to an increase in interest income of $621,000, or 3.2%, for the nine months ended June 30, 2005, respectively, which was partially offset by a $603,000, or 5.5%, increase in interest expense during such period. The average balance of interest-earning assets increased $7.7 million and $10.3 million for the three and nine months ended June 30, 2005, respectively, as compared to the same periods in 2004. Calculated on a tax-equivalent basis, the weighted average yield earned on interest-earning assets for the three months ended June 30, 2005 increased 14 basis points to 5.12% compared to the 2004 period and 5 basis points to 5.09% for the nine months ended June 30, 2005. However, offsetting such improvements in the yield were increases in the weighted average rate paid on interest-bearing liabilities. The weighted average rate paid on such liabilities increased 25 basis points to 2.98% during the three months ended June 30, 2005 from 2.73% for the same period in the prior fiscal year and 9 basis points to 2.90% for the nine months ended June 30, 2005 as compared to 2.81% for the nine months ended June 30, 2004. The increases in the cost of funds were primarily a result of the upwards repricing of certificates of deposit, money market accounts and floating rate debt due to increases in market rates of interest which outpaced the increases in the yield on interest-earning assets. In addition, net interest expense was affected by an increase in the average balance of interest-bearing liabilities of $6.6 million and $10.7 million for the three and nine months ended June 30, 2005, respectively, as compared to the same periods in 2004. The following tables present the average balances for various categories of assets and liabilities, and income and expense related to those assets and liabilities for the three and nine months ended June 30, 2005 and 2004. 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 practice followed by many institutions 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. 15
FOR THE THREE MONTHS ENDED ----------------------------------------------------------------------- JUNE 30, 2005 JUNE 30, 2004 ---------------------------------- -------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost(4) Balance Interest Cost(4) --------- --------- ---------- --------- -------- --------- Interest-earning assets: Loans receivable(1) (2) $ 304,240 $ 4,446 5.85% $ 296,824 $ 4,331 5.84% Mortgage-related securities(2) 163,818 1,662 4.06 141,377 1,327 3.75 Investment securities(2) 57,514 723 5.03 80,378 917 4.56 Other interest-earning assets 11,802 41 1.39 11,091 17 0.61 --------- --------- --------- -------- Total interest-earning assets 537,374 $ 6,872 5.12 529,670 $ 6,592 4.98 --------- --------- ---------- --------- -------- --------- Non-interest-earning assets 32,008 34,104 --------- --------- Total assets $ 569,382 $ 563,774 ========= ========= Interest-bearing liabilities: Deposits $ 357,629 $ 1,625 1.82 $ 347,979 $ 1,405 1.62 FHLB advances and other borrowings 153,418 1,888 4.92 156,429 1,763 4.51 Junior subordinated debentures 21,535 450 8.36 21,572 418 7.75 --------- --------- --------- -------- Total interest-bearing liabilities 532,582 3,963 2.98 525,980 3,586 2.73 --------- --------- ---------- --------- -------- --------- Interest rate spread 2.14% 2.25% ========== ========= Non-interest-bearing liabilities 7,105 6,715 --------- --------- Total liabilities 539,687 532,695 Stockholders' equity 29,695 31,079 --------- --------- Total liabilities and stockholders' equity $ 569,382 $ 563,774 ========= ========= Net interest-earning assets $ 4,792 $ 3,690 ========= ========= Net interest income $ 2,909 $ 3,006 ========= ======== Net interest margin(3) 2.17% 2.27% ========== ========= Ratio of average interest-earning assets to average interest-bearing liabilities 100.90% 100.70% ========== =========
- --------------------- (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. (4) Presented on a tax-equivalent basis. 16
FOR THE NINE MONTHS ENDED ---------------------------------------------------------------------- JUNE 30, 2005 JUNE 30, 2004 --------------------------------- ---------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Cost(4) Balance Interest Cost(4) ------- --------- --------- ----------- -------- -------- Interest-earning assets: Loans receivable(1) (2) $ 305,552 $ 13,317 5.81% $ 293,283 $ 13,154 5.98% Mortgage-related securities(2) 153,983 4,615 4.00 135,129 3,852 3.80 Investment securities(2) 64,444 2,408 4.98 84,992 2,793 4.38 Other interest-earning assets 12,049 122 1.35 12,304 52 0.56 --------- --------- ----------- -------- Total interest-earning assets 536,028 $ 20,462 5.09 525,708 $ 19,851 5.04 --------- --------- --------- ----------- -------- --------- Non-interest-earning assets 32,457 31,592 --------- ----------- Total assets $ 568,485 $ 557,300 ========= =========== Interest-bearing liabilities: Deposits $ 348,445 $ 4,551 1.74 $ 348,451 $ 4,481 1.71 FHLB advances and other borrowings 162,720 5,716 4.68 151,941 5,265 4.62 Junior subordinated debentures 21,544 1,328 8.22 21,581 1,246 7.70 --------- --------- ----------- -------- Total interest-bearing liabilities 532,709 11,595 2.90 521,973 10,992 2.81 --------- --------- --------- ----------- -------- --------- Interest rate spread 2.19% 2.23% ========= ========= Non-interest-bearing liabilities 6,007 3,730 --------- ----------- Total liabilities 538,716 525,703 Stockholders' equity 29,769 31,597 --------- ----------- Total liabilities and stockholders' equity $ 568,485 $ 557,300 ========= =========== Net interest-earning assets $ 3,319 $ 3,735 ========= =========== Net interest income $ 8,867 $ 8,859 ========= ======== Net interest margin(3) 2.21% 2.25% ========= ========= Ratio of average interest-earning assets to average interest-bearing liabilities 100.62% 100.72% ========= =========
- --------------------- (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. (4) Presented on a tax-equivalent basis. 17 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 as 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 --------------------------------------------------- JUNE 30, 2005 JUNE 30, 2005 --------------------------------------------------- AVERAGE AVERAGE (Dollars in thousands) INTEREST YIELD/COST INTEREST YIELD/COST --------------------------------------------------- Investment securities - nontaxable $ 639 4.44% $ 829 4.13% Tax equivalent adjustments 84 88 ------ ------ Investment securities - nontaxable to a taxable equivalent yield $ 723 5.03% $ 917 4.56% ====== ====== Net interest income $2,825 $2,919 Tax equivalent adjustment 84 88 ------ ------ Net interest income, tax equivalent $2,909 $3,007 ====== ====== Net interest rate spread, no tax adjustment 2.08% 2.18% Net interest margin, no tax adjustment 2.10% 2.20%
FOR THE NINE MONTHS ENDED --------------------------------------------------- JUNE 30, 2005 JUNE 30, 2005 --------------------------------------------------- AVERAGE AVERAGE (Dollars in thousands) INTEREST YIELD/COST INTEREST YIELD/COST --------------------------------------------------- Investment securities - nontaxable $2,147 4.44% $2,521 3.95% Tax equivalent adjustments 261 272 ------ ------ Investment securities - nontaxable to a taxable equivalent yield $2,408 4.98% $2,793 4.38% ====== ====== Net interest income $8,606 $8,588 Tax equivalent adjustment 261 272 ------ ------ Net interest income, tax equivalent $8,867 $8,860 ====== ====== Net interest rate spread, no tax adjustment 2.12% 2.16% Net interest margin, no tax adjustment 2.14% 2.18%
PROVISION FOR LOAN LOSSES. The Company establishes provisions for loan losses, which are charges to its operating results, in order to maintain a level of total allowance for losses that management believes covers all known and inherent losses that are both probable and reasonably estimable at each reporting date. Management performs reviews generally on a monthly basis, but at least quarterly, in order to identify these known and inherent losses and to assess the overall collection probability for the loan portfolio. Management's reviews consist of a quantitative analysis by loan category, using historical loss experience, and consideration of a series of qualitative loss factors. For each primary type of loan, management establishes a loss factor reflecting our estimate of the known and inherent losses in each loan type using both the quantitative analysis as well as consideration of the qualitative factors. Management's evaluation process includes, among other things, an analysis of delinquency trends, non-performing loan trends, the levels of charge-offs and recoveries, the levels of classified and special mention assets; prior loss experience, total loans outstanding, the volume of loan originations, the type, average size, terms and geographic location and concentration of loans held by the Company, the value and the nature of the collateral securing loans, the number of loans requiring heightened management oversight, general economic conditions, particularly as they relate to the Company's primary market area, and trends in market rates of interest. The amount of the allowance for loan losses is an estimate and actual 18 losses may vary from these estimates. Furthermore, the Company's primary banking regulator periodically reviews the Company's allowance for loan losses as an integral part of the examination process. Such agency may require the Company to make additional provisions for estimated loan losses based upon judgments different from those of management. For the three months ended June 30, 2005 and 2004, the provision for loan losses amounted to $1.6 million and $75,000, respectively, while for the nine months ended June 30, 2005 and 2004 the provision for loan losses amounted to $1.7 million and $225,000, respectively. The significant increase in the provision for loan losses reflected management's assessment of a number of factors, including, among other things, the significant increase in the level of the Company's non-performing loans including migration in the Company's classification of such assets in substandard, doubtful and special mention categories in the 2005 periods, the increased level of charge-offs, the changing composition of the commercial and multi-family real estate and commercial business loan portfolios as well as extensive discussions with the examination staff in connection with the recent examination of the Company by its primary banking regulator. At June 30, 2005, non-performing assets increased to $5.7 million, or 1.0% of total assets, from $3.3 million at September 30, 2004. The increase in non-performing assets was primarily the result of a $3.6 million increase in non-performing commercial real estate loans, combined with $144,000 increase in single-family residential loans, partially offset by previously non-performing construction and home equity loans aggregating $770,000 and $76,000, respectively, returning to current status. Included in non-performing assets at June 30, 2005 was a $3.8 million non-accrual commercial real estate loan to one borrower secured by a restaurant in Chesapeake City, Maryland which loan was one of the primary reasons for the substantial increase in the provision for the third quarter of fiscal 2005. Although the Company received an updated appraisal of the property, upon review, during the quarter ended June 30, 2005, of a number of factors concerning the loan and the unique nature of the property, the Company determined to classify this loan as "doubtful" and establish a significant reserve related to it. The Company will continue its foreclosure proceedings and the borrower is currently marketing the property for sale. Included in non-performing assets is $920,000 in real estate owned consisted primarily of one commercial real estate property. The Bank owns a 25% participation interest in an 18-hole golf course and a golf house located in Avondale, Pennsylvania. The lead lender collected $1.0 million from an easement agreement of which $250,000 represented the Bank's portion and reduced the book value of the property to $875,000. 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 approximately $0 and $150,000 for the three and nine months ended June 30, 2004. No operating expenses were incurred during the three and nine months ended June 30, 2005. In May 2004, the lead lender entered into an agreement of sale. Although the agreement of sale has expired, the prospective buyer is operating and incurring the operating costs of the facility under the expired agreement. During the three months ended June 30, 2005, the Company also charged-off $243,000 related to a small commercial loan. In addition, the Company's portfolios of commercial and multi-family real estate and land loans, construction loans and commercial business loans, all of which generally are deemed to have higher levels of known and inherent losses than single-family residential mortgage loans, continued to grow in the aggregate, both in terms of total dollar amount and as a percentage of the Company's total loan portfolio, during the nine months ended June 30, 2005. Furthermore, the composition of the Company's commercial loan portfolio in particular, much of which is unseasoned, has shifted in recent periods with respect to the nature of the collateral for such loans and the type of borrower. Increasingly, such loans' primary collateral is not real estate but inventory and accounts receivables, collateral which is, among other things, difficult to value. The borrowers tend to be small businesses which are more susceptible to adverse changes in business conditions, including, for example, rising interest rates, since such rate changes result, due to the adjustable nature of the loans, in increased operating costs for such borrowers. The coverage ratio, which is the ratio of the allowance for loan losses to non-performing loans, was 72.38% and 100.3% at June 30, 2005 and September 30, 2004, respectively, while the ratio of the allowance to gross loans was 1.13% and 0.67%, respectively, at such dates. 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. 19 NON-INTEREST INCOME. Non-interest income increased $108,000 to $683,000 for the three months ended June 30, 2005 from the same period last year. The increase in non-interest income was primarily the result of a $92,000 increase in service charges and other fees due to additional fee-based deposit services implemented in the latter part of fiscal 2004. Non-interest income decreased $1.1 million to $2.7 million for the nine months ended June 30, 2005 by comparison to the same period last year. Non-interest income was substantially higher in the 2004 period due to gains on sale of investment securities which resulted in gains experienced in the 2004 period related to the gain on sale of equity securities of a company that was acquired. Non-interest income for the nine months ended June 30, 2004 also included $550,000 related to a non-recurring real estate fee. By comparison, gains during the 2005 period only amounted to $539,000 and there were no real estate fees. The increase in cash surrender value of life insurance was $565,000 for the nine months ended June 30, 2005 as compared to $628,000 for the same period in 2004. The reduced rate of increase in the cash surrender value related to a reduction in the appreciation in the value of equity securities which form the primary investment of certain insurance policies held by the Bank to fund certain supplemental retirement benefits. Partially offsetting such decreases was a $364,000 increase in service charges and other fees due to the implementation of additional fee-based deposit services. NON-INTEREST EXPENSE. Non-interest expense for the quarter ended June 30, 2005 increased $300,000, or 11.3%, from the same period last year primarily due to increases of $108,000, or 36.3%, $65,000, or 33.3%, $52,000, or 12.6% and $41,000, or 3.0% in occupancy and equipment, professional fees, other non-interest expense and salaries and employee benefits, respectively. The increase in occupancy and equipment was related to branch expansion in the first quarter of fiscal 2005 and increased costs relating to rent, maintenance and taxes. Professional fees increased due to the additional auditing and legal fees resulting from the increased regulatory requirements placed on financial institutions. The increase in non-interest expense was due to the implementation of a training program as well as increased general administrative expenses. For the nine months ended June 30, 2005, non-interest expense decreased by $478,000, or 4.9%, primarily due to a decrease of $833,000, or 15.2%, in salary and employee benefits. The decrease was primarily the result of expenses recognized in the 2004 period in connection with the funding of a non-qualified supplemental retirement plan for certain executive officers and the prepayment of the outstanding balance of one of the loans to the ESOP. However, during fiscal 2005, such decreases were partially offset by a $379,000 increase in salary and employee benefit expense compared to the same period in the prior year due to merit increases, the hiring of additional personnel and retirement benefits. In addition, the decrease in non-interest expense was partially offset by increases of $227,000, or 24.6%, $110,000, or 16.2%, and $117,000, or 9.1%, in occupancy and equipment, professional fees and other non-interest expenses, respectively, for the reasons described above. Furthermore, the decrease in non-interest expense was partially offset by an increase of $46,000 in data processing costs. INCOME TAX EXPENSE. Income tax expense decreased $616,000 and $691,000 from $146,000 and $500,000 to a benefit of $470,000 and $190,000 for the three and nine months ended June 30, 2005, respectively. The decrease for the three and nine months ended June 30, 2005 was primarily related to the decline in pre-tax income for such periods. 20 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 June 30, 2005, the Company had short-term borrowings (due within one year or currently callable) outstanding of $155.0 million, all of which consisted of advances from the Federal Home Loan Bank of Pittsburgh. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer term basis, the Company maintains a strategy of investing in various lending products, mortgage-related securities and investment securities. The Company uses its sources of funds primarily to meet its ongoing commitments, to fund maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a portfolio of mortgage-related and investment securities. At June 30, 2005, 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 $39.7 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2005 totaled $82.5 million. Based upon its historical experience, management believes that a significant portion of maturing deposits will remain with the Company. As of June 30, 2005, 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 8.1% of its risk-weighted assets. At June 30, 2005, the Bank had tangible capital and core capital equal to 8.1% of adjusted total assets and total capital equal to 15.0% of risk-weighted assets. As of June 30, 2005, the Bank met the requirements of a "well capitalized" institution under OTS regulatory framework for prompt corrective action. 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. 21 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, 2004. There are no material changes in the Company's asset-liability management policy from those disclosed in the Form 10-K. The Company utilizes reports prepared by the OTS to measure interest rate risk. Using data from the Bank's quarterly thrift financial reports, the OTS models the net portfolio value ("NPV") of the Bank over a variety of interest rate scenarios. The NPV is defined as the present value of expected cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing off-balance sheet contracts. The model assumes instantaneous, parallel shifts in the U.S. Treasury Securities yield curve of 100 to 300 basis points up and 200 basis points down, in 100 basis point increments. The interest rate risk measures used by the OTS include an "Exposure Measure" or "Post-Shock" NPV ratio and a "Sensitivity Measure." The "Post-Shock" NPV ratio is the net present value as a percentage of assets over the various yield curve shifts. A low "Post-Shock" NPV ratio indicates greater exposure to interest rate risk and can result from a low initial NPV ratio or high sensitivity to changes in interest rates. The "Sensitivity Measure" is the decline in the NPV ratio, in basis points, caused by a 2% increase or decrease in rates, whichever produces a larger decline. The following sets forth the Bank's NPV as of June 30, 2005.
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 $46,656 $(21,465) (32)% 8.40% (316) bp 9.70 (179) bp 100 62,707 (5,414) (8) 10.84 (72) bp 0 68,121 -- -- 11.56 -- (100) 68,231 110 0 11.46 (10) bp (200) 56,033 (12,088) (18) 9.36 (220) bp
As of June 30, 2005, the Company's NPV was $68.1 million or 11.56% of the market value of assets. Following a 200 basis point decrease in interest rates, the Company's "post shock" NPV was $56.0 million or 9.36% of the market value of assets. The change in the NPV ratio or the Company's sensitivity measure was (2.20)%. ITEM 4. 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) and 15d-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) or 15(d)-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. 22 PART II OTHER INFORMATION Item 1. Legal Proceedings No material changes in the legal proceedings previously disclosed in Item 3 "Legal Proceedings" of the Company's Annual Report on Form 10-K for the year ended September 30, 2004. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a) - (b) Not applicable (c) 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, 2005 -- -- -- 51,432 May 1-31, 2005 -- -- -- 51,432 June 1-30, 2005 -- -- -- 51,432 Total -- -- -- 51,432 ======
- ------------------------- (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. Subsequent to June 30, 2005, the Company decided to terminate the repurchase program based on the determination that due to the pricing of the common stock and the consideration of various other factors, the completion of the Company's repurchase program was not the best use of the Company's available funds. Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information (a) None (b) No changes in procedures. Item 6. Exhibits (a) List of Exhibits
Exhibit No. Description - ---------- --------------------------------------------------------------------------------- 3.1 Amended and Restated Articles of Incorporation of First Keystone Financial, Inc. 1 3.2 Amended and Restated Bylaws of First Keystone Financial, Inc. 1 4.1 Specimen Stock Certificate of First Keystone Financial, Inc. 1 4.2 Instrument defining the rights of security holders ** 10.1 Employee Stock Ownership Plan and Trust of First Keystone Financial, Inc. 1, *
23 10.2 401(K)/ Profit-sharing Plan of First Keystone Federal Savings Bank 1, * 10.3 Employment Agreement between First Keystone Financial, Inc. and Thomas M. Kelly dated December 1, 2004. 2,* 10.4 Severance Agreement between First Keystone Financial, Inc. and Elizabeth M. Mulcahy dated December 1, 2004. 2,* 10.5 Severance Agreement between First Keystone Financial, Inc. and Carol Walsh dated December 1, 2004. 2,* 10.6 1995 Stock Option Plan. 3, * 10.7 1995 Recognition and Retention Plan and Trust Agreement 4,* 10.8 1998 Stock Option Plan 4, * 10.9 Employment Agreement between First Keystone Bank and Thomas M. Kelly dated December 1, 2004 2, * 10.10 Severance Agreement between First Keystone Bank and Elizabeth M. Mulcahy dated December 1, 2004 2, * 10.11 Severance Agreement between First Keystone Bank and Carol Walsh dated December 1, 2004 2, * 10.12 First Keystone Bank Supplemental Executive Retirement Plan 5,* 10.13 Consulting Agreement between First Keystone Bank and Edmund Jones 6,* 10.14 Amendment No. 1 to the Employment Agreement between First Keystone Financial, Inc. and Thomas M. Kelly. 7,* 10.15 Amendment No. 1 to the Employment Agreement between First Keystone Bank and Thomas M. Kelly. 7,* 10.16 Transition, Consulting, Noncompetition and Retirement Agreement by and between First Keystone Financial, Inc., First Keystone Bank and Donald S. Guthrie. 8,* 11 Statement re: computation of per share earnings. See Note 2 to the Consolidated Financial Statements included in Item 8 hereof. 31.1 Section 302 Certification of Chief Executive Officer 31.2 Section 302 Certification of Chief Financial Officer 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Codes of Ethics 9
- ---------------------------- (1) Incorporated by reference from the Registration Statement Form S-1 (Registration No. 33-84824) filed by the Registrant with the SEC on October 6, 1994, as amended. (2) Incorporated by reference from Exhibit 10.5, 10.6, 10.8, 10.14, 10.15 and 10.16, respectively, in the Form 8-K filed by the Registrant with the SEC on December 7, 2004 (File No. 000-25328). (3) Incorporated by reference from Exhibit 10.9 in the Form 10-K filed by the Registrant with SEC on December 29, 1995 (File No. 000-25328). (4) Incorporated from Appendix A of the Registrant's definitive proxy statement dated December 24, 1998 (File No. 000-25328). (5) Incorporated by reference from Exhibit 10.17 in the Form 10-Q filed by the Registrant with the SEC on May 17, 2004. (6) Incorporated by reference from Exhibit 10.18 in the Form 10-K filed by the Registrant with the SEC on December 29, 2004. (7) Incorporated by reference from Exhibit 10.19 and 10.20, respectively, in the Form 8-K filed by the Registrant with the SEC on March 29, 2005. (8) Incorporated by reference from Exhibit 10.21 in the Form 8-K filed by the Registrant with the SEC on March 29, 2005. 24 (9) Incorporated by reference from the Form 10-K filed by the Registrant with the SEC on December 23, 2003. (*) Consists of a management contract or compensatory plan (**) The Company has no instruments defining the rights of holders of long-term debt where the amount of securities authorized under such instrument exceeds 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any such instrument to the SEC upon request. 25 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 15, 2005 By: /s/ Thomas M. Kelly ---------------------------------- Thomas M. Kelly President and Chief Executive Officer Date: August 15, 2005 By: /s/ Rose M. DiMarco ---------------------------------- Rose M. DiMarco Chief Financial Officer 26 EX-31.1 2 w12002exv31w1.txt SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER 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, Thomas M. Kelly, 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 15, 2005 /s/Thomas M. Kelly --------------------------------------------- Thomas M. Kelly President and Chief Executive Officer EX-31.2 3 w12002exv31w2.txt SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER 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 15, 2005 /s/Rose M. DiMarco --------------------------------------------- Rose M. DiMarco Chief Financial Officer EX-32.1 4 w12002exv32w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF SARBANES-OXLEY 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 certifies that the Registrant's Form 10-Q for the quarter ended June 30, 2005 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/ Thomas M. Kelly -------------------------------------------- Name: Thomas M. Kelly Title: President and Chief Executive Officer Date: August 15, 2005 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 w12002exv32w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF SARBANES-OXLEY 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 certifies that the Registrant's Form 10-Q for the quarter ended June 30, 2005 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 15, 2005 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-----