-----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, KnzzpnMoq0erPneCsNWMTET5dXj27QqOq12R+XDqiYGMgrfM2pmSAR0GnpXV2Gn2 EMTBusn+7UstZcLK0xXJcA== 0000893220-99-000945.txt : 19990817 0000893220-99-000945.hdr.sgml : 19990817 ACCESSION NUMBER: 0000893220-99-000945 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST KEYSTONE FINANCIAL INC CENTRAL INDEX KEY: 0000856751 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 232576479 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25328 FILM NUMBER: 99690314 BUSINESS ADDRESS: STREET 1: 22 WEST STATE ST CITY: MEDIA STATE: PA ZIP: 19063 BUSINESS PHONE: 6105656210 10-Q 1 FORM 10-Q FIRST KEYSTONE FINANCIAL, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .......... to .......... Commission File Number: 0-25328 FIRST KEYSTONE FINANCIAL, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-0469351 ------------ ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 22 West State Street Media, Pennsylvania 19063 (Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (610) 565-6210 Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares of Common Stock outstanding as of August 4, 1999: 2,251,716 Transitional Small Business Disclosure Format Yes No X 2 FIRST KEYSTONE FINANCIAL, INC. CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Statements of Financial Condition as of June 30, 1999 (Unaudited) and September 30, 1998 ..................... 1 Consolidated Statements of Income for the Three and Nine Months Ended June 30, 1999 and 1998 (Unaudited) ...................... 2 Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended June 30, 1998 (Unaudited) ............................... 3 Consolidated Statements of Cash Flows for the Three and Nine Months Ended June 30, 1999 and 1998 (Unaudited) ...................... 4 Notes to Consolidated Financial Statements (Unaudited) ............... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................ 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk ........... 15 PART II OTHER INFORMATION Item 1. Legal Proceedings .................................................... 16 Item 2. Changes in Securities and Use of Proceeds ............................ 16 Item 3. Defaults Upon Senior Securities ...................................... 16 Item 4. Submission of Matters to a Vote of Security Holders .................. 16 Item 5. Other Information .................................................... 16 Item 6. Exhibits and Reports on Form 8-K ..................................... 16 SIGNATURES .......................................................................... 18
i 3 FIRST KEYSTONE FINANCIAL, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands)
June 30 September 30 ASSETS 1999 1998 - ------ --------- --------- (Unaudited) Cash and amounts due from depository institutions ........................................ $ 2,733 $ 2,457 Interest-bearing deposits with depository institutions ................................... 22,000 21,669 --------- --------- Total cash and cash equivalents ................................................ 24,733 24,126 Investment securities available for sale ................................................. 40,418 40,621 Mortgage-related securities available for sale ........................................... 111,329 115,486 Loans held for sale ...................................................................... 3,295 2,799 Mortgage-related securities held to maturity - at amortized cost (approximate fair value of $15,060 at June 30, 1999 and $18,700 at September 30, 1998) ........................................... 15,538 18,769 Loans receivable - net ................................................................... 222,526 198,343 Accrued interest receivable .............................................................. 2,832 3,117 Real estate owned ........................................................................ 534 1,663 Federal Home Loan Bank stock - at cost ................................................... 6,066 5,079 Office properties and equipment - net .................................................... 2,868 2,612 Deferred income taxes .................................................................... 2,011 283 Prepaid expenses and other assets ........................................................ 9,930 2,965 --------- --------- TOTAL ASSETS ............................................................................. $ 442,080 $ 415,863 ========= ========= LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY Liabilities: Deposits ....................................................................... $ 258,618 $ 247,311 Advances from Federal Home Loan Bank ........................................... 116,291 101,578 Securities sold under agreements to repurchase ................................. 19,496 19,300 Accrued interest payable ....................................................... 2,035 1,683 Advances from borrowers for taxes and insurance ................................ 3,138 1,036 Accounts payable and accrued expenses .......................................... 2,423 2,091 --------- --------- Total liabilities ............................................. 402,001 372,999 --------- --------- Company-obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debentures of the Company ............. 16,200 16,200 Stockholders' Equity: Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued Common stock, $.01 par value, 20,000,000 shares authorized; issued and outstanding: 2,251,716 shares at June 30, 1999 and 2,329,216 shares at September 30, 1998 ............................... 14 14 Additional paid-in capital ..................................................... 13,361 13,204 Common stock acquired by stock benefit plans ................................... (1,597) (1,789) Treasury stock at cost; 468,284 shares at June 30, 1999 ........................ (5,622) (4,575) and 390,784 shares at September 30, 1998 Unrealized (loss) gain on available for sale securities - net of tax ........... (2,288) 1,487 Retained earnings - partially restricted ....................................... 20,011 18,323 --------- --------- Total stockholders' equity .................................... 23,879 26,664 --------- --------- TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY .............. $ 442,080 $ 415,863 ========= =========
See notes to consolidated financial statements. 1 4 FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except per share data)
Three months ended Nine months ended June 30 June 30 -------------------------- -------------------------- 1999 1998 1999 1998 -------- -------- -------- -------- INTEREST INCOME: Interest on: Loans ............................................ $ 4,329 $ 4,102 $ 12,948 $ 12,297 Mortgage-related securities ...................... 1,896 1,880 5,857 6,003 Investments ...................................... 708 697 2,173 1,706 Interest-bearing deposits ........................ 117 97 321 368 -------- -------- -------- -------- Total interest income ........... 7,050 6,776 21,299 20,374 -------- -------- -------- -------- INTEREST EXPENSE: Interest on: Deposits ......................................... 2,542 2,497 7,707 7,351 Federal Home Loan Bank advances .................. 1,304 982 3 983 3,045 Other borrowings ................................. 300 373 888 1,116 -------- -------- -------- -------- Total interest expense .......... 4,146 3,852 12,578 11,512 -------- -------- -------- -------- NET INTEREST INCOME ........................................ 2,904 2,924 8,721 8,862 PROVISION FOR LOAN LOSSES .................................. 84 20 184 172 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ....................................... 2,820 2,904 8,537 8,690 -------- -------- -------- -------- OTHER INCOME (LOSS): Service charges and other fees ........................ 222 219 697 687 Net gain on sale of: Loans ............................................ 70 76 270 334 Investment and mortgage-related securities ....... 42 9 291 56 Real estate owned ................................ 8 6 8 7 Other assets ..................................... 1 1 Real estate operations ................................ (68) (11) (92) (29) Other income .......................................... 98 20 207 47 -------- -------- -------- -------- Total other income .............. 372 320 1,381 1,103 -------- -------- -------- -------- OPERATING EXPENSES: Salaries and employee benefits ........................ 876 916 2,662 2,735 Occupancy and equipment expenses ...................... 258 264 771 761 Professional fees ..................................... 142 136 435 425 Federal deposit insurance premium ..................... 37 36 110 109 Bank service charges .................................. 123 104 326 305 Data processing ....................................... 98 94 290 262 Advertising ........................................... 90 69 247 216 Provision for real estate owned losses ................ 140 350 140 Minority interest in expense of subsidiary ............ 393 393 1,179 1,179 Other ................................................. 206 211 783 632 -------- -------- -------- -------- Total operating expenses ........ 2,223 2,363 7,153 6,764 -------- -------- -------- -------- INCOME BEFORE INCOME TAX EXPENSE ........................... 969 861 2,765 3,029 INCOME TAX EXPENSE ......................................... 244 160 668 972 -------- -------- -------- -------- NET INCOME ................................................. $ 725 $ 701 $ 2,097 $ 2,057 ======== ======== ======== ======== BASIC EARNINGS PER COMMON SHARE ............................ $ 0.35 $ 0.33 $ 1.03 $ 0.96 ======== ======== ======== ======== DILUTED EARNINGS PER COMMON SHARE .......................... $ 0.34 $ 0.31 $ 0.98 $ 0.90 ======== ======== ======== ========
See notes to consolidated financial statements. 2 5 FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (dollars in thousands)
Common stock Additional acquired by Common paid-in stock benefit Treasury stock capital plans stock ----- ------- ----- ----- BALANCE AT SEPTEMBER 30, 1998 $ 14 $ 13,204 $ (1,789) $ (4,575) ESOP stock committed to be released 87 Excess of fair value above cost of ESOP stock committed to be released 157 RRP amortization 105 Dividends - $.18 per share Net unrealized loss on securities available for sale, net of tax Purchase of treasury stock (1,047) Net income -------- -------- -------- -------- BALANCE AT JUNE 30, 1999 $ 14 $ 13,361 $ (1,597) $ (5,622) ======== ======== ======== ======== Unrealized gain (loss) on securities Total available for sale Retained stockholders' (net of tax) earnings equity ------------ -------- ------ BALANCE AT SEPTEMBER 30, 1998 $ 1,487 $ 18,323 $ 26,664 ESOP stock committed to be released 87 Excess of fair value above cost of ESOP stock committed to be released 157 RRP amortization 105 Dividends - $.18 per share (409) (409) Net unrealized loss on securities available for sale, net of tax (3,775) (3,775) Purchase of treasury stock (1,047) Net income 2,097 2,097 -------- -------- -------- BALANCE AT JUNE 30, 1999 $ (2,288) $ 20,011 $ 23,879 ======== ======== ========
See notes to consolidated financial statements. 3 6 FIRST KEYSTONE FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
Nine months ended June 30 ------------------------ 1999 1998 -------- -------- OPERATING ACTIVITIES: Net income $ 2,097 $ 2,057 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for depreciation and amortization 335 341 Amortization of premiums and discounts (221) 85 Gain on sales of: Loans (270) (334) Mortgage-related securities available for sale (47) Investment securities available for sale (291) (9) Real estate owned (8) (7) Provision for loan losses 184 171 Provision for real estate owned losses 350 140 Amortization of stock benefit plans 349 441 Changes in assets and liabilities which provided (used) cash: Origination of loans held for sale (40,113) (47,813) Loans sold in the secondary market 39,617 45,996 Deferred income taxes 4 28 Accrued interest receivable 285 (252) Prepaid expenses and other assets (6,965) (16) Accrued interest payable 352 (52) Accrued expenses 332 745 -------- -------- Net cash (used in) provided by operating activities (3,963) 1,474 -------- -------- INVESTING ACTIVITIES: Loans originated (75,626) (39,125) Purchases of: Investment securities available for sale (20,051) (36,714) Mortgage-related securities available for sale (38,217) (26,422) Investment securities held to maturity (2,000) Mortgage-related securities held to maturity (2,687) Purchase of FHLB stock (987) (438) Proceeds from sales of real estate owned 2,120 1,051 Proceeds from sales of mortgage-related securities 14,295 Proceeds from sales of investment securities 6,791 7,009 Principal collected on loans 50,616 33,036 Proceeds from maturities, calls, or repayments of: Investment securities available for sale 12,075 4,070 Mortgage-related securities available for sale 38,414 21,316 Investment securities held to maturity 7,000 Mortgage-related securities held to maturity 3,188 3,468 Purchase of property and equipment (591) (429) Net expenditures on real estate acquired through foreclosure and in development (24) (1,248) -------- -------- Net cash used in investing activities (22,292) (17,818) -------- -------- FINANCING ACTIVITIES: Net increase in deposit accounts 11,307 13,855 Net proceeds from FHLB advances and other borrowings 14,909 219 Net increase in advances from borrowers for taxes and insurance 2,102 2,106 Purchase of treasury stock (1,047) (1,840) Cash dividend (409) (358) -------- -------- Net cash provided by financing activities 26,862 13,982 -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 607 (2,362) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,126 21,561 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,733 $ 19,199 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments for interest on deposits and borrowings $ 12,226 $ 11,564 Transfers of loans receivable into real estate owned 1,317 193 Cash payments of income taxes 715 850
See notes to consolidated financial statements. 4 7 FIRST KEYSTONE FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1999 (UNAUDITED) AND SEPTEMBER 30, 1998 AND (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998 (dollars in thousands, except per share amounts) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the unaudited interim periods. The results of operations of the three and nine month periods ended June 30, 1999 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 1999. The consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company's Annual Report to Stockholders for the year ended September 30, 1998. Certain information in this quarterly statement may constitute forward-looking information (within the meaning of the Private Securities Litigation Reform Act of 1998) that involves risks and uncertainties that could cause actual results to differ materially from those estimated. Persons are cautioned that such forward-looking statements are not guarantees of future performance and are subject to various factors which could cause actual results to differ materially from those estimated. These factors include changes in general economic and market conditions; changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines; and the development of an interest rate environment that adversely affects the interest rate spread or other income from the Company's investments and operations. 2. INVESTMENT SECURITIES The amortized cost and approximate fair value of investment securities are as follows:
June 30, 1999 ------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ---- ---- ---- ---------- Available for Sale: U.S. Treasury securities and securities of U.S. Government agencies: 1 to 5 years $ 5,744 $ 50 $ 5,694 5 to 10 years 4,994 163 4,831 Municipal obligations 18,922 $ 31 598 18,355 Corporate bonds 2,010 135 1,875 Mutual funds 2,000 20 1,980 Preferred stocks 5,500 42 97 5,445 Other equity investments 2,390 10 162 2,238 ------- ------- ------- ------- Total $41,560 $ 83 $ 1,225 $40,418 ======= ======= ======= =======
5 8
September 30, 1998 ------------------ Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ---- ---- ---- ---------- Available for Sale: U.S. Treasury securities and securities of U.S. Government agencies: 5 to 10 years $12,000 $109 $12,109 Municipal obligations 18,993 484 19,477 Mutual funds 2,000 $ 8 1,992 Preferred stocks 5,500 263 5,763 Other equity investments 1,390 110 1,280 ------- ------ ---- ------- Total $39,883 $856 $118 $40,621 ======= ==== ==== =======
3. MORTGAGE-RELATED SECURITIES Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:
June 30, 1999 ------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ---- ---- ---- ---------- Available for Sale: FHLMC pass-through certificates $ 12,694 $103 $ 155 $ 12,642 FNMA pass-through certificates 33,987 47 805 33,229 GNMA pass-through certificates 33,180 49 676 32,553 Collateralized mortgage obligations 33,571 135 801 32,905 ------- ---- ---- ------- Total $113,432 $334 $2,437 $111,329 ======== ==== ====== ======== Held to Maturity: FHLMC pass-through certificates $ 3,594 $15 $ 49 $ 3,560 FNMA pass-through certificates 7,366 246 7,120 Collateralized mortgage obligations 4,578 198 4,380 ------ ----- ---- ------ Total $15,538 $15 $493 $15,060 ======= === ==== =======
6 9
September 30, 1998 ------------------ Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ---- ---- ---- ---------- Available for Sale: FHLMC pass-through certificates $ 10,968 $ 197 $ 11,165 FNMA pass-through certificates 25,600 503 26,103 GNMA pass-through certificates 41,379 562 41,941 Collateralized mortgage obligations 36,022 327 $72 36,277 -------- ------ --- -------- Total $113,969 $1,589 $72 $115,486 ======== ====== === ======== Held to Maturity: FHLMC pass-through certificates $ 4,698 $33 $ 1 $ 4,730 FNMA pass-through certificates 8,747 46 103 8,690 Collateralized mortgage obligations 5,324 1 45 5,280 ------ --- ---- ------ Total $18,769 $80 $149 $18,700 ======= === ==== =======
The collateralized mortgage obligations contain both fixed and adjustable classes of bonds which are repaid in accordance with a predetermined priority. The underlying collateral of the bonds primarily consist of loans which are insured or guaranteed by FHLMC, FNMA, or the GNMA. The mortgage-related securities designated as available for sale, by definition, could be sold in response to changes in interest rates and cash flows or for restructuring purposes. 7 10 5. LOANS RECEIVABLE Loans receivable consist of the following:
June 30 September 30 1999 1998 ---- ---- Real estate loans: Single-family $ 162,774 $ 148,088 Construction and land 20,937 15,858 Multi-family and commercial 29,623 20,563 Consumer loans: Home equity and lines of credit 18,190 19,609 Deposit 213 181 Education 360 449 Other 1,144 1,429 Commercial loans 1,476 1,390 --------- --------- Total loans 234,717 207,567 Loans in process (8,653) (5,781) Allowance for loan losses (1,857) (1,738) Deferred loan fees (1,681) (1,705) --------- --------- Loans receivable - net $ 222,526 $ 198,343 ========= =========
The following is an analysis of the allowance for loan losses:
Nine Months Ended June 30 --------------------- 1999 1998 ------- ------- Balance beginning of period $ 1,738 $ 1,628 Provisions charged to income 184 172 Charge-offs (67) (54) Recoveries 2 15 ------- ------- Total $ 1,857 $ 1,761 ======= =======
At June 30, 1999 and September 30, 1998, non-performing loans (which consists of loans in excess of 90 days delinquent) amounted to approximately $3,761 and $3,704, respectively. 6. DEPOSITS Deposits consist of the following major classifications:
June 30 September 30 1999 1998 ---- ---- Amount Percent Amount Percent ------ ------- ------ ------- Non-interest bearing accounts $ 7,214 2.8% $ 8,254 3.3% NOW accounts 35,762 13.8 28,181 11.4 Passbook accounts 41,243 15.9 37,988 15.4 Money market demand accounts 17,720 6.9 16,087 6.5 Certificate accounts 156,679 60.6 156,801 63.4 -------- -------- -------- -------- Total $258,618 100.0% $247,311 100.0% ======== ======== ======== ========
8 11 7. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, effective October 1, 1998. The statement requires disclosure of amounts from transactions and other events which are currently excluded from the statement of operations and are recorded directly to stockholders' equity. These transactions and other events represent foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. Only the last of these items, however, is currently applicable to the Company. For the three and nine months ended June 30, 1999 and 1998, the Company's comprehensive income was as follows:
Three Months Ended Nine Months Ended June 30 June 30 --------- -------- 1999 1998 1999 1998 ------- ------- ------- ------- Net income $ 725 $ 701 $ 2,097 $ 2,057 Net SFAS 115 adjustment (2,579) (150) (3,775) 367 ------- ------- ------- ------- Total comprehensive income (loss) $(1,854) $ 551 $(1,678) $ 2,424 ======= ======= ======= =======
8. EARNINGS PER SHARE Basic net income per share is based upon the weighted average number of common shares outstanding, while diluted net income per share is based upon the weighted average number of common share outstanding and common share equivalents that would arise from the exercise of dilutive securities. The calculated basic and diluted earnings per share ("EPS") is as follows:
For the Three Months Ended For the Nine Months Ended June 30, June 30, -------- -------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Numerator $ 725 $ 701 $ 2,097 $ 2,057 Denominators: Basic shares outstanding 2,044,095 2,122,631 2,039,771 2,143,440 Effect of dilutive securities 98,729 135,095 104,032 138,620 ---------- ---------- ---------- ---------- Dilutive shares outstanding 2,142,824 2,257,726 2,143,803 2,282,060 ========== ========== ========== ========== EPS: Basic $ 0.35 $ 0.33 $ 1.03 $ 0.96 Diluted $ 0.34 $ 0.31 $ 0.98 $ 0.90
9 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 (UNAUDITED) AND SEPTEMBER 30, 1998 Total assets of the Company increased $26.2 million or 6.3% from $415.9 million at September 30, 1998 to $442.1 million at June 30, 1999 primarily due to a $24.2 million increase in loans receivable - net and a $7.0 million increase in prepaid expenses and other assets partially offset by a $4.2 million decrease in mortgage-related securities available for sale. The increased loan growth was concentrated primarily in single-family, construction and commercial real estate loans and funded through deposits and cash flows as well as advances from the Federal Home Loan Bank of Pittsburgh. The decrease in the mortgage-related securities available for sale was primarily due to decreases in the market value of the securities combined with cash prepayments. The increase in prepaid expenses and other assets was due to the purchase of $7.0 million of bank owned life insurance policies in order to fund ongoing costs of employee benefit and retirement plans. Deposits increased $11.3 million or 4.6% from $247.3 million at September 30, 1998 to $258.6 million at June 30, 1999. The increase resulted primarily from the growth in core deposits which are passbook accounts, NOW accounts, money market accounts and commercial checking. Stockholders' equity decreased $2.8 million due to the combined effects of the repurchase of shares of common stock pursuant to the Company's publicly announced repurchase program, dividends paid and a decrease in the market valuation, net of taxes, of securities available for sale partially offset by the Company's net income for the nine months ended June 30, 1999. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998 Net Income. Net income was $725,000 for the three months ended June 30, 1999 as compared to $701,000 for the same period in 1998. Net income for the nine month periods ended June 30, 1999 and 1998 was $2.1 million and $2.06 million, respectively. The $24,000 or 3.4% increase in net income for the three months ended June 30, 1999 was primarily due to a $52,000 increase in other income combined with a $140,000 decrease in operating expenses partially offset by a $64,000 increase in the provision for loan losses together with a $84,000 increase in income tax expense. The $40,000 increase in net income for the nine months ended June 30, 1999 compared to the same period in 1998 was primarily due to a $304,000 decrease in income tax expense as well as a $278,000 increase in other income offset in part by a $389,000 increase in operating expenses and a $141,000 decrease in net interest income. 10 13 Net Interest Income. Net interest income decreased $20,000 to $2.9 million and $141,000 to $8.7 million for the three and nine months ended June 30, 1999, respectively. Such decreases were primarily due to a $294,000 or 7.6% and a $1.1 million or 9.3% increase in interest expense for the three and nine months ended June 30, 1999, respectively, which were partially offset by a $274,000 or 4.0% and a $925,000 or 4.5% increase in interest income during such periods. The average balance of interest-earning assets increased $36.1 million and $38.8 million for the three and nine months ended June 30, 1999, respectively, as compared to the same period in 1998. Calculated on a fully taxable equivalent basis, the weighted average yield earned on such amount for the three and nine months ended June 30, 1999 decreased 34 basis points to 7.05% and 35 basis points to 7.14%, respectively, compared to the 1998 periods. In addition, net interest income was affected by an increase in the average balance of interest-bearing liabilities of $43.0 million and $44.7 million for the three and nine months ended June 30, 1999, respectively, as compared to the same period in 1998. However, the weighted average rate paid of such liabilities decreased 21 basis points to 4.42 % and 18 basis points to 4.49% during the three and nine months ended June 30, 1999, respectively, as compared to 4.63% and to 4.67%, respectively, during the three and nine months ended June 30, 1998. The interest rate spread and net interest margin amounted to 2.63% and 2.96% for the three months ended June 30, 1999 as compared to 2.76% and 3.23% for the same period in 1998. The interest rate spread and net interest margin were 2.65% and 2.98%, respectively, for the nine months ended June 30, 1999 as compared to 2.82% and 3.28% for the same periods in 1998. The decline in the net interest rate spread and net interest margin is primarily due to the compression of the yield curve, reflecting the movement of market rates of interest. The Bank's yield on interest-earning assets, primarily tied to longer term interest rates, has declined at a more rapid pace than the Bank's funding liabilities, which are primarily tied to shorter term rates. Provision for Loan Losses. The Company's provision for loan losses increased to $84,000 for the three months ended June 30, 1999 as compared to $20,000 for the same period in 1998. For the nine months ended June 30, 1999 and 1998, the provision for loan losses was $184,000 and $172,000, respectively. Other Income. Other income increased $52,000 or 16.3% to $372,000 and $278,000 or 25.2% to $1.4 million for the three and nine months ended June 30, 1999, respectively, as compared to the same periods in 1998. The increase was primarily a result of increases in the net gain on sales of mortgage-related securities and investments along with an increase in other income due to the purchase of bank owned life insurance policies offset by a decrease in real estate operations. Gain on sales of investment and mortgage-related securities are highly dependent on market conditions and consequently the amount of gains may differ materially in subsequent quarters. 11 14 Operating Expenses. Operating expenses decreased $140,000 or 5.9% during the three months ended June 30, 1999 as compared to the same period in 1998. The decrease was primarily due to decreases of $40,000 and $140,000 in salaries and employee benefits and provisions for real estate owned, respectively, partially offset by increases in bank service charges and advertising expenses. For the nine months ended, June 30, 1999, operating expenses increased $389,000 or 5.8% due to an increase of $210,000 in the provision relating to a real estate owned property consisting of a 106-lot residential townhouse project located in Pennsylvania. The project was completed in March 1999. In addition, increases of $21,000, $31,000, $28,000 and $151,000 were incurred in bank service changes, advertising, data processing and other expenses, respectively, offset by a reduction of $73,000 in salaries and employee benefits. Income Tax Expense. Income tax expense increased $84,000 to $244,000 for the three months ended June 30, 1999 compared to June 30, 1998, while decreasing $304,000 to $668,000 for the nine months ended June 30, 1999. The increase during the three months ended June 30, 1999 is a result of an increase in income before income taxes and recognition in the third quarter of fiscal 1998 of a reversal of 127,000 in state income taxes which was accrued in a prior quarter. For the nine months ended June 30, 1999, the decreases were primarily a result of decreases in income before income taxes combined with the implementation of various tax planning strategies including investments in tax-exempt securities. Year 2000 Compliance The Year 2000 Issue is the result of computer programs which were written using two digits rather than four to define the applicable year. As a result, such programs may recognize a date using "00" as the year 1900 instead of the year 2000 which could result in system failures or miscalculations. In order to be ready for the year 2000, the Company has developed a Year 2000 Policy (the "Policy") which was presented to the Board of Directors during June 1997. The Policy was developed using the guidelines outlined in the Federal Financial Institutions Examination's Council's "The Effect of Year 2000 on Computer Systems". The Board of Directors and its Executive Committee assigned responsibility for the Policy to the Year 2000 Committee, which reports to the Board of Directors on a monthly basis. The Policy recognizes that the Company's operating, processing and accounting operations are computer reliant and could be affected by the Year 2000 Issue. The Company is primarily reliant on third party vendors for its computer output and processing, as well as other significant functions and services (i.e., securities safekeeping services, securities pricing information, etc.). The Year 2000 Committee is continually working with these third party vendors to assess their year 2000 readiness. Based upon the initial assessment, management presently believes that with planned modifications to existing software and hardware and planned conversions to new software and hardware, the Company's third party vendors are taking the appropriate steps to ensure critical systems will function properly. The Company has identified 74 priority 1 (directly effects customers) and 61 priority 2 (effects employee's ability to service customers) third party vendors. Of such priority 1 and priority 2 vendors, as of June 30, 1999, the Company has been informed thereby that 80% are Year 2000 compliant. The Company's data service processing vendor, which is its major software provider, has informed the Company that it has completed testing and updating systems. The initial phase of testing of the data service processor's updated system was successfully completed in January 1999, and the subsequent phase of modifications and conversions 12 15 and related testing of the system was completed by March 31, 1999. Substantially all of the Company's vendors of its priority 1 and priority 2 applications (discussed below) have provided assurances, written or oral, that they are working to make their products and services Year 2000 compliant. While the Company has received assurances from such vendors as to compliance, such assurances are not guarantees and may not be enforceable. The Company's existing older contracts with such vendors do not include Year 2000 certifications or warranties. Thus, in the event such vendor's products and/or services are not Year 2000 compliant, the Company's recourse in the event of such failure may be limited. If the required modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 Issue could have a material impact on the operations of the Company. There can be no assurance that potential system interruptions or unanticipated additional expense incurred to obtain Year 2000 compliance will not have a material adverse effect on the Company's business, financial condition, results of operations and business prospects. Nevertheless, the Company does not believe that the cost of addressing the Year 2000 issues will be a material event or uncertainty that would cause reported financial information not to be necessarily indicative of future operating results or financial conditions, nor does it believe that the costs or the consequences of incomplete or untimely resolution of its Year 2000 issues represents a known material event or uncertainty that is reasonably likely to affect its future financial results, or cause its reported financial information not to be necessarily indicative of future operating results or future financial condition. The Year 2000 issues also affect certain of the Company's customers, particularly in the areas of access to funds and additional expenditures to achieve compliance. As of June 30, 1999, the Company had contacted all of its commercial credit customers (86 borrowers with loans outstanding aggregating $21.8 million) regarding the customers' awareness of the Year 2000 Issue. While no assurance can be given that the customers will be Year 2000 compliant, management believes, based on representations of such customers and reviews of their operations (including assessments of the borrowers' level of sophistication and data and record keeping requirements), that the customers are either addressing the appropriate issues to insure compliance or that they are not faced with material Year 2000 issues. In the majority of cases the credit extended to such borrowers is collateralized by real estate which inherently minimizes the Company's exposure to loss in the event that such borrowers do experience problems becoming Year 2000 compliant. The remaining borrowers have completed their Year 2000 projects or are in the process of completing their projects. The Year 2000 Committee is continually working with its commercial customers to assess their Year 2000 readiness. The Company has completed its own company-wide Year 2000 contingency plan. Individual contingency plans concerning specific software and hardware issues and operational plans for continuing operations were completed by December 1998. The Year 2000 Committee has reviewed substantially all mission critical test plans and contingency plans to ensure the reasonableness of the plans. Testing began on mission critical systems in August 1998 with a majority of such systems completed by March 31, 1999. The Company has developed contingency plans for substantially all priority 1 and priority 2 applications which address operational policies and procedures in the event of data processing, electric power supply and/or telephone service failures associated with the Year 2000. Such contingency plans provide documented actions to allow the Company to maintain and/or resume normal operations in the event of the failure of priority 1 and priority 2 applications. Such plans identify participants, processes and equipment that will be necessary to permit the Company to continue operations. The plans include providing off-line system processing, back-up electrical and telephone systems and other methods to ensure the Company's ability to continue to operate. The costs of modifications to the existing software is being primarily absorbed by the third party vendors. The Company recognizes that the need exists to purchase new hardware and software regardless of year 2000 implications. Based upon current estimates, 13 16 the Company has identified the hardware and software that would have to be replaced, and have found the amounts to not be material and consistent with the Company's normal expenditures for technology upgrades. The Company has been charged $25,000 to participate in the data service processor's Year 2000 testing which the amount has been incurred by the Company as of June 30, 1999. Liquidity and Capital Resources. The Company's liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. The Company's primary sources of funds are deposits, amortization, prepayment and maturities of outstanding loans and mortgage-related securities, sales of loans, maturities of investment securities and other short-term investments, borrowing and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-related securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, the Company invests excess funds in overnight deposits and other short-term interest-earning assets which provide liquidity to meet lending requirements. The Company has been able to generate sufficient cash through its deposits as well as borrowings to satisfy its funding commitments. At June 30, 1999, the Company had short-term borrowings outstanding of $35.1 million, all of which were advances from the Federal Home Loan Bank of Pittsburgh. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer term basis, the Company maintains a strategy of investing in various lending products, mortgage-related securities and investment securities. The Company uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a portfolio of mortgage-related and investment securities. At June 30, 1999, the total approved loan commitments outstanding amounted to $12.9 million, not including loans in process. At the same date, commitments under unused lines of credit amounted to $24.4 million. Certificates of deposit scheduled to mature in one year or less at June 30, 1999 totaled $123.2 million. Based upon its historical experience, management believes that a significant portion of maturing deposits will remain with the Company. First Keystone Federal Savings Bank (the "Bank"), the Company's wholly owned subsidiary, is required by the Office of Thrift Supervision ("OTS") to maintain average daily balances of liquid assets and short-term liquid assets (as defined) in amounts equal to 4% of net withdrawable deposits and borrowings payable in one year or less to assure its ability to meet demand from withdrawals and repayments of short-term borrowings. The liquidity requirements may vary from time to time at the direction of the OTS depending upon economic conditions and deposit flows. The Bank's average monthly liquidity ratio for June 1999 was 6.91%. As of June 30, 1999, the Bank had regulatory capital in excess of applicable limits. The Bank is required under certain federal regulations to maintain tangible capital equal to at least 1.5% of its adjusted total assets, core capital equal to at least 4.0% of its adjusted total assets and total capital to at least 8.0% of its total risk-weighted assets. At June 30, 1999, the Bank had tangible and core capital equal to 8.3% of adjusted total assets and total capital equal to 19.6% of risk-weighted assets. 14 17 QUANTITATIVE AND QUALITATIVE DISCLOSURES DISCLOSURES ABOUT MARKET RISK The Company's balance sheet consists of interest-earning assets and interest-bearing liabilities and is therefore exposed to interest rate risk. The following additional information is being provided regarding the exposure to this interest rate risk. The Company utilizes reports prepared by the OTS to measure interest rate risk. Using data from the Bank's quarterly thrift financial reports, the OTS models the net portfolio value ("NPV") of the Bank over a variety of interest rate scenarios. The NPV is defined as the present value of expected cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing off-balance sheet contracts. The model assumes instantaneous, parallel shifts in the U.S. Treasury Securities yield curve of 100 to 300 basis points, either up or down, and in 100 basis point increments. The interest rate risk analysis used by the OTS includes 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 table sets forth the Bank's NPV as of March 31, 1999, the most recent data for which data is available. Net Portfolio Value
Changes in Rates in Dollar Percentage Net Portfolio Value Change in Basis Points Amount Change Change As a % of Assets Percentage(1) ------------ ------ ------ ------ ---------------- ------------- 200 $24,881 (17,165) (40.82)% 5.97% (37.68)% 100 34,033 (8,013) (19.06) 7.94 (17.12) 0 42,046 9.58 (100) 47,640 5,594 13.30 10.65 11.17 (200) 51,968 9,922 23.60 11.44 19.42
(1) Based on the portfolio value of the Bank's assets in the base case scenario Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV Table presented assumes that the composition of the Bank's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Also, the model does not take into account the Bank's business or strategic plans. Accordingly, although the NPV Table provides an indication of the Bank's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Bank's net interest income and may differ from actual results. Based upon the Company's knowledge as of the date hereof, the Company does not believe that there has been any material change in the Company's asset and liability position or the market value of the Company's portfolio equity since March 31, 1999. 15 18 PART II Item 1. Legal Proceedings Not applicable Item 2. Changes in Securities and Use of Proceeds Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Documents filed as part of this Report. (1) The following documents are filed as part of this report and are incorporated herein by reference from the Registrant's Annual Report. Report of Independent Auditors. Consolidated Statements of Financial Condition at September 30, 1998 and 1997. Consolidated Statements of Income for the Years Ended September 30, 1998, 1997 and 1996. Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September 30, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996. Notes to the Consolidated Financial Statements. (2) All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or notes thereto. (3) The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index. 16 19
No Description - -- ----------- 3.1 Amended and Restated Articles of Incorporation of First Keystone Financial, Inc. * 3.2 Amended and Restated Bylaws of First Keystone Financial, Inc. * 4 Specimen Stock Certificate of First Keystone Financial, Inc. * 10.1 Employee Stock Ownership Plan and Trust of First Keystone Financial, Inc. * 10.2 401(K)/ Profit Sharing Plan of First Keystone Federal Savings Bank * 10.3 Employment Agreement between First Keystone Financial, Inc. and Donald S. Guthrie (incorporated by reference from Exhibit 10.3 to Registrant's Form 10-KSB for the year ended September 30, 1995). 10.4 Employment Agreement between First Keystone Financial, Inc. and Stephen J. Henderson (incorporated by reference from Exhibit 10.4 to Registrant's Form 10-KSB for the year ended September 30, 1995). 10.5 Employment Agreement between First Keystone Financial, Inc. and Thomas M. Kelly (incorporated by reference from Exhibit 10.5 to Registrant's Form 10-KSB for the year ended September 30, 1995). 10.6 Form of Severance Agreement between First Keystone Financial, Inc. and Elizabeth M. Mulcahy (incorporated by reference from Exhibit 10.6 to Registrant's Form 10-KSB for the year ended September 30, 1995). 10.8 Form of Severance Agreement between First Keystone Financial, Inc. and Carol Walsh (incorporated by reference from Exhibit 10.8 to Registrant's Form 10-KSB for the year ended September 30, 1995). 10.9 1995 Stock Option Plan (incorporated by reference from Exhibit 10.9 to Registrant's Form 10-KSB for the year ended September 30, 1995). 10.10 1995 Recognition and Retention Plan and Trust Agreement, (incorporated by reference from Exhibit 10.10 to Registrant's Form 10-KSB for the year ended September 30, 1995). 13 Annual Report to Stockholders. 21 Subsidiaries of the Registrant - Reference is made to Item 1 "Business," for the required information. 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule
- ----------------------- (*) 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. (b) Reports filed on Form 8-K. None. 17 20 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 12, 1999 By: /s/ Donald S. Guthrie ------------------------------------- Donald S. Guthrie President and Chief Executive Officer Date: August 12, 1999 By: /s/ Thomas M. Kelly ------------------------------------- Thomas M. Kelly Executive Vice-President and Chief Financial Officer 18 EX-27 2 FINANCIAL DATA SCHEDULE
9 3-MOS SEP-30-1999 APR-01-1999 JUN-30-1999 2,733 22,000 0 0 151,747 15,538 15,060 222,526 1,857 442,080 258,618 40,206 23,992 95,385 0 0 6,156 17,723 442,080 4,329 2,604 117 7,050 2,542 4,146 2,904 84 42 2,223 969 969 0 0 969 .35 .34 7.05 3,759 2 42 0 1,782 11 2 1,857 1,207 0 650
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