-----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, EkHf7RjnkIc4arMBRuz8bHKeZ9hBH2cP0DQpQeu5MUUmTY0hploTPJKbW2l/kZyY WFQBRQkcO6x5n2AC7v+NiQ== 0000893220-99-001406.txt : 19991230 0000893220-99-001406.hdr.sgml : 19991230 ACCESSION NUMBER: 0000893220-99-001406 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991229 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-K SEC ACT: SEC FILE NUMBER: 000-25328 FILM NUMBER: 99782275 BUSINESS ADDRESS: STREET 1: 22 WEST STATE ST CITY: MEDIA STATE: PA ZIP: 19063 BUSINESS PHONE: 6105656210 10-K 1 ANNUAL REPORT 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 Securities registered pursuant to Section 12(b) of the Act: NOT APPLICABLE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK (PAR VALUE $.01 PER SHARE) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- As of December 15, 1999 the aggregate value of the 1,897,005 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 354,711 shares held by all directors and officers of the Registrant as a group, was approximately $17.5 million. This figure is based on the last known trade price of $9.25 per share of the Registrant's Common stock on December 15, 1999. Number of shares of Common Stock outstanding as of December 15, 1999: 2,251,716 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated: (1) Portions of the Annual Report to Stockholders for the fiscal year ended September 30, 1999 are incorporated into Parts II and III. (2) Portions of the definitive proxy statement for the Annual Meeting of Stockholders are incorporated into Part III. 2 PART I. Item 1. BUSINESS GENERAL First Keystone Financial, Inc. (the "Company") is a Pennsylvania corporation and sole shareholder of First Keystone Federal Savings Bank (the "Bank") which converted to the stock form of organization in January 1995. The only significant assets of the Company are the capital stock of the Bank, the Company's loans to its employee stock ownership plan, and various equity and other investments. See Note 19 of the Notes to Consolidated Financial Statements in the Annual Report to Stockholders for the year ended September 30, 1999 set forth as Exhibit 13 hereto ("Annual Report"). The business of the Company primarily consists of the business of the Bank. The Bank is a traditional, community oriented federal savings bank emphasizing customer service and convenience. The Bank's primary business is to attract deposits from the general public and invest those funds together with other available sources of funds, primarily borrowings, to originate loans. A substantial portion of the Bank's deposits are comprised of core deposits consisting of passbook, money market("MMDA"), NOW and noninterest-bearing accounts which amounted to $101.1 million or 38.7% of the Bank's total deposits at September 30, 1999. The Bank's primary lending emphasis has been loans secured by first and second liens on single-family (one-to-four units) residences located in Delaware and Chester Counties, Pennsylvania and to a lesser degree, Montgomery County, Pennsylvania and New Castle County, Delaware. The Bank originates these first mortgage loans for resale into the secondary market while retaining for its portfolio adjustable-rate mortgage loans and fixed-rate loans that complement the Bank's asset/liability strategies. The Bank also originates, due to their shorter terms, adjustable or variable interest rates, higher yields, and as a result of the Bank's analysis that the markets have become more stable, loans secured by commercial and residential multi-family real estate properties as well as residential and commercial construction loans secured by properties located in the Bank's market area. The Bank's originations of commercial, construction and multi-family loans has continued to increase as a direct result of the Bank's emphasis on developing business loan products. Multi-family and commercial real estate loans amounted to $31.2 million or 13.1% of the total loan portfolio at September 30, 1999 as compared to $20.6 million or 9.9% at September 30, 1998. The Bank also originates for sale, servicing released, in the secondary market, single-family residences secured by first and second mortgages with respect to non-conforming jumbo loans and sub-prime loans to credit impaired borrowers. The Bank also purchases loan participation interests depending on market conditions and portfolio needs. To a lesser extent, the Bank also originates consumer loans (consisting almost entirely of home equity loans and lines of credit) and other mortgage loans. In addition to its deposit gathering and lending activities, the Bank invests in mortgage-related securities, substantially all of which are issued or guaranteed by U.S. Government agencies and government sponsored enterprises, as well as U.S. Treasury and federal government agency obligations and municipal obligations. At September 30, 1999, the Bank's mortgage-related securities (including mortgage-related securities available for sale) amounted to $127.5 million, or 28.3% of the Company's total assets, and investment securities available for sale amounted to $44.3 million, or 9. 8% of total assets. 3 MARKET AREA The Bank's primary market area consists of Delaware and Southern Chester Counties and to a lesser extent the contiguous counties of Montgomery and Northern Chester Counties, Pennsylvania and New Castle County, Delaware. Delaware County is part of the Philadelphia Primary Metropolitan Statistical Area ("PMSA") which includes besides Delaware County, Bucks, Chester, Montgomery and Philadelphia Counties (as well as four counties in New Jersey). The Philadelphia area economy is typical of many large northeast and midwest cities where the traditional manufacturing based economy has declined to a certain degree and has been replaced with service sector and specialty area growth. As a result of such growth, the Philadelphia PMSA's economic diversity has broadened and employment in the area is derived from a number of different employment sectors. In particular, Delaware County has experienced the development of companies providing products and services for the health care market such as Crozer/Keystone Health System, Wyeth-Ayerst Labs, Inc. and Mercy Health Corp. Philadelphia's central location in the northeast corridor, its well-educated and skilled population base, infrastructure and other factors has made the Bank's market area attractive to many large corporate employers. Such employers include Comcast Corp., Boeing, State Farm Insurance, Unisys Corp., ARCO Chemical Company, PECO Energy, SAP America, Inc., and many others. There are over seventy-five Fortune 1,000 companies maintaining a presence in this area and approximately twenty Fortune 500 companies headquartered in the region surrounding the Philadelphia PMSA including CIGNA Corp., E.I. duPont de Nemours, Bethlehem Steel, Ikon Office Solutions, Sun Company, Crown Cork & Seal and others. Delaware County has experienced slower population growth than the Philadelphia PMSA, although the growth rates in the outlying areas of Delaware County have exceeded that of the Philadelphia PMSA. Since 1990, there has been no population growth in Delaware County and it is expected to increase by less than 1 percent over the next 20 years. Chester County, on the other hand, has grown over 11% since 1990 and expected to increase further through the millennium. By comparison, median household income in Delaware County and Chester County is approximately $42,300 and $55,100, respectively, both of which are near or more than the Philadelphia PMSA median of approximately $26,900 (1996 estimates). Likewise, median home values in Delaware and Chester Counties were approximately $113,200 and $155,900, respectively, as compared to approximately $112,000 for the Philadelphia PMSA in 1990. Unemployment rates in Delaware County have been below those experienced by the Philadelphia PMSA but higher than some of the other counties comprising the PMSA. The average annual unemployment rate (not seasonally adjusted) for 1999 through October was 3.6% in Delaware County and 2.5% in Chester County as compared to 4.1% for the Philadelphia PMSA. 2 4 Lending Activities Loan Portfolio Composition. The following table sets forth the composition of the Bank's loan portfolio by type of loan at the dates indicated (excluding loans held for sale).
September 30, --------------------------------------------------------------------------------- 1999 1998 1997 1996 ------------------ ------------------ ------------------ ------------------ Amount % Amount % Amount % Amount % -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in thousands) Real estate loans: Single-family $166,802 69.82% $148,088 71.34% $135,168 68.53% $122,270 68.68% Multi-family and commercial 31,188 13.05 20,563 9.91 18,305 9.28 11,129 6.25 Construction and land 18,426 7.71 15,858 7.64 16,400 8.31 17,682 9.93 -------- ------ -------- ------ -------- ------ -------- ------ Total real estate loans 216,416 90.58 184,509 88.89 169,873 86.12 151,081 84.86 -------- ------ -------- ------ -------- ------ -------- ------ Consumer: Home equity loans and lines of credit 18,624 7.80 19,609 9.45 22,964 11.64 20,444 11.48 Deposit 243 .10 181 .09 348 .18 457 .26 Education 365 .15 449 .21 365 .19 917 .52 Other (1) 1,080 .45 1,429 .69 1,690 .86 2,212 1.24 -------- ------ -------- ------ -------- ------ -------- ------ Total consumer loans 20,312 8.50 21,668 10.44 25,367 12.87 24,030 13.50 -------- ------ -------- ------ -------- ------ -------- ------ Commercial business loans 2,190 .92 1,390 .67 2,000 1.01 2,923 1.64 -------- ------ -------- ------ -------- ------ -------- ------ Total loans receivable (2) 238,918 100.00% 207,567 100.00% 197,240 100.00% 178,034 100.00% -------- ====== -------- ====== -------- ====== -------- ====== Less: Loans in process (construction and land) 9,005 5,781 5,670 6,368 Deferred loan origination fees and discounts 1,610 1,705 1,653 1,512 Allowance for loan losses 1,928 1,738 1,628 2,624 -------- -------- -------- -------- 12,543 9,224 8,951 10,504 -------- -------- -------- -------- Total loans receivable, net $226,375 $198,343 $188,289 $167,530 ======== ======== ======== ========
September 30, ------------------ 1995 ------------------ Amount % -------- ------- (Dollars in thousands) Real estate loans: Single-family $115,225 69.01% Multi-family and commercial 11,789 7.06 Construction and land 16,343 9.79 -------- ------ Total real estate loans 143,357 85.86 -------- ------ Consumer: Home equity loans and lines of credit 18,229 10.92 Deposit 350 .21 Education 1,010 .60 Other (1) 1,491 .89 -------- ------ Total consumer loans 21,080 12.62 -------- ------ Commercial business loans 2,533 1.52 -------- ------ Total loans receivable (2) 166,970 100.00% -------- ====== Less: Loans in process (construction and land) 6,070 Deferred loan origination fees and discounts 1,411 Allowance for loan losses 1,487 -------- 8,968 -------- Total loans receivable, net $158,002 ========
- ----------------------------- (1) Consists primarily of credit cards and consumer lease receivables. (2) Does not include $1.8 million, $2.8 million, $4.6 million, $2.4 million, and $57,000 of loans held for sale at September 30, 1999, 1998, 1997, 1996, and 1995, respectively. 3 5 Contractual Principal Repayments. The following table sets forth the scheduled contractual maturities of the Bank's loans held to maturity at September 30, 1999. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdraft loans are reported as due in one year or less. The amounts shown for each period do not take into account loan prepayments and normal amortization of the Bank's loan portfolio held to maturity.
Real Estate Loans ------------------------------------------------------ Multi-family Consumer and and Construction Commercial Single-family Commercial and Land Total Business Loans Total ------------- ---------- -------- ----- -------------- ----- (In thousands) Amounts due in: One year or less $ 7,037 $ 2,275 $18,426 $ 27,738 $ 5,255 $ 32,993 After one year through three years 12,580 6,287 18,867 4,614 23,481 After three years through five years 12,551 10,147 22,698 3,380 26,078 After five years through ten years 33,599 10,344 43,943 5,743 49,686 After ten years through twenty years 34,120 1,117 35,237 2,050 37,287 Over twenty years 66,915 1,018 67,933 1,460 69,393 -------- ------- ------- -------- ------- -------- Total(1) $166,802 $31,188 $18,426 $216,416 $22,502 $238,918 ======== ======= ======= ======== ======= ======== Interest rate terms on amounts due after one year: Fixed $146,625 $15,249 $161,874 Adjustable 42,053 1,998 44,051 -------- ------- -------- Total(1) $188,678 $17,247 $205,925 ======== ======= ========
- ----------------------------- (1) Does not include adjustments relating to loans in process, allowances for loan losses and deferred fee income. 4 6 Scheduled contractual amortization of loans does not reflect the expected term of the Bank's loan portfolio. The average life of loans is substantially less than their contractual terms because of prepayments and due-on-sale clauses, which give the Bank the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan rates are higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are lower than current mortgage loan rates (due to refinancings of adjustable-rate and fixed-rate loans at lower rates). Under the latter circumstances, the weighted average yield on loans decreases as higher yielding loans are repaid or refinanced at lower rates. Loan Origination, Purchase and Sales Activity. The following table shows the loan origination, purchase and sale activity of the Bank during the periods indicated.
Year Ended September 30, --------------------------------------- 1999 1998 1997 --------- --------- --------- (In thousands) Gross loans at beginning of period(1) $ 210,366 $ 201,817 $ 180,491 --------- --------- --------- Loan originations for investment: Real estate: Residential 49,970 39,226 18,016 Commercial and multi-family 18,031 3,578 8,458 Construction 22,313 14,662 16,298 --------- --------- --------- Total real estate loans originated for investment 90,314 57,466 42,772 Consumer 7,309 4,819 8,859 Commercial business 3,594 4,231 2,755 --------- --------- --------- Total loans originated for investment 101,217 66,516 54,386 Loans originated for resale 46,199 56,398 37,209 --------- --------- --------- Total originations 147,416 122,914 91,595 --------- --------- --------- Deduct: Principal loan repayments and prepayments (68,549) (55,982) (34,779) Transferred to real estate owned (1,317) (207) (411) Loans sold in secondary market (47,206) (58,176) (35,079) --------- --------- --------- Subtotal 117,072 114,365 70,269 --------- --------- --------- Net increase in loans(1) 30,344 8,549 21,326 --------- --------- --------- Gross loans at end of period(1) $ 240,710 $ 210,366 $ 201,817 ========= ========= =========
- ------------------------------ (1) Includes loans held for sale of $1.8 million, $2.8 million, and $4.6 million at September 30, 1999, 1998 and 1997, respectively. 5 7 The lending activities of the Bank are subject to written underwriting standards and loan origination procedures established by the Bank's Board of Directors and management. Applications for all types of loans are taken at all of the Bank's branch offices by the branch manager or other designated loan officers. Applications for single-family residential mortgage loans for portfolio retention also are obtained through loan originators who are employees of the Bank. The Bank's loan originators will take loan applications outside of the Bank's offices at the customer's convenience and are compensated on a commission basis. The Mortgage Lending Department supervises the process of obtaining credit reports, appraisals and other documentation involved with a loan. The Bank generally requires that a property appraisal be obtained in connection with all new mortgage loans. Property appraisals generally are performed by an independent appraiser from a list approved by the Bank's Board of Directors. The Bank requires that title insurance (other than with respect to home equity loans) and hazard insurance be maintained on all security properties and that flood insurance be maintained if the property is within a designated flood plain. Residential mortgage loan applications are primarily developed from referrals from real estate brokers and builders, existing customers and walk-in customers. Residential mortgage loans also are originated through correspondents. Commercial and multi-family real estate loan applications are obtained primarily from previous borrowers, direct solicitations by Bank personnel, as well as referrals. Consumer loans originated by the Bank are obtained primarily through existing and walk-in customers who have been made aware of the Bank's programs by advertising and other means. Applications for single-family residential mortgage loans which are originated for resale in the secondary market or loans designated for portfolio retention that conform to the requirements for resale into the secondary market and do not exceed Fannie Mae ("FNMA")/Freddie Mac ("FHLMC") limits are approved by the Bank's Chief Lending Officer or in his absence, by the Senior Loan Underwriter or Loan Committee (a committee comprised of four directors and the Bank's Chief Lending Officer). All other first mortgage loans (commercial and multi-family residential real estate and construction loans) and residential mortgage loans in excess of FNMA/FHLMC maximum amounts (currently $240,000) but less than $1.0 million must be approved by the Loan Committee. All first mortgage loans in excess of $1.0 million must be approved by the Bank's Board of Directors or the Executive Committee thereof. All mortgage loans which do not require approval by the Board of Directors are submitted to the Board at its next meeting for review and ratification. Home equity loans and lines of credit up to $100,000 can be approved by the Chief Lending Officer, the Vice President of Construction Loans or the Administrative Vice President of Mortgage Lending. Loans in excess of such amount must be approved by the Loan Committee. Applications for non-conforming and sub-prime residential real estate loans, submitted by correspondents and sold servicing released into the secondary market, are packaged and submitted for pre-approval to the buyer prior to closing. The Bank, on occasion will originate non-conforming loans in accordance with the buyers' underwriting standards and sells them in bulk to such buyers. See "- Mortgage Banking Activities." Single-Family Residential Loans. Substantially all of the Bank's single-family residential mortgage loans consist of conventional loans. Conventional loans are loans that are neither insured by the Federal Housing Administration or partially guaranteed by the Department of Veterans Affairs. The vast majority of the Bank's single-family residential mortgage loans are secured by properties located in Pennsylvania, primarily in Delaware and Chester Counties, and are originated under terms and documentation which permit their sale to the FHLMC or FNMA. The Bank, consistent with its asset/liability management strategies, sells some of its newly originated longer term fixed-rate residential mortgage loans and to a limited degree, existing longer term fixed-rate residential mortgage loans while retaining adjustable-rate mortgage loans and shorter term fixed-rate residential mortgage loans. See "- Mortgage-Banking Activities." The single-family residential mortgage loans offered by the Bank currently consist of fixed-rate loans, including bi-weekly and balloon loans, and adjustable-rate loans. Fixed-rate loans generally have maturities ranging from 15 to 30 years and are fully amortizing with monthly loan payments sufficient to repay the total amount of the loan with interest by the end of the loan term. The Bank's fixed-rate loans are originated under terms, conditions and documentation which permit them to be sold to U.S. Government-sponsored agencies, such as the FHLMC and the FNMA, and other investors in the secondary mortgage market. The Bank also offers bi-weekly loans under the terms of which the borrower makes payments every two weeks. Although such loans have a 30 year amortization schedule, due to the bi-weekly payment schedule, such loans repay substantially more rapidly than a standard monthly amortizing 6 8 30-year fixed-rate loan. The Bank also offers five and seven year balloon loans which provide that the borrower can conditionally renew the loan at the fifth or seventh year at a to-be-determined rate for the remaining 25 or 23 years, respectively, of the amortization period. At September 30, 1999, $134.2 million, or 56.2%, of the Bank's single-family residential mortgage loans held in portfolio were fixed-rate loans, including $29.0 million of bi-weekly fixed-rate residential mortgage loans. The adjustable-rate loans currently offered by the Bank have interest rates which adjust every one or three years in accordance with a designated index, such as U.S. Treasury obligations, adjusted to a constant maturity ("CMT"), plus a stipulated margin. The Bank's adjustable-rate single-family residential real estate loans generally have a cap of 2% on any increase or decrease in the interest rate at any adjustment date, and a cap of 6% over the life of the loan. In order to increase acceptance of adjustable-rate loans, the Bank recently has been originating loans which are fixed for a period of one to three years after which they convert to one-year adjustable-rate loans. The Bank's adjustable-rate loans require that any payment adjustment resulting from a change in the interest rate of an adjustable-rate loan be sufficient to result in full amortization of the loan by the end of the loan term and, thus, do not permit any of the increased payment to be added to the principal amount of the loan, or so-called negative amortization. Although the Bank does offer adjustable-rate loans with initial rates below the fully indexed rate, such loans are underwritten using methods approved by FHLMC and FNMA which requires borrowers to be qualified at 2% above the discounted loan rate under certain conditions. At September 30, 1999, $43.3 million or 29.2% of the Bank's single-family residential mortgage loans held for portfolio were adjustable-rate loans. Adjustable-rate loans decrease the risks associated with changes in interest rates but involve other risks, primarily because as interest rates increase the loan payment by the borrower increases to the extent permitted by the terms of the loan, thereby increasing the potential for default. Moreover, as with fixed-rate loans, as interest rates increase, the marketability of the underlying collateral property may be adversely affected by higher interest rates. The Bank believes that these risks, which have not had a material adverse effect on the Bank to date because of the generally stable interest rate environment in recent years, generally are less than the risks associated with holding fixed-rate loans in an increasing interest rate environment. For conventional residential mortgage loans held in portfolio and also for those loans originated for sale in the secondary market, the Bank's maximum loan-to-value ("LTV") ratio is 97%, and is based on the lesser of sales price or appraised value. On most loans with a LTV ratio of over 80%, private mortgage insurance is required to be obtained. Commercial and Multi-Family Residential Real Estate Loans. The Bank has moderately increased its investment in commercial and multi-family lending. Such loans are being extended primarily to small and medium-sized businesses located in the Bank's primary market area, a portion of the market that the Bank believes has been underserved in recent years. Loans secured by commercial and multi-family real estate amounted to $31.2 million, or 13.1%, of the Bank's total loan portfolio, at September 30, 1999. The Bank's commercial and multi-family residential real estate loans are secured primarily by professional office buildings, small retail establishments, warehouses and apartment buildings (with 36 units or less) located in the Bank's primary market area. The Bank's adjustable-rate multi-family residential and commercial real estate loans generally are either one-year or three-year adjustable-rate loans indexed to the CMT plus a margin. In addition, depending on collateral value and strength of the borrower, fixed-rate balloon loans and longer term fixed-rate loans are also originated. Generally, fees of 1% to 3% of the principal loan balance are charged to the borrower upon closing. Although terms for multi-family residential and commercial real estate loans may vary, the Bank's underwriting standards generally provide for terms of up to 25 years with amortization of principal over the term of the loan and loan-to-value ratios of not more than 75%. Generally, the Bank obtains personal guarantees of the principals of the borrower as additional security for any commercial real estate and multi-family residential loans and requires that the borrower have at least a 25% equity investment in any such property. The Bank evaluates various aspects of commercial and multi-family residential real estate loan transactions in an effort to mitigate risk to the extent possible. In underwriting these loans, consideration is given to the stability of the property's cash flow history, future operating projections, current and projected occupancy, position in the market, location and physical condition. In recent periods, the Bank has also generally imposed a debt coverage ratio (the ratio of net cash from operations before payment of debt service to debt service) of not less than 110%. The underwriting 7 9 analysis also includes credit checks and a review of the financial condition of the borrower and guarantor, if applicable. An appraisal report is prepared by a state-licensed and certified appraiser (generally Member of the Appraisal Institute ("MAI") qualified) commissioned by the Bank to substantiate property values for every commercial real estate and multi-family loan transaction. All appraisal reports are reviewed by the Bank prior to the closing of the loan. Multi-family residential and commercial real estate lending entails different and significant risks when compared to single-family residential lending because such loans often involve large loan balances to single borrowers and because the payment experience on such loans is typically dependent on the successful operation of the project or the borrower's business. These risks can also be significantly affected by supply and demand conditions in the local market for apartments, offices, warehouses or other commercial space. The Bank attempts to minimize its risk exposure by limiting such lending to proven developers/owners, only considering properties with existing operating performance which can be analyzed, requiring conservative debt coverage ratios, and periodically monitoring the operation and physical condition of the collateral. Construction Loans. Substantially all of the Bank's construction loans consist of loans to construct single-family properties extended either to individuals or to selected developers with whom the Bank is familiar to build such properties on a pre-sold or limited speculative basis. To a lesser extent, the Bank provides financing for construction to permanent commercial loan properties. The loan converts to permanent commercial term loan upon completion of construction. With respect to construction loans to individuals, such loans have a maximum term of six months, have variable rates of interest based upon the prime rate published in the Wall Street Journal plus a margin and have loan-to-value ratio of 80% or less of the appraised value upon completion and generally do not require the amortization of principal during the term. Upon completion of construction, the loans convert to permanent residential mortgage loans. Commercial construction loans have a maximum term of 12 months during the construction period with interest based upon the prime rate published in the Wall Street Journal ("Prime Rate") plus a margin and have LTV ratios of 70% or less of the appraised value upon completion. The loans convert to permanent commercial term loans upon completion of construction. The Bank also provides construction loans and lines of credit to developers. The majority of construction loans consist of loans to selected local developers with whom the Bank is familiar to build single-family dwellings on a pre-sold or, to a significantly lesser extent, on a speculative basis. The Bank generally limits to two the number of unsold units which a developer may have under construction in a project. Such loans generally have terms of 24 to 36 months or less, have maximum loan-to-value ratios of 75% of the appraised value upon completion and generally do not require the amortization of the principal during the term. The loans are made with floating rates of interest based on the Prime Rate plus a margin adjusted on a monthly basis. The Bank also receives origination fees which generally range from 1.0% to 3.0% of the commitment. The borrower is required to fund a portion of the project's costs, the exact amount being determined on a case-by-case basis. Loan proceeds are disbursed in stages after inspections of the project indicate that such disbursements are for costs already incurred and which have added to the value of the project. Only interest payments are due during the construction phase and the Bank may provide the borrower with an interest reserve from which it can pay the stated interest due thereon. The Bank's construction loans include loans to developers to acquire the necessary land, develop the site and construct the residential units ("ADC loans"). At September 30, 1999, residential construction loans totaled $13.6 million, or 5.7%, of the total loan portfolio, which primarily consisted of construction loans to developers. At September 30, 1999, commercial construction loans totaled $585,000, or .25% of the total loan portfolio. The Bank also will originate ground or land loans, both to individuals to purchase a building lot on which he intends to build his primary residence, as well as to developers to purchase lots to build speculative homes at a later date. Such loans have terms of 36 months or less with a maximum loan-to-value ratio of 75% of the lower of appraised value or sale price. The loans are made with floating rates based on the Prime Rate plus a margin. The Bank also receives origination fees, which generally range between 1.0% and 3.0% of the loan amount. At September 30, 1999, land loans (including loans to acquire and develop land) totaled $4.2 million or 1.8% of the total loan portfolio. 8 10 Loans to developers include both secured and unsecured lines of credit with outstanding commitments totaling $800,000. All have personal guaranties of the principals and are cross-collateralized with existing loans. Loans outstanding under builder lines of credit totaled $592,000, or .25% of the total loan portfolio at September 30, 1999. These loans were unsecured and given only to the Bank's most creditworthy and long standing customers. Prior to making a commitment to fund a construction loan, the Bank requires an appraisal of the property by an independent state-licensed and qualified appraiser approved by the Board of Directors. In addition, during the term of the construction loan, the project is inspected by an independent inspector. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project, when completed, having a value which is insufficient to assure full repayment. Loans on lots may run the risk of adverse zoning changes, environmental or other restrictions on future use. Consumer Lending Activities. The Bank offers consumer loans in order to provide a full range of retail financial services to its customers. At September 30, 1999, $20.3 million, or 8.5%, of the Bank's total loan portfolio was comprised of consumer loans. The Bank originates substantially all of such loans in its primary market area. The largest component of the Bank's consumer loan portfolio consists of home equity loans and home equity lines of credit (a form of revolving credit), both of which are secured by the underlying equity in the borrower's primary residence. Home equity loans are amortizing loans with fixed interest rates and maximum terms of 15 years while equity lines of credit have adjustable interest rates indexed to the Prime Rate. Generally home equity loans or home equity lines do not exceed $100,000. The Bank's home equity loans and lines of credit generally require combined loan-to-value ratios of 80% or less. Loans with higher LTV are available but with higher interest rates and stricter credit standards. At September 30, 1999, home equity loans and lines of credit amounted to $18.6 million, or 7.8%, of the Bank's total loan portfolio. At September 30, 1999, the remaining portion of the Bank's consumer loan portfolio was comprised of education, deposit and other consumer loans. At September 30, 1999, the Bank had $365,000 or .15% of the total loan portfolio invested in education loans, all of which were underwritten to conform with the standards of the Pennsylvania Higher Education Agency. Deposit loans and other consumer loans (including credit card loans) totaled $1.3 million, or .55%, of the Bank's total loan portfolio at September 30, 1999. In April 1995, the Bank introduced its own credit card program. The credit cards were offered to only the Bank's most creditworthy customers. At September 30, 1999, these loans totaled $574,000 or .24% of the total loan portfolio. Consumer loans also included certain consumer leases totaling $507,000 purchased from a leasing company. Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk than mortgage loans because of the type and nature of the collateral and, in certain cases, the absence of collateral. These risks are not as prevalent in the case of the Bank's consumer loan portfolio, however, because a high percentage of the portfolio is comprised of home equity loans and home equity lines of credit which are secured by real estate and underwritten in a manner such that they result in a lending risk which is substantially similar to single-family residential loans. Commercial Business Loans. The Bank grants commercial business loans directly to business enterprises that are located in its market area. The Bank actively targets and markets to small and medium sized businesses. The majority of the loans are for less than $1.0 million. Applications for commercial business loans are obtained from existing commercial customers, branch and customer referrals, direct inquiry and those that are obtained by our commercial lenders. As of September 30, 1999, commercial business loans amounted to $2.2 million or .92% of the Bank's total loan portfolio. 9 11 The commercial business loans consist of a limited number of commercial lines of credit secured by real estate, some working capital financing secured by accounts receivable and inventory and, to a limited extent, unsecured lines of credit. Commercial business loans originated by the Bank ordinarily have terms of five years or less and fixed and adjustable rates tied to the Prime Rate plus a margin. Such loans are generally secured by real estate, receivables, equipment or inventory and are generally backed by personal guarantees of the borrower. Although commercial business loans generally are considered to involve increased credit risk than other certain types of loans, management intends to offer commercial business loans to small, medium sized businesses in an effort to better serve our community's needs, obtain core noninterest-bearing deposits and increase the Bank's interest rate spread. Mortgage-Banking Activities. Due to customer preference for fixed-rate loans, especially during the declining mortgage interest rate environment in early 1999 and 1998 and the stable interest rate environment in 1997, the Bank has continued to originate fixed-rate loans. Long-term, generally 30 years, fixed-rate loans not taken into portfolio for asset/liability purposes are sold into the secondary market. In addition, the Bank has developed for sale in the secondary market non-conforming (loans not conforming to FHLMC/FNMA underwriting guidelines) and impaired credit loans. The Bank's net gain on sales of mortgage loans amounted to $325,000, $526,000, and $285,000 during the years ended September 30, 1999, 1998 and 1997, respectively. Although originations of sub-prime loans have slowed from the record level in 1998, the Bank continues to focus on market penetration for this type of product. The Bank had $1.8 million and $2.8 million of mortgage loans held for sale at September 30, 1999 and 1998, respectively. The Bank's conforming mortgage loans sold to others are sold, generally with servicing retained, on a loan-by-loan basis primarily to the FHLMC and the FNMA. A period of less than five days generally elapses between the closing of the loan by the Bank and its purchase by the investor. Mortgages with established interest rates generally will decrease in value during periods of increasing interest rates. Accordingly, fluctuations in prevailing interest rates may result in a gain or loss to the Bank as a result of adjustments to the carrying value of loans held for sale or upon sale of loans. The Bank attempts to protect itself from these market fluctuations through the use of forward commitments at the time of the commitment by the Bank of a loan rate to the borrower. These commitments are mandatory delivery contracts with FHLMC and FNMA within a certain time frame and within certain dollar amounts by a price determined at the commitment date. Market risk does exist as non-refundable points paid by the borrower may not be sufficient to offset fees associated with closing the forward commitment contract. Non-conforming mortgage loans sold to others are sold, servicing released, on a loan-by-loan basis and are generally pre-approved by the buyer prior to closing the loan with the borrower. Borrowers are generally charged an origination fee, which is a percentage of the principal balance of the loan. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases," the various fees received by the Bank in connection with the origination of loans are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method. However, when such loans are sold, the remaining unamortized fees (which is all or substantially all of such fees due to the relatively short period during which such loans are held) are recognized on the sale of loans held for sale. The Bank, for conforming loan products, generally retains the servicing on all loans sold to others. In addition, the Bank services substantially all of the loans which it retains in portfolio. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, making advances to cover delinquent payments, making inspections as required of mortgaged premises, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults and generally administering the loans. Funds that have been escrowed by borrowers for the payment of mortgage-related expenses, such as property taxes and hazard and mortgage insurance premiums, are maintained in noninterest-bearing accounts at the Bank. 10 12 The following table presents information regarding the loans serviced by the Bank for others at the dates indicated. Substantially all the loans were secured by properties in Pennsylvania. A small percentage of the loans are secured by properties located in Delaware, Maryland or New Jersey.
September 30, ---------------------------------- 1999 1998 1997 -------- -------- -------- (In thousands) Loans originated by the Bank and serviced for: FNMA $ 2,752 $ 3,796 $ 5,228 FHLMC 74,031 92,065 108,895 Others 403 414 431 -------- -------- -------- Total loans serviced for others $ 77,186 $ 96,275 $114,554 ======== ======== ========
The Bank receives fees for servicing mortgage loans, which generally amount to 0.25% per annum on the declining principal balance of mortgage loans. Such fees serve to compensate the Bank for the costs of performing the servicing function. Other sources of loan servicing revenues include late charges. For years ended September 30, 1999, 1998 and 1997, the Bank earned gross fees of $205,000, $246,000 and $293,000, respectively, from loan servicing. The Bank retains a portion of funds received from borrowers on the loans it services for others in payment of its servicing fees received on loans serviced for others. Loans-to-One Borrower Limitations. Regulations impose limitations on the aggregate amount of loans that a savings institution could make to any one borrower, including related entities. Under such regulations, the permissible amount of loans-to-one borrower follows the national bank standard for all loans made by savings institutions, which generally does not permit loans-to-one borrower to exceed 15% of unimpaired capital and surplus. Loans in an amount equal to an additional 10% of unimpaired capital and surplus also may be made to a borrower if the loans are fully secured by readily marketable securities. At September 30, 1999, the Bank's five largest loans or groups of loans-to-one borrower, including related entities, ranged from an aggregate of $2.2 million to $3.2 million, and the Bank's loans-to-one borrower limit was $5.3 million at such date. ASSET QUALITY General. As a part of the Bank's efforts to improve its asset quality, it has developed and implemented an asset classification system. All of the Bank's assets are subject to review under the classification system, but particular emphasis is placed on the review of multi-family residential and commercial real estate loans, construction loans and commercial business loans. All assets of the Bank are periodically reviewed and the classification recommendations submitted to the Asset Classification Committee at least monthly. The Asset Classification Committee is composed of the President and Chief Executive Officer, the Chief Financial Officer, the Vice President of Loan Administration, the Internal Auditor and the Vice President of Construction Lending. All assets are placed into one of the four following categories: Pass, Substandard, Doubtful and Loss. The criteria used to review and establish each asset's classification are substantially identical to the asset classification system used by the Office of Thrift Supervision (the "OTS") in connection with the examination process. As of September 30, 1999, the Bank did not have any assets which it had classified as doubtful or loss. See "- Non-Performing Assets" and "- Other Classified Assets" for a discussion of certain of the Bank's assets which have been classified as substandard and regulatory classification standards generally. When a borrower fails to make a required payment on a loan, the Bank attempts to cure the deficiency by contacting the borrower and seeking payment. Contacts are generally made 30 days after a payment is due. In most cases, deficiencies are cured promptly. If a delinquency continues, late charges are assessed and additional efforts are made 11 13 to collect the loan. While the Bank generally prefers to work with borrowers to resolve such problems, when the account becomes 90 days delinquent, the Bank institutes foreclosure or other proceedings, as necessary, to minimize any potential loss. Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. As a matter of policy, the Bank does not accrue interest on loans past due 90 days or more. See Note 2 of the Notes to Consolidated Financial Statements included in the Company's Annual Report. Real estate acquired by the Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until sold. Real estate owned is initially recorded at the lower of fair value less estimated costs to sell the property, or cost (generally the balance of the loan on the property at the date of acquisition). After the date of acquisition, all costs incurred in maintaining the property are expenses and costs incurred for the improvement or development of such property are capitalized up to the extent of their net realizable value. Under generally accepted accounting principles ("GAAP"), the Bank is required to account for certain loan modifications or restructuring as "troubled debt restructuring." In general, the modification or restructuring of a debt constitutes a troubled debt restructuring if the Bank, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider under current market conditions. Debt restructuring or loan modifications for a borrower do not necessarily always constitute troubled debt restructuring, however, and troubled debt restructuring do not necessarily result in non-accrual loans. 12 14 Delinquent Loans. The following table sets forth information concerning delinquent loans at the dates indicated, in dollar amounts and as a percentage of each category of the Bank's loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts which are past due.
September 30, 1999 September 30, 1998 ------------------------------------- ------------------------------------- 30-59 Days 60-89 Days 30-59 Days 60-89 Days ----------------- ----------------- ----------------- ----------------- Percent Percent Percent Percent of of of of Loan Loan Loan Loan Amount Category Amount Category Amount Category Amount Category ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in thousands) Real estate loans: Single-family residential $704 .42% $442 .27% $557 .38% $98 .07% Construction 86 .54% 39 .25 Consumer loans 10 .05 23 .11 1 10 .05 Commercial business loans 1 .05 1 .07 ---- ---- ---- ---- Total $715 .30% $465 .19% $645 .31% $147 .07% ==== === ==== === ==== === ==== ===
13 15 Non-Performing Assets. The following table sets forth the amounts and categories of the Bank's non-performing assets and troubled debt restructurings at the dates indicated.
September 30, ------------------------------------------------------ 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ (Dollars in thousands) Non-performing loans: Single-family residential $2,312 $2,341 $1,661 $1,466 $1,986 Commercial and multi- family(1) 289 323 22 55 22 Construction(2) 556 895 275 888 Consumer 16 43 14 1,666 2 Commercial business 6 83 100 2,165 258 ------ ------ ------ ------ ------ Total non-performing loans 3,179 3,685 2,072 5,352 3,156 ------ ------ ------ ------ ------ Accruing loans greater than 90 days delinquent 1 19 5 ------ ------ ------ ------ ------ Total non-performing loans 3,180 3,704 2,077 5,352 3,156 ------ ------ ------ ------ ------ REO 297 1,663 1,672 1,557 465 ------ ------ ------ ------ ------ Total non-performing assets $3,477 $5,367 $3,749 $6,909 $3,621 ====== ====== ====== ====== ====== Troubled debt restructurings (3) $ 24 $ 46 $ 384 $ $2,348 ====== ====== ====== ====== ====== Total non-performing loans and troubled debt restructurings as a percentage of gross loans receivable (4) 1.39% 1.85% 1.29% 3.10% 3.45% ====== ====== ====== ====== ====== Total non-performing assets as a percentage of total assets .77% 1.29% 1.00% 2.35% 1.29% ====== ====== ====== ====== ====== Total non-performing assets and troubled debt restructurings as percentage of total assets .78% 1.30% 1.11% 2.35% 2.12% ====== ====== ====== ====== ======
- ----------------------------- (1) Consists of two loans at September 30, 1999, 1998 and 1996 and one loan at September 30, 1997 and 1995, respectively. (2) Consists of three loans from two borrowers at September 30, 1999, six loans from three borrowers at September 30, 1998 and two loans at September 30, 1997 and 1995. (3) Consists of lease financing receivables at September 30, 1999, 1998 and 1997 from the Bennett Funding Group of Syracuse, New York ("Bennett Funding") and one loan at September 30, 1995. The troubled debt restructurings in 1997 and 1995 have been performing in accordance with the terms of the agreements since the restructurings. (4) Includes loans receivable and loans held for sale, less construction and land loans in process and deferred loan origination fees and discounts. 14 16 The Bank's total non-performing assets and troubled debt restructurings have decreased from $5.4 million, or 1.30% of total assets, at September 30, 1998 to $3.5 million, or .78% of total assets at September 30, 1999. The primary reason for the $1.9 million decrease was due to the completion of the Bank's only real estate owned development project. The $2.3 million of single-family residential loans at September 30, 1999 consisted of 34 loans with principal balances, ranging from $2,000 to $650,000, with an average balance of approximately $70,000. At September 30, 1999, the $297,000 of REO consisted of six single-family residential properties, one with a carrying value of $168,000. Other Classified Assets. Federal regulations require that each insured savings association classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: "substandard," "doubtful" and "loss." Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. At September 30, 1999, the Bank had $3.9 million of assets classified as substandard, respectively, and no assets classified as doubtful or loss. Substantially all classified assets are also non-performing. Allowance for Loan Losses. The Bank's policy is to establish reserves for estimated losses on delinquent loans when it determines that losses are expected to be incurred on such loans and leases. The allowance for losses on loans is maintained at a level believed adequate by management to absorb potential losses in the portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loss experience, current economic conditions, volume, growth and composition of the portfolio, and other relevant factors. The allowance is increased by provisions for loan losses which are charged against income. The activity in the Bank's allowance for loan losses has remained relatively stable (other than the $956,000 Bennett Funding charge-off in fiscal 1997) and the level of provisions has been relatively small with the exception in fiscal 1996 of an additional $1.1 million provision related to Bennett Funding. As shown in the table below, at September 30, 1999, the Bank's allowance for loan losses amounted to 60.63% and .84% of the Bank's non-performing loans and gross loans receivable, respectively. 15 17 The following table summarizes changes in the allowance for loan losses and other selected statistics for the periods presented.
Year Ending September 30, --------------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- (Dollars in thousands) Allowance for loan losses, beginning of period $ 1,738 $ 1,628 $ 2,624 $ 1,487 $ 1,540 Charged-off loans: Single-family residential (12) (86) (119) (113) (163) Construction Commercial lease purchases (956) Consumer and commercial business (60) (28) (177) (5) ------- ------- ------- ------- ------- Total charged-off loans (72) (114) (1,252) (113) (168) ------- ------- ------- ------- ------- Recoveries on loans previously charged off: Single-family residential 2 22 7 12 Construction 14 10 43 Commercial and multi- family residential 8 Consumer and commercial business 1 2 ------- ------- ------- ------- ------- Total recoveries 3 38 17 63 ------- ------- ------- ------- ------- Net loans charged-off (69) (76) (1,235) (113) (105) Provision for loan losses 259 186 239 1,250 52 ------- ------- ------- ------- ------- Allowance for loan losses, end of period $ 1,928 $ 1,738 $ 1,628 $ 2,624 $ 1,487 ======= ======= ======= ======= ======= Net loans charged-off to average loans outstanding(1) .03% .04% .68% .07% .07% ======= ======= ======= ======= ======= Allowance for loan losses to gross loans receivable(1) .84% .86% .86% 1.54% .93% ======= ======= ======= ======= ======= Net loans charged-off to allowance for loan losses 3.58% 4.37% 75.86% 4.31% 7.06% ======= ======= ======= ======= ======= Recoveries to charge-offs 4.17% 33.33% 1.36% % 37.50% ======= ======= ======= ======= =======
- ---------- (1) Gross loans receivable and average loans outstanding include loans receivable and loans held for sale, less construction and land loans in process and deferred loan origination fees and discounts. 16 18 The following table presents the Bank's allocation of the allowance for loan losses to the total amount of loans in each category listed at the dates indicated.
September 30, ------------------------------------------------------------------------------- 1999 1998 1997 ------------------------ ------------------------ ----------------------- % of Loans % of Loans % of Loans in Each in Each in Each Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------ ----------- (Dollars in thousands) Single-family residential $ 572 69.82% $ 446 71.34% $ 439 68.53% Commercial and multi- family residential 166 13.05 109 9.91 77 9.28 Construction 320 7.71 382 7.64 300 8.31 Consumer 42 8.50 63 10.44 67 12.87 Commercial business 14 .92 20 .67 31 1.01 Unallocated 814 718 714 ------ ------ ------ ------ ------ ------ Total allowance for loan losses $1,928 100.00% $1,738 100.00% $1,628 100.00% ====== ====== ====== ====== ====== ======
September 30, --------------------------------------------------- 1996 1995 ------------------------ ------------------------ % of Loans % of Loans in Each in Each Category to Category to Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- (Dollars in thousands) Single-family residential $ 204 68.68% $ 226 69.01% Commercial and multi- family residential 3 6.25 12 7.06 Construction 290 9.93 615 9.79 Consumer 370 13.50 100 12.62 Commercial business 1,152 1.64 55 1.52 Unallocated 605 479 ------ ------ ------ ------ Total allowance for loan losses $2,624 100.00% $1,487 100.00% ====== ====== ====== ======
17 19 Effective December 21, 1993, the OTS, in conjunction with the Office of the Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued a joint policy statement ("Policy Statement") regarding an institution's allowance for loan and lease losses. The Policy Statement, which reflects the position of the issuing regulatory agencies and does not necessarily constitute GAAP, includes guidance (i) on the responsibilities of management for the assessment and establishment of an adequate allowance and (ii) for the agencies' examiners to use in evaluating the adequacy of such allowance and the policies utilized to determine such allowance. The Policy Statement also sets forth quantitative measures for the allowance with respect to assets classified substandard and doubtful and with respect to the remaining portion of an institution's loan portfolio. While the Policy Statement sets forth quantitative measures, such guidance is not intended as a "floor" or "ceiling." The review of the Policy Statement did not and has not resulted in a material adjustment to the Bank's policy for establishing loan losses. Management of the Bank presently believes that its allowance for loan losses is adequate to cover any probable losses in the Bank's loan portfolio. However, future adjustments to this allowance may be necessary, and the Bank's results of operations could be adversely affected if circumstances differ substantially from the assumptions used by management in making its determinations in this regard. MORTGAGE-RELATED SECURITIES AND INVESTMENT SECURITIES Mortgage-Related Securities. Federally chartered savings institutions have authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies and of state and municipal governments, certificates of deposit at federally-insured banks and savings and loan associations, certain bankers' acceptances and Federal funds. Subject to various restrictions, federally chartered savings institutions may also invest a portion of their assets in commercial paper, corporate debt securities and mutual funds, the assets of which conform to the investments that federally chartered savings institutions are otherwise authorized to make directly. The Bank maintains a significant portfolio of mortgage-related securities as a means of investing in housing-related mortgage instruments without the costs associated with originating mortgage loans for portfolio retention and with limited credit risk of default which arises in holding a portfolio of loans to maturity. Mortgage-related securities (which also are known as mortgage participation certificates or pass-through certificates) represent a participation interest in a pool of single-family or multi-family residential mortgages. The principal and interest payments on mortgage-backed securities are passed from the mortgage originators, as servicer, through intermediaries (generally U.S. Government agencies and government-sponsored enterprises) that pool and repackage the participation interests in the form of securities, to investors such as the Bank. Such U.S. Government agencies and government sponsored enterprises, which guarantee the payment of principal and interest to investors, primarily include the FHLMC, the FNMA and the Government National Mortgage Association ("GNMA"). The Bank also invests to a limited degree in certain privately issued, credit enhanced mortgage-related securities rated AAA by national securities rating agencies. The FHLMC is a public corporation chartered by the U.S. Government. The FHLMC issues participation certificates backed principally by conventional mortgage loans. The FHLMC guarantees the timely payment of interest and the ultimate return of principal on participation certificates. The FNMA is a private corporation chartered by the U.S. Congress with a mandate to establish a secondary market for mortgage loans. The FNMA guarantees the timely payment of principal and interest on FNMA securities. FHLMC and FNMA securities are not backed by the full faith and credit of the United States, but because the FHLMC and the FNMA are U.S. Government-sponsored enterprises, these securities are considered to be among the highest quality investments with minimal credit risks. The GNMA is a government agency within the Department of Housing and Urban Development which is intended to help finance government-assisted housing programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and the timely payment of principal and interest on GNMA securities are guaranteed by the GNMA and backed by the full faith and credit of the U.S. Government. Because the FHLMC, the FNMA and the GNMA were established to provide support for low- and middle-income housing, there are limits to the maximum size of loans that qualify for these, programs which limit is currently $240,000. Mortgage-related securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The underlying pool of 18 20 mortgages can be composed of either fixed-rate or adjustable-rate loans. As a result, the risk characteristics of the underlying pool of mortgages, (i.e., fixed-rate or adjustable rate) as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security thus approximates the life of the underlying mortgages. The Bank's mortgage-related securities include regular interests in collateralized mortgage obligations ("CMOs"). CMOs were developed in response to investor concerns regarding the uncertainty of cash flows associated with the prepayment option of the underlying mortgagor and are typically issued by governmental agencies, governmental sponsored enterprises and special purpose entities, such as trusts, corporations or partnerships, established by financial institutions or other similar institutions. A CMO can be collateralized by loans or securities which are insured or guaranteed by the FNMA, the FHLMC or the GNMA. In contrast to pass-through mortgage-related securities, in which cash flow is received pro rata by all security holders, the cash flow from the mortgages underlying a CMO is segmented and paid in accordance with a predetermined priority to investors holding various CMO classes. By allocating the principal and interest cash flows from the underlying collateral among the separate CMO classes, different classes of bonds are created, each with its own stated maturity, estimated average life, coupon rate and prepayment characteristics. The short-term classes of a CMO usually carry a lower coupon rate than the longer term classes and, therefore, the interest differential cash flow on a residual interest is greatest in the early years of the CMO. As the early coupon classes are extinguished, the residual income declines. Thus, the longer the lower coupon classes remain outstanding, the greater the cash flow accruing to CMO residuals. As interest rates decline, prepayments accelerate, the interest differential narrows, and the cash flow from the CMO declines. Conversely, as interest rates increase, prepayments decrease, generating a larger cash flow to residuals. A senior-subordinated structure often is used with CMOs to provide credit enhancement for securities which are backed by collateral which is not guaranteed by FNMA, FHLMC or GNMA. These structures divide mortgage pools into various risk classes: a senior class and one or more subordinated classes. The subordinated classes provide protection to the senior class. When cash flow is impaired, debt service goes first to the holders of senior classes. In addition, incoming cash flows also may go into a reserve fund to meet any future shortfalls of cash flow to holders of senior classes. The holders of subordinated classes may not receive any funds until the holders of senior classes have been paid and, when appropriate, until a specified level of funds has been contributed to the reserve fund. Mortgage-related securities generally yield less than the loans which underlie such securities because of their payment guarantees or credit enhancements which offer nominal credit risk. In addition, mortgage-related securities are more liquid than individual mortgage loans and may be used to collateralize certain obligations of the Bank. At September 30, 1999, $37.5 million of the Bank's mortgage-related securities were pledged to secure various obligations of the Bank, including reverse repurchase agreements, treasury tax and loan processing, and as collateral for certain government deposits. The Bank's mortgage-related securities are classified as either "held to maturity" or "available for sale" based upon the Bank's intent and ability to hold such securities to maturity at the time of purchase, in accordance with GAAP. As of September 30, 1999, the Bank had an aggregate of $127.5 million, or 28.3%, of total assets invested in mortgage-related securities, net, of which $14.5 million was held to maturity and $113.0 million was available for sale. The mortgage-related securities of the Bank which are held to maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using a method which approximates a level yield, while mortgage-related securities available for sale are carried at the current fair value. See Notes 1 and 4 of the Notes to Consolidated Financial Statements in the Annual Report. 19 21 The following table sets forth the composition of the Bank's mortgage-related securities portfolio, both held to maturity and available for sale, at the dates indicated.
September 30, -------------------------------------- 1999 1998 1997 -------- -------- -------- Held to maturity: (In thousands) Mortgage-backed securities: FHLMC $ 3,156 $ 4,698 $ 2,747 FNMA 6,832 8,747 10,053 -------- -------- -------- Total mortgage-backed securities 9,988 13,445 12,800 -------- -------- -------- Collateralized mortgage obligations: FHLMC 25 233 2,026 FNMA 4,484 5,091 5,740 Other 141 -------- -------- -------- Total collateralized mortgage obligations 5,324 7,907 -------- -------- Total mortgage-related securities, amortized cost 4,509 $ 18,769 $ 20,707 -------- ======== ======== Total fair value(1) $ 14,100 $ 18,700 $ 20,200 ======== ======== ======== Available for sale: Mortgage-backed securities: FHLMC $ 11,927 $ 10,968 $ 17,540 FNMA 32,795 25,600 14,587 GNMA 34,639 41,379 28,938 -------- -------- -------- Total mortgage-backed securities 79,361 77,947 61,065 -------- -------- -------- Collateralized mortgage obligations: FHLMC 6,502 2,704 5,356 FNMA 4,515 15,284 17,301 GNMA 536 994 1,338 Other 24,501(1) 17,040 18,819 -------- -------- -------- Total collateralized mortgage obligations 36,054 36,022 42,814 -------- -------- -------- Total mortgage-related securities, amortized cost $115,415 $113,969 $103,879 ======== ======== ======== Total fair value(2) $113,046 $115,486 $104,472 ======== ======== ========
- -------- (1) Includes "AAA" rated securities of Norwest Asset Securities Corporation, Chase Mortgage Services, GE Capital Mortgage Services and Residential Asset Securitization Trust with book values of $6.9 million, $6.7 million, $3.7 million and $2.5 million, respectively, and fair values of $6.8 million, $6.5 million, $3.6 million and $2.4 million, respectively. (2) See Note 4 of the Notes to Consolidated Financial Statements in the Annual Report. 20 22 The following table sets forth the purchases, sales and principal repayments of the Bank's mortgage-related securities for the periods indicated.
Year Ended September 30, ------------------------------------------- 1999 1998 1997 --------- --------- --------- (In thousands) Mortgage-related securities, beginning of period(1)(2) $ 134,255 $ 125,179 $ 83,432 --------- --------- --------- Purchases: CMOs - held to maturity 2,687 Mortgage-backed securities - available for sale 21,210 42,422 33,584 CMOs - available for sale 24,685 10,000 18,069 Sales: Mortgage-backed securities - available for sale (13,200) CMOs - available for sale (1,047) Repayments and prepayments: Mortgage-backed securities (22,759) (14,456) (7,668) CMOs (25,493) (18,336) (4,057) Increase (decrease) in net premium (469) 82 535 Change in net unrealized gain (loss) on mortgage-related securities available for sale (3,886) 924 1,284 --------- --------- --------- Net (decrease) increase in mortgage-related securities (6,712) 9,076 41,747 --------- --------- --------- Mortgage-related securities, end of period(1) $ 127,543 $ 134,255 $ 125,179 ========= ========= =========
- -------------------------- (1) Includes both mortgage-related securities available for sale and held to maturity. (2) Calculated at amortized cost for securities held to maturity and at fair value for securities available for sale At September 30, 1999, the weighted average contractual maturity of the Bank's fixed-rate mortgage-related securities was approximately 6.4 years. The actual maturity of a mortgage-backed security is less than its stated maturity due to prepayments of the underlying mortgages. Prepayments that are faster than anticipated may shorten the life of the security and adversely affect its yield to maturity. The yield is based upon the interest income and the amortization of any premium or discount related to the mortgage-backed security. In accordance with GAAP, premiums and discounts are amortized over the estimated lives of the loans, which decrease and increase interest income, respectively. The prepayment assumptions used to determine the amortization period for premiums and discounts can significantly affect the yield of the mortgage-backed security, and these assumptions are reviewed periodically to reflect actual prepayments. Although prepayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of rising mortgage interest rates, if the coupon rates of the underlying mortgages are less than the prevailing market interest rates offered for mortgage loans, refinancings generally decrease and slow the prepayment of the underlying mortgages and the related securities. Conversely, during periods of falling mortgage interest rates, if the coupon rates of the underlying mortgages exceed the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related securities. Under such circumstances, the Bank may be subject to reinvestment risk because to the extent that the Bank's mortgage-related securities amortize or prepay faster than anticipated, the Bank may not be able to reinvest the proceeds of such repayments and prepayments at a comparable yield. At September 30, 1999, of the $14.5 million of mortgage-related securities held to maturity, an aggregate of $7.0 million were secured by fixed-rate securities and an aggregate of $7.5 million were secured by adjustable-rate securities. 21 23 Investment Securities. The following table sets forth information regarding the carrying and fair value of the Company's investment securities, both held to maturity and available for sale, at the dates indicated.
At September 30, ---------------------------------------------------------------------------------------------- 1999 1998 1997 --------------------------- --------------------------- -------------------------- Carrying Fair Carrying Fair Carrying Fair Value Value Value Value Value Value ---------- ---------- ---------- ---------- ---------- ---------- (In thousands) FHLB stock $ 6,157 $ 6,157 $ 5,079 $ 5,079 $ 3,769 $ 3,769 U.S. Government and agency obligations 1 to 5 years 5,746 5,652 4,000 4,015 5 to 10 years 6,994 6,780 12,000 12,109 3,000 2,983 Over 10 years 10,000 9,960 Municipal securities 18,924 17,873 18,993 19,477 3,138 3,213 Corporate bonds 4,909 4,639 Mutual funds 2,000 1,972 2,000 1,992 Preferred stocks 5,534 5,248 5,500 5,763 Other equity investments 2,390 2,151 1,390 1,280 ---------- ---------- ---------- ---------- ---------- ---------- Total $ 52,654 $ 50,472 $ 44,962 $ 45,700 $ 23,907 $ 23,940 ========== ========== ========== ========== ========== ==========
At September 30, 1999, the Company had an aggregate of $52.7 million, or 11.7%, of total assets invested in investment securities, of which $6.2 million consist of FHLB stock and $46.5 million was investment securities available for sale. Included in U.S. Government and agency obligations are callable bonds with a term of three years. The Bank's investment securities (excluding equity securities and FHLB stock) had a weighted average maturity to the call date of 5.9 years and a weighted average yield of 6.85% (adjusted to a fully taxable equivalent yield). SOURCES OF FUNDS General. The Bank's principal source of funds for use in lending and for other general business purposes has traditionally come from deposits obtained through the Bank's branch offices. The Bank also derives funds from contractual payments and prepayments of outstanding loans and mortgage-related securities, from sales of loans, from maturing investment securities and from advances from the FHLB of Pittsburgh and other borrowings. Loan repayments are a relatively stable source of funds, while deposits inflows and outflows are significantly influenced by general interest rates and money market conditions. The Bank uses borrowings to supplement its deposits as a source of funds. Deposits. The Bank's current deposit products include passbook accounts, NOW accounts, MMDA, certificates of deposit ranging in terms from 30 days to five years and noninterest-bearing personal and business checking accounts. The Bank's deposit products also include Individual Retirement Account ("IRA") certificates and Keogh accounts. The Bank's deposits are obtained primarily from residents in Delaware and Chester Counties in southeastern Pennsylvania. The Bank attracts local deposit accounts by offering a wide variety of accounts, competitive interest rates, and convenient branch office locations and service hours. The Bank utilizes traditional marketing methods to attract new customers and savings deposits, including print media and radio advertising and direct mailings. However, the Bank does not solicit funds through deposit brokers nor does it pay any brokerage fees if it accepts such deposits. The Bank participates in the regional ATM network known as MAC(R). 22 24 The Bank has been competitive in the types of accounts and in interest rates it has offered on its deposit products but does not necessarily seek to match the highest rates paid by competing institutions. With the significant decline in interest rates paid on deposit products, the Bank in recent years has experienced disintermediation of deposits into competing investment products. The following table shows the distribution of, and certain information relating to, the Bank's deposits by type of deposit as of the dates indicated.
September 30, -------------------------------------------------------------------------------------------------- 1999 1998 1997 ---------------------------- ---------------------------- ---------------------------- Amount Percent Amount Percent Amount Percent ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Passbook $ 40,324 15.46% $ 37,988 15.36% $ 38,035 16.69% MMDA 19,417 7.45 16,087 6.50 16,429 7.21 NOW 33,412 12.81 28,181 11.40 27,754 12.18 Certificates of deposit 159,761 61.25 156,801 63.40 139,535 61.22 Noninterest-bearing deposits 7,912 3.03 8,254 3.34 6,165 2.70 ---------- ---------- ---------- ---------- ---------- ---------- Total deposits $ 260,826 100.00% $ 247,311 100.00% $ 227,918 100.00% ========== ========== ========== ========== ========== ==========
The following table sets forth the net savings flows of the Bank during the periods indicated.
Year Ended September 30, -------------------------------------------- 1999 1998 1997 ---------- ---------- ---------- (In thousands) Increase before interest credited $ 4,336 $ 9,737 $ 99 Interest credited 9,179 9,656 8,614 ---------- ---------- ---------- Net savings increase $ 13,515 $ 19,393 $ 8,713 ========== ========== ==========
The following table sets forth maturities of the Bank's certificates of deposit of $100,000 or more at September 30, 1999 by time remaining to maturity.
Amounts in Thousands -------------------- Three months or less $ 9,847 Over three months through six months 2,904 Over six months through twelve months 4,261 Over twelve months 4,048 ------- $21,060 =======
23 25 The following table presents, by various interest rate categories, the amount of certificates of deposit at September 30, 1999 and 1998 and the amounts at September 30, 1999 which mature during the periods indicated.
Amounts at September 30, 1999 September 30, Maturing Within ------------------------ --------------------------------------------------------------- Certificates of Deposit 1999 1998 One Year Two Years Three Years Thereafter ------- ---- ---- -------- --------- ----------- ---------- (In thousands) 4.0% or less $ 741 $ 647 $ 741 4.01% to 5.0% 76,007 141,948 70,767 $ 2,492 $ 554 $ 2,194 5.01% to 6.0% 72,000 43,089 17,565 3,778 7,568 6.01% to 7.0% 11,013 13,248 8,000 2,978 35 Over 7.01% 958 -------- -------- -------- -------- -------- -------- Total certificate accounts $159,761 $156,801 $122,597 $ 23,035 $ 4,332 $ 9,797 ======== ======== ======== ======== ======== ========
The following table presents the average balance of each deposit type and the average rate paid on each deposit type for the periods indicated.
September 30, --------------------------------------------------------------------------------------------------------- 1999 1998 1997 ----------------------------- ------------------------------ ---------------------------------- Average Average Average Average Rate Average Rate Average Rate Balance Paid Balance Paid Balance Paid ------------ -------------- --------------- --------------- --------------- --------------- Passbook accounts $ 39,625 2.41% $ 38,273 2.41% $ 39,199 2.42% MMDA accounts 17,833 2.82 16,368 2.76 16,350 2.75 Certificates of deposit 157,134 5.33 145,105 5.64 133,091 5.58 NOW accounts 34,581 1.27 29,412 1.28 28,143 1.28 Noninterest-bearing deposits 6,360 5,779 4,357 -------- -------- -------- Total deposits $255,533 4.02% $234,937 4.23% $221,140 4.15% ======== ==== ======== ==== ======== ====
24 26 Borrowings. The Bank may obtain advances from the FHLB of Pittsburgh upon the security of the common stock it owns in the FHLB and certain of its residential mortgage loans and securities held to maturity, provided certain standards related to creditworthiness have been met. Such advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. The Bank, during fiscal 1999 and 1998, increased its FHLB borrowings to fund asset growth. At September 30, 1999, the Bank had $123.1 million in outstanding FHLB advances. See Note 10 of the Notes to Consolidated Financial Statements in the Annual Report for additional information. The Bank has entered into agreements to sell securities under terms which require it to repurchase the same or substantially similar securities by a specified date. Repurchase agreements are considered borrowings which are secured by the sold securities. At September 30, 1999, the Bank had $19.3 million of repurchase agreements outstanding scheduled to mature in 2002. See Note 11 of the Notes to Consolidated Financial Statements in the Annual Report. Both the FHLB advances and the repurchase agreements have certain call features whereby the issuer can call the borrowings after the expiration of certain time frames. The time frames on the callable borrowings range from three months to seven years. SUBSIDIARIES The Bank is permitted to invest up to 2% of its assets in the capital stock of, or secured or unsecured loans to, service corporations, with an additional investment of 1% of assets when such additional investment is utilized primarily for community development purposes. It may invest essentially unlimited amounts in subsidiaries deemed operating subsidiaries that can only engage in activities that the Bank is permitted to engage in. Under such limitations, as of September 30, 1999, the Bank was authorized to invest up to approximately $8.9 million in the stock of, or loans to, service corporations. As of September 30, 1999, the net book value of the Bank's investment in stock, unsecured loans, and conforming loans to its service corporations was $28,300. At September 30, 1999, in addition to the Bank, the Company has five direct or indirect subsidiaries: First Keystone Capital Trust I, FKF Management Corp., Inc., State Street Services Corp., First Pointe, Inc. ("First Pointe"), and First Chester Services, Inc. First Keystone Capital Trust I (the "Trust") is a Delaware statutory business trust wholly owned by the Company formed in 1997 for the purpose of issuing trust preferred securities and investing the proceeds therefrom in Junior Subordinated Debentures issued by the Company. See Note 18 of the Notes to Consolidated Financial Statements in the Annual Report for further discussion regarding the issuance of trust preferred securities. FKF Management Corp., Inc., a Delaware corporation, is a wholly owned operating subsidiary of the Bank established in 1997 for the purpose of managing assets of the Bank. Assets under management totaled $135.1 million at September 30, 1999 and comprised principally of investment and mortgage-related securities. State Street Services Corp., a wholly owned subsidiary of the Bank established in 1999 for the purpose of offering a full array of insurance products by entering in a partnership, as a 51% interest , in First Keystone Insurance Services, LLC. In addition, it holds a 30% equity position in a title company which offers title services. First Pointe, is a wholly owned subsidiary of the Bank which was formed for the purpose of developing a real estate parcel received in a deed-in-lieu of foreclosure action. At September 30, 1999, all of the townhomes have been completed and sold. The Bank has one remaining subsidiay which was involved in real estate management. With the Bank's cessation of its involvement in such activities and the resolution of the various development projects in which the subsidiaries were involved, this subsidiary was placed on an inactive status. See "-Asset Quality - Non-Performing Assets" and Notes 1 and 7 of the Notes to Consolidated Financial Statements in the Annual Report. 25 27 COMPETITION The Bank faces strong competition both in attracting deposits and making real estate loans. Its most direct competition for deposits has historically come from other savings associations, credit unions and commercial banks located in its market area including many large financial institutions which have greater financial and marketing resources available to them. In addition, during times of high interest rates, the Bank has faced additional significant competition for investors' funds from short-term money market securities, mutual funds and other corporate and government securities. The ability of the Bank to attract and retain savings deposits depends on its ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities. The Bank experiences strong competition for real estate loans principally from other savings associations, commercial banks and mortgage banking companies. The Bank competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers and the convenient locations of its branch office network. Competition may increase as a result of the continuing reduction of restrictions on the interstate operations of financial institutions. EMPLOYEES The Bank had 76 full-time employees and 13 part-time employees as of September 30, 1999. None of these employees is represented by a collective bargaining agreement. The Bank believes that it enjoys excellent relations with its personnel. 26 28 REGULATION The Company. The Company as a savings and loan holding company within the meaning of the Home Owners' Loan Act, as amended ("HOLA"), is required to register as such with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Company and affiliates thereof. Federal Activities Restrictions. There are generally no restrictions on the activities of a savings and loan holding company which holds only one subsidiary savings association. However, if the Director of the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings association, the Director may impose such restrictions as deemed necessary to address such risk, including limiting (i) payment of dividends by the savings association; (ii) transactions between the savings association and its affiliates; and (iii) any activities of the savings association that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings association. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet a QTL test, then such unitary holding company also shall become subject to the activities restrictions applicable to multiple savings and loan holding companies and, unless the savings association qualifies as a QTL within one year thereafter, shall register as, and become subject to the restrictions applicable to, a bank holding company. See "- The Bank - Qualified Thrift Lender Test." If the Company were to acquire control of another savings association, other than through merger or other business combination with the Bank, the Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, as set forth below, the activities of the Company and any of its subsidiaries (other than the Bank or other subsidiary savings associations) would thereafter be subject to further restrictions. No multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof any business activity, other than: (i) furnishing or performing management services for a subsidiary savings association; (ii) conducting an insurance agency or escrow business; (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association; (iv) holding or managing properties used or occupied by a subsidiary savings association; (v) acting as trustee under deeds of trust; (vi) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple savings and loan holding companies; or (vii) unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies, those activities authorized by the Federal Reserve Board as permissible for bank holding companies. The activities described in (i) through (vi) above may only be engaged in after giving the OTS prior notice and being informed that the OTS does not object to such activities. In addition, the activities described in (vii) above also must be approved by the Director of the OTS prior to being engaged in by a multiple savings and loan holding company. Limitations on Transactions with Affiliates. Transactions between savings associations and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act ("FRA") and OTS regulations issued in connection therewith. An affiliate of a savings association is any company or entity which controls, is controlled by or is under common control with the savings association. In a holding company context, the parent holding company of a savings association (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings association. Generally, Sections 23A and 23B (i) limit the extent to which the savings association or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such association's capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the association or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes, among other things, the making of loans or extension of credit to an affiliate, purchase of assets, issuance of a guarantee and similar transactions. In addition to the restrictions imposed by Sections 23A and 23B, under OTS regulations no savings association may (i) loan or otherwise extend credit to an affiliate, 27 29 except for any affiliate which engages only in activities which are permissible for bank holding companies, (ii) a savings association may not purchase or invest in securities of an affiliate other than shares of a subsidiary; (iii) a savings association and its subsidiaries may not purchase a low-quality asset from an affiliate; (iv) and covered transactions and certain other transactions between a savings association or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices. With certain exceptions, each extension of credit by a savings association to an affiliate must be secured by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of the loan or extension of credit. The OTS regulation generally excludes all non-bank and non-savings association subsidiaries of savings associations from treatment as affiliates, except to the extent that the OTS or the Federal Reserve Board decides to treat such subsidiaries as affiliates. The regulation also requires savings associations to make and retain records that reflect affiliate transactions in reasonable detail, and provides that certain classes of savings associations may be required to give the OTS prior notice of affiliate transactions. In addition, Sections 22(g) and (h) of the FRA place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of a savings institution (a "principal stockholder"), and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the savings institution's loans to one borrower limit (generally equal to 15% of the institution's unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered to employees of the Bank and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a savings institution to all insiders cannot exceed the institution's unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. At September 30, 1999, the Bank was in compliance with the foregoing restrictions. Restrictions on Acquisitions. Except under limited circumstances, savings and loan holding companies are prohibited from acquiring, without prior approval of the Director of the OTS, (i) control of any other savings association or savings and loan holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of a savings association or holding company thereof which is not a subsidiary. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock, may acquire control of any savings association, other than a subsidiary savings association, or of any other savings and loan holding company. Federal Securities Laws. The Company's Common Stock is registered with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934 ("Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. Shares of common stock owned by an affiliate of the Company are subject to the resale restrictions of Rule 144 under the Securities Act of 1933, as amended ("Securities Act"). If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) is able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. The Bank. The OTS has extensive regulatory authority over the operations of savings associations. As part of this authority, savings associations are required to file periodic reports with the OTS and are subject to periodic examinations by the OTS. The investment and lending authority of savings associations are prescribed by federal laws and regulations and they are prohibited from engaging in any activities not permitted by such laws and regulations. Those laws and regulations generally are applicable to all federally chartered savings associations and may also apply to state-chartered savings associations. Such regulation and supervision is primarily intended for the protection of depositors. 28 30 The OTS' enforcement authority over all savings associations and their holding companies was substantially enhanced by Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. FIRREA significantly increased the amount of and grounds for civil money penalties. FIRREA requires, except under certain circumstances, public disclosure of final enforcement actions by the OTS. Insurance of Accounts. The deposits of the Bank are insured to the maximum extent permitted by the SAIF, which is administered by the FDIC, and are backed by the full faith and credit of the United States Government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action. The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of any existing circumstances which could result in termination of the Bank's deposit insurance. The BIF fund met its target reserve level in September 1995, but the SAIF was not expected to meet its target reserve level until at least 2002. Consequently, in late 1995, the FDIC approved a final rule regarding deposit insurance premiums which, effective with respect to the semi-annual premium assessment beginning January 1, 1996, reduced deposit insurance premiums for BIF member institutions to zero basis points (subject to an annual minimum of $2,000) for institutions in the lowest risk category. Deposit insurance premiums for SAIF members were maintained at their existing levels (23 basis points for institutions in the lowest risk category). On September 30, 1996, President Clinton signed into law legislation (the "Deposit Insurance Funds Act of 1996") to eliminate the premium differential between SAIF-insured institutions and BIF-insured institutions by recapitalizing the SAIF's reserves to the required ratio. The legislation provided that all SAIF member institutions pay a one-time special assessment to recapitalize the SAIF, which in the aggregate was sufficient to bring the reserve ratio in the SAIF to 1.25% of insured deposits. The legislation also provided for the merger of the BIF and the SAIF, with such merger being conditioned upon, among other things, the prior elimination of the federal thrift charter. Effective October 8, 1996, pursuant to the provision of the Deposit Insurance Funds Act of 1996, FDIC regulations imposed a one-time special assessment equal to 65.7 basis points for all SAIF-assessable deposits as of March 31, 1995, which was collected on November 27, 1996. The Bank's one-time special assessment amounted to approximately $1.4 million. Net of related tax benefits, the one-time special assessment amounted to $876,000. Following the imposition of the one-time special assessment, the FDIC lowered assessment rates for SAIF members to reduce the disparity in the assessment rates paid by BIF and SAIF members. Beginning October 1, 1996, effective BIF and SAIF rates both range from zero basis points to 27 basis points. From 1997 through 1999, SAIF members will pay 6.4 basis points to fund the Financing Corporation while BIF member institutions will pay approximately 1.3 basis points. 29 31 Capital requirements. Federally insured savings associations are required to maintain minimum levels of regulatory capital. Pursuant to FIRREA, the OTS has established capital standards applicable to all savings associations. These standards generally must be as stringent as the comparable capital requirements imposed on national banks. The OTS also is authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. Current OTS capital standards require savings associations to satisfy three different capital requirements. Under these standards, savings associations must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core" capital equal to 4% of adjusted total assets and "total" capital (a combination of core and "supplementary" capital) equal to 8.0% of "risk-weighted" assets. For purposes of the regulation, core capital generally consists of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits and "qualifying supervisory goodwill." Tangible capital is given the same definition as core capital but does not include qualifying supervisory goodwill and is reduced by the amount of all the savings association's intangible assets, with only a limited exception for purchased mortgage servicing rights ("PMSRs"). Both core and tangible capital are further reduced by an amount equal to a savings association's debt and equity investments in subsidiaries engaged in activities not permissible for national banks (other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies). In addition, under the Prompt Corrective Action provisions of the OTS regulations, all but the most highly rated institutions must maintain a minimum leverage ratio of 4% in order to be adequately capitalized. See "- Prompt Corrrective Action." At September 30, 1999, the Bank did not have any investment in subsidiaries engaged in impermissible activities and required to be deducted from its capital calculation. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") granted the OTS the authority to prescribe rules for the amount of PMSRs that may be included in a savings association's regulatory capital and required that the value of readily marketable PMSRs included in the calculation of a savings association's regulatory capital not exceed 90% of fair market value and that such value be determined at least quarterly. Under final OTS rules effective March 4, 1994, (i) PMSRs do not have to be deducted from tangible and core regulatory capital, provided that they do not exceed 50% of core capital, (ii) savings associations are required to determine the fair market value and to review the book value of their PMSRs at least quarterly and to obtain an independent valuation of PMSRs annually, (iii) savings associations that desire to include PMSRs in regulatory capital may not carry them at a book value under GAAP that exceeds the discounted value of their future net income stream and (iv) for purposes of calculating regulatory capital, the amount of PMSRs reported as balance sheet assets should amount to the lesser of 90% of their fair market value, 90% of their original purchase price or 100% of their remaining unamortized book value. At September 30, 1999, the Bank had PMSRs totalling $111,000. A savings association is allowed to include both core capital and supplementary capital in the calculation of its total capital for purposes of the risk-based capital requirements, provided that the amount of supplementary capital does not exceed the savings association's core capital. Supplementary capital generally consists of hybrid capital instruments; perpetual preferred stock which is not eligible to be included as core capital; subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no additional capital) for assets such as cash to 100% for repossessed assets or loans more than 90 days past due. Single-family residential real estate loans which are not past-due or non-performing and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk-weighing system, as are certain privately-issued mortgage-backed securities representing indirect ownership of such loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics. Under OTS regulations, an institution with a greater than "normal" level of interest rate exposure must deduct an interest rate risk ("IRR") component from total capital for purposes of calculating risk-based capital requirement. Interest rate exposure is measured, generally, as the decline in an institution's net portfolio value that would result from a 200 basis point increase or decrease in market interest rates (whichever would result in lower net portfolio value), 30 32 divided by the estimated economic value of the savings association's assets. The interest rate risk component to be deducted from total capital is equal to one-half of the difference between an institution's measured exposure and "normal" IRR exposure (which is defined as 2%), multiplied by the estimated economic value of the institution's assets. Although the OTS has decided to delay implementation of this rule, it will continue to closely monitor the level of interest rate risk at individual savings associations and it retains the authority, on a case-by-case basis, to impose additional capital requirements for individual savings associations with significant interest rate risk. The OTS recently updated its standards regarding the management of interest rate risk to include summary guidelines to assist savings associations in determining their exposures to interest rate risk. 31 33 The following is a reconciliation of the Bank's equity determined in accordance with GAAP to regulatory tangible, core, and risk-based capital at September 30, 1999, 1998 and 1997.
September 30, 1999 September 30, 1998 September 30, 1997 ------------------------------ ---------------------------------- ------------------------------ Tangible Core Risk-based Tangible Core Risk-based Tangible Core Risk-based Capital Capital Capital Capital Capital Capital Capital Capital Capital --------- ------- ---------- ----------- -------- --------- -------- -------- ---------- (In thousands) GAAP equity $36,467 $36,467 $36,467 $33,701 $33,701 $33,701 $30,254 $30,254 $30,254 General valuation allowances 1,813 1,688 1,578 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total regulatory capital 36,467 36,467 38,280 33,701 33,701 35,389 30,254 30,254 31,832 Minimum capital requirement per FIRREA published guidelines 6,696 17,586 16,294 6,113 12,225 13,424 5,594 11,188 12,792 ------- ------- ------- ------- ------- ------- ------- ------- ------- Excess $29,771 $18,881 $21,986 $27,588 $21,476 $21,965 $24,660 $19,066 $19,040 ======= ======= ======= ======= ======= ======= ======= ======= =======
These capital requirements are viewed as minimum standards by the OTS, and most institutions are expected to maintain capital levels well above the minimum. In addition, the OTS regulations provide that minimum capital levels higher than those provided in the regulations may be established by the OTS for individual savings association's capital, upon a determination that the regulations provide that higher individual minimum regulatory capital requirements may be appropriate in circumstances where, among others: (1) a savings association has a high degree of exposure to interest rate risk, prepayment risk, credit risk, concentration of credit risk, certain risks arising from nontraditional activities, or similar risks or a high proportion of off-balance sheet risk; (2) a savings association is growing, either internally or through acquisitions, at such a rate that supervisory problems are presented that are not dealt with adequately by OTS regulations; and (3) a savings association may be adversely affected by the activities or condition of its holding company, affiliates, subsidiaries or other persons or savings associations with which it has significant business relationships. The Bank is not subject to any such individual minimum regulatory capital requirement. 32 34 Prompt Corrective Action. Under Section 38 of the FDIA as added by FDICIA, the OTS adopted in 1992 regulations implementing Section 38 of the FDIA. Under the regulations, an institution shall be deemed to be (i) "well capitalized" if it has total risk-based capital of 10% or more, has a Tier I risk-based capital ratio of 6% or more, has a Tier I leverage capital ratio of 5% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure, (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8% or more, a Tier I risk-based capital ratio of 4% or more and a Tier I leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of "well capitalized," (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8%, a Tier I risk-based capital ratio that is less than 4% or a Tier I leverage capital ratio that is less than 4% (3% under certain circumstances), (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6%, a Tier I risk-based capital ratio that is less than 3% or a Tier I leverage capital ratio that is less than 3%, and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2%. Section 38 of the FDIA and the OTS regulations promulgated thereunder also specify circumstances under the OTS may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). At September 30, 1999, the Bank meet the requirements of a "well capitalized" institution under OTS regulations. Liquidity Requirements. All savings associations are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At the present time, the required minimum liquid asset ratio is 4%. The Bank has consistently exceeded such regulatory liquidity requirement and, at September 30, 1999, had a average liquidity ratio of 6.17%. Qualified Thrift Lender Test. Under Section 2303 of the Economic Growth and Regulatory Paper work Reduction Act of 1996, a savings association can comply with the QTL test by either meeting the QTL test set forth in the HOLA and the implementing regulations or qualifying as a domestic building and loan association as defined in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended ("Code"). The QTL Test set forth in the HOLA requires that Qualified Thrift Investments ("QTLs") represent 65% of portfolio assets. A savings institution that does not comply with the QTL test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the association may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the association shall be restricted to those of a national bank; (iii) the association shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the association shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the association ceases to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations). Portfolio assets are defined as total assets less intangibles, property used by a savings association in its business and liquidity investments in an amount not exceeding 20% of assets. Generally, QTLs are residential housing related assets, The recent legislation allows small business loans, credit card loans, student loans and loans for personal, family and household purposes to be included without limitation as qualified investments. In addition, commercial loans may be made in an amount up to 10% of total assets. At September 30, 1999, approximately 81.10% of the Bank's assets were invested in QTLs, which was in excess of the percentage required to qualify the Bank under the QTL Test in effect at that time. Restrictions on Capital Distributions. OTS regulations govern capital distributions by savings associations, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of a savings association to make capital distributions. Generally, the regulation creates a safe harbor for specified levels of capital distributions (as a percentage of income) from associations meeting at least their minimum capital requirements, so long as such associations notify the OTS and 33 35 receive no objection to the distribution from the OTS. Savings institutions and distributions that do not qualify for the safe harbor are required to obtain prior OTS approval before making any capital distributions. Generally, savings associations such as the Bank includes in a subsidiary of a savings and loan holding company can, upon 30 days prior notice, distribute during each calendar year an amount equal to or less than its net income for the year to date plus retained net income for the preceding two years. Amounts in excess of this must be approved by the OTS. OTS regulations also prohibit the Bank from declaring or paying any dividends or from repurchasing any of its stock if, as a result, the regulatory (or total) capital of the Bank would be reduced below the amount required to be maintained for the liquidation account established by it for certain depositors in connection with its conversion from mutual to stock form. Community Reinvestment. Under the Community Reinvestment Act of 1977, as amended ("CRA"), as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The Bank received a satisfactory rating as a result of its last OTS evaluation. Policy Statement on Nationwide Branching. Effective May 11, 1992, the OTS amended and codified its policy statement on branching by federally chartered savings associations to delete then-existing regulatory restrictions on the branching authority of such associations and to permit nationwide branching to the extent allowed by federal statute. (Prior OTS policy generally permitted interstate branching for federally chartered savings associations only to the extent allowed state-chartered savings associations in the states where the association's home office was located and where the branch was sought or if the branching resulted from OTS approval of a supervisory interstate acquisition of a troubled institution.) Current OTS policy generally permits a federally chartered savings association to establish branch offices outside of its home state if the association meets the domestic building and loan test in Section 7701(a)(19) of the Code or the asset composition test of subparagraph (c) of that section, and if, with respect to each state outside of its home state where the association has established branches, the branches, taken alone, also satisfy one of the two tax tests. An association seeking to take advantage of this authority would have to have a branching application approved by the OTS, which would consider the regulatory capital of the association and its record under the CRA, as amended, among other things. Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh, which is one of 12 regional FHLBs that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. As a member, the Bank is required to purchase and maintain stock in the FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of its advances from the FHLB of Pittsburgh, whichever is greater. At September 30, 1999, the Bank had $6.2 million in FHLB stock, which was in compliance with this requirement. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. For the years ended September 30, 1999, 1998 and 1997, dividends from the FHLB to the Bank amounted to approximately $375,000, $261,000 and $196,000, respectively. If dividends were reduced, the Bank's net interest income would likely also be reduced. Further, there can be no assurance that the impact of recent or future legislation on the FHLBs will not also cause a decrease in the value of FHLB stock held by the Bank, if any. 34 36 Federal Reserve System. The Federal Reserve Bank ("FRB") requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. At September 30, 1999, the Bank was in compliance with applicable requirements. However, because required reserves must be maintained in the form of vault cash or a noninterest-bearing account at a Federal Reserve Bank, the effect of this reserve requirement is to reduce an institution's earning assets. Safety and Soundness Guidelines. The OTS and the other federal banking agencies have established guidelines for safety and soundness, addressing operational and managerial, as well as compensation matters for insured financial institutions. Institutions failing to meet these standards are required to submit compliance plans to their appropriate federal regulators. The OTS and the other agencies have also established guidelines regarding asset quality and earnings standards for insured institutions. Recent Regulatory Developments. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (the "Act") which will, effective March 11, 2000, permit qualifying bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. The Act defines "financial in nature" to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Board has determined to be closely related to banking. A qualifying national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development, and real estate investment, through a financial subsidiary of the Bank. The Act also prohibits new unitary thrift holding companies from engaging in nonfinancial activities or from affiliating with an nonfinancial entity. As a grandfathered unitary holding company, the Company will retain its authority to engage in nonfinancial activities. FEDERAL AND STATE TAXATION General. The Company and the Bank are subject to the corporate tax provisions of the Code, as well as certain additional provisions of the Code which apply to thrift and other types of financial institutions. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company and the Bank. Fiscal Year. The Company and the Bank and its subsidiaries file a consolidated federal income tax return on a fiscal year basis ending September 30. Method of Accounting. The Bank maintains its books and records for federal income tax purposes using the accrual method of accounting. The accrual method of accounting generally requires that items of income be recognized when all events have occurred that establish the right to receive the income and the amount of income can be determined with reasonable accuracy, and that items of expense be deducted at the later of (i) the time when all events have occurred that establish the liability to pay the expense and the amount of such liability can be determined with reasonable accuracy or (ii) the time when economic performance with respect to the item of expense has occurred. Bad Debt Reserves. The Bank is permitted to establish reserves for bad debts and to make annual additions thereto which qualify as deductions from taxable income. The Company, as of October 1, 1996, changed its method of computing reserves for bad debts to the experience method (the "Experience Method"). The bad debt deduction allowable under this method is available to small banks with assets less than $500 million. Generally, this method will allow the Company to deduct an annual addition to the reserve for bad debts equal to the increase in the balance of the Company's reserve for bad debts at the end of the year to an amount equal to the percentage of total loans at the end of the year, computed using the ratio of the previous six years net charge offs divided by the sum of the previous six years total outstanding loans at year end. 35 37 The Bank treated such change as a change in a method of accounting determined solely with respect to the "applicable excess reserves" of the institution. The amount of the applicable excess reserves will be taken into account ratably over a six-taxable year period, beginning with the first taxable year beginning after December 31, 1995. The timing of the recapture may be delayed for a two-year period provided certain residential lending requirements are met. For financial reporting purposes, the Company will not incur any additional tax expense. At September 30, 1997, under SFAS No. 109, deferred taxes were provided on the difference between the book reserve at September 30, 1997 and the applicable excess reserve in an amount equal to the Bank's increase in the tax reserve from December 31, 1987 to September 30, 1997. Prior to September 30, 1996, the Bank had the option of electing either the experience method or the percentage of taxable income method (the "Percentage Method") for its annual addition to the bad debt reserves. Under the Experience Method, the deductible annual addition is the amount necessary to increase the balance of the reserve at the close of the taxable year to the greater of (i) the amount which bears the same ratio to loans outstanding at the close of the taxable year as the total net bad debts sustained during the current and five preceding taxable years bear to the sum of the loans outstanding at the close of those six years or (ii) the balance in the reserve account at the close of the Bank's "base year," which was its tax year ended December 31, 1987. Under the Percentage Method, the bad debt deduction with respect to qualifying real property loans is computed as a percentage of the Bank's taxable income before such deduction, as adjusted for certain items (such as capital gains and the dividends received deduction). Under this method, a qualifying institution such as the Bank generally may deduct 8% of its taxable income. In the absence of other factors, the availability of the Percentage Method has permitted a qualifying savings institution, such as the Bank, to be taxed at an effective federal income tax rate of 31.28%, as compared to 34% for corporations generally. For taxable years ended on or before December 31, 1988, the Bank has generally elected to use the Percentage Method to compute the amount of its bad debt deduction with respect to its qualifying real property loans. For all taxable years ended after December 31, 1988 with the exception of the September 30, 1996 tax year, the Bank elected to use the Experience Method to compute the amount of its bad debt deduction with respect to its qualifying real property loans. The income of the Company or any non-bank subsidiaries would not be subject to the bad debt deduction allowed the Bank, whether or not consolidated tax returns are filed. Distributions. While the Bank maintains a bad debt reserve, if it were to distribute cash or property to its sole stockholder having a total fair market value in excess of its accumulated tax-paid earnings and profits, or were to distribute cash or property to its stockholder in redemption of its stock, the Bank would generally be required to recognize as income an amount which, when reduced by the amount of federal income tax that would be attributable to the inclusion of such amount in income, is equal to the lesser of: (i) the amount of the distribution or (ii) the sum of (a) the amount of the accumulated bad debt reserve of the Bank with respect to qualifying real property loans (to the extent that additions to such reserve exceed the additions that would be permitted under the experience method) and (b) the amount of the Bank's supplemental bad debt reserve. Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences ("alternative minimum taxable income" or "AMTI"). The alternative minimum tax is payable to the extent such AMTI is in excess of an exemption amount. The Code provides that an item of tax preference is the excess of the bad debt deduction allowable for a taxable year pursuant to the percentage of taxable income method over the amount allowable under the experience method. The other items of tax preference that constitute AMTI include (a) tax-exempt interest on newly-issued (generally, issued on or after August 8, 1986) private activity bonds other than certain qualified bonds and (b) for taxable years beginning after 1989, 75% of the excess (if any) of (i) adjusted current earnings as defined in the Code, over (ii) AMTI (determined without regard to this preference and prior to reduction 36 38 by net operating losses). Net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. Audit by IRS. The Bank's consolidated federal income tax returns for taxable years through September 30, 1995 have been closed for the purpose of examination by the IRS. STATE TAXATION The Company and the Bank's subsidiaries are subject to the Pennsylvania Corporate Net Income Tax and Capital Stock and Franchise Tax. The Corporate Net Income Tax rate for fiscal 1999 is 9.99% and is imposed on the Company's unconsolidated taxable income for federal purposes with certain adjustments. In general, the Capital Stock Tax is a property tax imposed at the rate of 1.2% of a corporation's capital stock value, which is determined in accordance with a fixed formula. The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax Act (the ("MTIT"), as amended to include thrift institutions having capital stock. Pursuant to the MTIT, the Bank's tax rate is 11.5%. The MTIT exempts the Bank from all other taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation imposed by political subdivisions, except taxes on real estate and real estate transfers. The MTIT is a tax upon net earnings, determined in accordance with GAAP with certain adjustments. The MTIT, in computing GAAP income, allows for the deduction of interest earned on state and federal securities, while disallowing a percentage of a thrift's interest expense deduction in the proportion of interest income on those securities to the overall interest income of the Bank. Net operating losses, if any, thereafter can be carried forward three years for MTIT purposes. 37 39 ITEM 2. PROPERTIES At September 30, 1999, the Bank conducted business from its executive offices located in Media, Pennsylvania and six full-service offices located in Delaware and Chester Counties, Pennsylvania. See also Note 8 of the Notes to Consolidated Financial Statements in the Annual Report. The following table sets forth certain information with respect to the Bank's offices at September 30, 1999.
Net Book Value Amount of Description/Address Leased/Owned of Property Deposits - --------------------------------------- ------------- ------------------ ------------------------ (In thousands) Executive Offices: 22 West State Street Media, Pennsylvania 19063 Owned(1) $1,094 $ 80,775 Branch Offices: 3218 Edgmont Avenue Brookhaven, Pennsylvania 19015 Owned 498 81,678 Routes 1 and 100 Chadds Ford, Pennsylvania 19318 Leased(2) 204 24,284 23 East Fifth Street Chester, Pennsylvania 19013 Leased(3) 221 19,677 31 Baltimore Pike Chester Heights, Pennsylvania 19017 Leased(4) 232 Route 82 and 926 Kennett Square, Pennsylvania 19348 Leased(5) 62 5,287 330 Dartmouth Avenue Swarthmore, Pennsylvania 19081 Owned 114 49,125 ------ -------- $2,425 $260,826 ====== ========
- ------------------ (1) Also a branch office. (2) Lease expiration date is September 30, 2000. The Bank has two five year renewal options. (3) Lease expiration date is December 31, 2005. The Bank has one ten year renewal option. (4) Lease expiration date is December 31, 2028. The Bank has options to cancel on the 15th , 20th and 25th year of the lease. (5) Lease expiration date is September 30, 2001. The Bank has four five year renewal options. 38 40 ITEM 3. LEGAL PROCEEDINGS. The Company is involved in routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management to be immaterial to the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required herein is incorporated by reference on page 36 of the Company's Annual Report. ITEM 6. SELECTED FINANCIAL DATA. The information required herein is incorporated by reference from pages 5 to 6 of the Registrant's Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The information required herein is incorporated by reference from pages 7 to 16 of the Registrant's Annual Report. ITEM 7A QUANTITATIVE AND QUALITATIVE 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 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 September 30, 1999. 39 41
Net Portfolio Value (Dollars in thousands) - --------------------------------------------------------------------------------------------------------- Changes in Rates in Dollar Percentage Net Portfolio Value As a Change in Basis Points Amount Change Change % of Assets Percentage (1) - --------------------------------------------------------------------------------------------------------- 200 $23,774 $(18,739) (44.08)% 5.57% (40.93)% 100 33,479 (9,035) (21.25) 7.62 (19.19) 0 42,513 9.43 (100) 49,347 6,834 16.08 10.73 13.79 (200) 52,254 9,741 22.91 11.22 18.98
(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. See also discussion on pages 7 to 8 of the Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data required herein are incorporated by reference from pages 18 to 36 of the Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required herein is incorporated by reference from pages 2 to 5 and page 15 of the Registrant's Proxy Statement dated December 23, 1999 ("Proxy Statement"). 40 42 ITEM 11. EXECUTIVE COMPENSATION. The information required herein is incorporated by reference from pages 8 to 9 of the Registrant's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required herein is incorporated by reference from pages 6 to 8 of the Registrant's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required herein is incorporated by reference from pages 14 to 15 of the Registrant's Proxy Statement. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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, 1999 and 1998. Consolidated Statements of Income for the Years Ended September 30, 1999, 1998 and 1997. Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September 30, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the Years Ended September 30, 1999, 1998 and 1997. 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. 41 43 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 dated May 26, 1999. 10.4 Employment Agreement between First Keystone Financial, Inc. and Stephen J. Henderson dated May 26, 1999. 10.5 Employment Agreement between First Keystone Financial, Inc. and Thomas M. Kelly dated May 26, 1999. 10.6 Form of Severance Agreement between First Keystone Financial, Inc. and Elizabeth M. Mulcahy dated May 26, 1999. 10.8 Form of Severance Agreement between First Keystone Financial, Inc. and Carol Walsh dated May 26, 1999. 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). 42 44 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). 10.11 1998 Stock Option Plan (incorporated from Appendix A of The Registrant's definitive proxy statement dated December 24, 1998. 10.12 Employment Agreement between First Keystone Federal Savings Bank and Donald S. Guthrie dated May 26, 1999. 10.13 Employment Agreement between First Keystone Federal Savings Bank and Stephen J. Henderson dated May 26, 1999. 10.14 Employment Agreement between First Keystone Federal Savings Bank and Thomas M. Kelly dated May 26, 1999. 10.15 Form of Severance Agreement between First Keystone Federal Savings Bank and Elizabeth M. Mulcahy dated May 26, 1999. 10.16 Form of Severance Agreement between First Keystone Federal Savings Bank and Carol Walsh dated May 26, 1999. 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. 43 45 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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. By:/s/ Donald S. Guthrie ----------------------------- Donald S. Guthrie President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report had been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Donald S. Guthrie December 29, 1999 - -------------------------------------------------- Donald S. Guthrie President and Chief Executive Officer (Principal Executive Officer) /s/ Thomas M. Kelly December 29, 1999 - ----------------------------------------------- Thomas M. Kelly Executive Vice-President and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Donald A. Purdy December 29, 1999 - ------------------------------------------------ Donald A. Purdy Chairman of the Board /s/ William K. Betts December 29, 1999 - ------------------------------------------------ William K. Betts Director /s/ Edward Calderoni December 29, 1999 - ------------------------------------------------ Edward Calderoni Director /s/ Silvio F. D'Ignazio December 29, 1999 - ------------------------------------------------ Silvio F. D'Ignazio Director 44 46 /s/ Olive J. Faulkner December 29, 1999 - ------------------------------------------------ Olive J. Faulkner Director /s/ Edmund Jones December 29, 1999 - ------------------------------------------------ Edmund Jones Director /s/ Willard F. Letts December 29, 1999 - ------------------------------------------------ Willard F. Letts Director /s/ Walter J. Lewicki December 29, 1999 - ---------------------------------------------- Walter J. Lewicki Director /s/ Joan G. Taylor December 29, 1999 - ----------------------------------------------- Joan G. Taylor Director 45 EX-10.3 2 EMPLOYMENT AGREEMENT DONALD GUTHRIE 05/26/1999 1 EXHIBIT 10.3 AGREEMENT AGREEMENT, dated this 26th day of May 1999, between First Keystone Financial, Inc. (the "Corporation"), a Pennsylvania corporation, and Donald S. Guthrie (the "Executive"). WITNESSETH WHEREAS, the Executive is presently an officer of the Corporation and First Keystone Federal Savings Bank (the "Savings Bank") (together, the "Employers"); WHEREAS, the Employers desire to be ensured of the Executive's continued active participation in the business of the Employers; WHEREAS, the Employers currently have an agreement with the Executive dated January 25, 1995, which is being amended and superseded by this Agreement, and in accordance with the provisions of Office of Thrift Supervision ("OTS") Regulatory Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate agreements with the Executive with respect to his employment by each of the Employers; and WHEREAS, in order to induce the Executive to remain in the employ of the Employers and in consideration of the Executive's agreeing to remain in the employ of the Employers, the parties desire to specify the severance benefits which shall be due the Executive by the Corporation in the event that his employment with the Corporation is terminated under specified circumstances. NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following words and terms shall have the meanings set forth below for the purposes of this Agreement: (a) AVERAGE ANNUAL COMPENSATION. The Executive's "Average Annual Compensation" for purposes of this Agreement shall be deemed to mean the average level of compensation paid to the Executive by the Employers or any subsidiary thereof during the most recent five taxable years preceding the Date of Termination, including Base Salary and benefits and bonuses under any employee benefit plans of the Employers. (b) BASE SALARY. "Base Salary" shall have the meaning set forth in Section 3(a) hereof. (c) CAUSE. Termination of the Executive's employment for "Cause" shall mean termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any 2 law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order or material breach of any provision of this Agreement. (d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not the Corporation is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (e) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated for Cause or for Disability, the date specified in the Notice of Termination, and (ii) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or as specified in such Notice. (g) DISABILITY. Termination by the Corporation of the Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Employers or any subsidiary or, if no such plan applies, which would qualify the Executive for disability benefits under the Federal Social Security System. (h) GOOD REASON. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive following a Change in Control of the Corporation based on: (i) Without the Executive's express written consent, a reduction by the Employers in the Executive's Base Salary as the same may be increased from time to time or, except to the extent permitted by Section 3(b) hereof, a reduction in the package of fringe benefits provided to the Executive, taken as a whole; (ii) The principal executive office of the Employers is relocated outside of the Media, Pennsylvania, area or, without the Executive's express written 2 3 consent, the Employers require the Executive to be based anywhere other than an area in which the Employers' principal executive office is located, except for required travel on business of the Employers to an extent substantially consistent with the Executive's present business travel obligations; (iii) Any purported termination of the Executive's employment for Cause, Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (j) below; or (iv) The failure by the Corporation to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 9 hereof. (i) IRS. IRS shall mean the Internal Revenue Service. (j) NOTICE OF TERMINATION. Any purported termination of the Executive's employment by the Corporation for any reason, including without limitation for Cause, Disability or Retirement, or by the Executive for any reason, including without limitation for Good Reason, shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, (iii) specifies a Date of Termination, which shall be not less than thirty (30) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Corporation's termination of Executive's employment for Cause; and (iv) is given in the manner specified in Section 10 hereof. (k) RETIREMENT. Termination by the Corporation of the Executive's employment based on "Retirement" shall mean voluntary termination by the Executive in accordance with the Employers' retirement policies, including early retirement, generally applicable to their salaried employees. 2. TERM OF EMPLOYMENT. (a) The Corporation hereby employs the Executive as President and Chief Executive Officer of the Corporation and Executive hereby accepts said employment and agrees to render such services to the Corporation on the terms and conditions set forth in this Agreement. The term of employment under this Agreement shall be for three years, commencing on the date of this Agreement and, subject to the requirements of the succeeding sentence, shall be deemed automatically, without further action, to extend for an additional year on each annual anniversary of the date of this Agreement. Prior to the anniversary of the date of this Agreement and each annual anniversary thereafter, the Board of Directors of the Corporation shall consider and review (with 3 4 appropriate corporate documentation thereof, and after taking into account all relevant factors, including the Executive's performance hereunder) extension of the term under this Agreement, and the term shall continue to extend in the manner set forth above unless either the Board of Directors does not approve such extension and provides written notice to the Executive of such event or the Executive gives written notice to the Corporation of the Executive's election not to extend the term, in each case with such written notice to be given not less than thirty (30) days prior to any such anniversary date. References herein to the term of this Agreement shall refer both to the initial term and successive terms. (b) During the term of this Agreement, the Executive shall perform such executive services for the Corporation as may be consistent with his titles and from time to time assigned to him by the Corporation's Board of Directors. 3. COMPENSATION AND BENEFITS. (a) The Employers shall compensate and pay Executive for his services during the term of this Agreement at a minimum base salary of $180,000 per year ("Base Salary"), which may be increased from time to time in such amounts as may be determined by the Boards of Directors of the Employers and may not be decreased without the Executive's express written consent. In addition to his Base Salary, the Executive shall be entitled to receive during the term of this Agreement such bonus payments as may be determined by the Boards of Directors of the Employers. (b) During the term of the Agreement, Executive shall be entitled to participate in and receive the benefits of any pension or other retirement benefit plan, profit sharing, stock option, employee stock ownership, or other plans, benefits and privileges given to employees and executives of the Employers, to the extent commensurate with his then duties and responsibilities, as fixed by the Boards of Directors of the Employers. The Corporation shall not make any changes in such plans, benefits or privileges which would adversely affect Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all executive officers of the Corporation and does not result in a proportionately greater adverse change in the rights of or benefits to Executive as compared with any other executive officer of the Corporation. Nothing paid to Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary payable to Executive pursuant to Section 3(a) hereof. (c) During the term of this Agreement, the Executive shall be entitled to not less than six weeks paid annual vacation. The Executive shall be entitled to receive any additional compensation from the Employers for failure to take a vacation and shall be able to accumulate unused vacation time from one year to the next. (d) During the term of this Agreement, including any renewal thereof, the Employers shall provide the Executive with a full-sized, four-door automobile for the Executive's use, which automobile shall be replaced during the term hereof and any renewal thereof no less frequently than every three years. 4 5 (e) The Employers shall provide medical insurance for the benefit of the Executive and his spouse until the Executive shall have attained the age of 69; furthermore, in the event of the death of the Executive prior to attaining age 69, the Employers shall provide the Executive's spouse with said medical insurance until such spouse is eligible for state or federal government subsidized medical benefits, but in no event shall such spouse be entitled to said medical insurance after attaining age 69. (f) The Employers shall pay for or reimburse Executive with respect to expenses incurred thereby in obtaining dental care for Executive and his spouse up to a maximum of $2,500 per person per year, which amount may be increased from time to time as may be determined by the Boards of Directors of the Employers. (g) During the term of this Agreement, the Employers will pay the Executive's annual membership dues at the Spring Haven Country Club or such other club of his choice in an amount up to $7,500 per year, subject to increase from time to time as may be determined by the Boards of Directors of the Employers. (h) In the event of the Executive's death during the term of this Agreement, his spouse, estate, legal representative or named beneficiaries (as directed by the Executive in writing) shall be paid on a monthly basis the Executive's annual compensation from the Employers at the rate in effect at the time of the Executive's death for a period equal to the period then remaining under this Agreement. (i) The Executive's compensation, benefits and expenses shall be paid by the Corporation and the Savings Bank in the same proportion as the time and services actually expended by the Executive on behalf of each respective Employer. 4. EXPENSES. The Employers shall reimburse Executive or otherwise provide for or pay for all reasonable expenses incurred by Executive in furtherance of, or in connection with the business of the Employers, including, but not by way of limitation, automobile (including costs of leasing, insurance, repairs, maintenance, and licensing) and traveling expenses, and all reasonable entertainment expenses (whether incurred at the Executive's residence, while traveling or otherwise), subject to such reasonable documentation and other limitations as may be established by the Boards of Directors of the Employers. If such expenses are paid in the first instance by Executive, the Employers shall reimburse the Executive therefor. 5 6 5. TERMINATION. (a) The Corporation shall have the right, at any time upon prior Notice of Termination, to terminate the Executive's employment hereunder for any reason, including without limitation termination for Cause or Retirement, and Executive shall have the right, upon prior Notice of Termination, to terminate his employment hereunder for any reason. (b) In the event that (i) Executive's employment is terminated by the Corporation for Cause or Retirement or in the event of the Executive's death, or (ii) Executive terminates his employment hereunder other than for Good Reason, Executive shall have no right pursuant to this Agreement to compensation or other benefits for any period after the applicable Date of Termination except as otherwise provided herein. (c) In the event that (i) Executive's employment is terminated (including termination due to Disability) by the Corporation for other than Cause, Retirement or the Executive's death or (ii) such employment is terminated by the Executive (a) due to a material breach of this Agreement by the Corporation, which breach has not been cured within fifteen (15) days after a written notice of non-compliance has been given by the Executive to the Corporation, or (b) for Good Reason, then the Corporation shall, subject to the provisions of Section 6 hereof, if applicable (A) pay to the Executive, in thirty-six (36) equal monthly installments beginning with the first business day of the month following the Date of Termination, a cash severance amount equal to three (3) times the Executive's Base Salary, and (B) maintain and provide for a period ending at the earlier of (i) the expiration of the remaining term of employment pursuant hereto prior to the Notice of Termination or (ii) the date of the Executive's full-time employment by another employers (provided that the Executive is entitled under the terms of such employment to benefits substantially similar to those described in this subparagraph (B)), at no cost to the Executive, the Executive's continued participation in all group insurance, life insurance, health and accident, disability and other employee benefit plans, programs and arrangements in which the Executive was entitled to participate immediately prior to the Date of Termination (other than stock option and restricted stock plans of the Employers), provided that in the event that the Executive's participation in any plan, program or arrangement as provided in this subparagraph (B) is barred, or during such period any such plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Corporation shall arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans, programs and arrangements immediately prior to the Date of Termination. (d) In the event of the failure by the Employers to elect or to re-elect or to appoint or to re-appoint the Executive to the offices of President and Chief Executive Officer of the Corporation and the Savings Bank or a material adverse change made by the Employers in the Executive's 6 7 functions, duties or responsibilities as President and Chief Executive Officer of the Corporation and the Savings Bank without the Executive's express written consent, the Executive shall be entitled to terminate his employment hereunder and shall be entitled to the payments and benefits provided for in Section 5(c)(A) and (B); however, such termination shall not otherwise constitute a material breach of this Agreement by the Corporation. 6. PAYMENT OF ADDITIONAL BENEFITS UNDER CERTAIN CIRCUMSTANCES. (a) If the payments and benefits pursuant to Section 5 hereof, either alone or together with other payments and benefits which the Executive has the right to receive from the Employers (including, without limitation, the payments and benefits which the Executive would have the right to receive from the Savings Bank pursuant to Section 5 of the Agreement between the Savings Bank and the Executive dated as of the date hereof (the "Savings Bank Agreement"), before giving effect to any reduction in such amounts pursuant to Section 6 of the Savings Bank Agreement), would constitute a "parachute payment" as defined in Section 280G(b)(2) of the Code (the "Initial Parachute Payment," which includes the amounts paid pursuant to clause (A) below), then the Corporation shall pay to the Executive, in thirty-six (36) equal monthly installments beginning with the first business day of the month following the Date of Termination or in a lump sum within five business days of the Date of Termination (at the Executive's election), a cash amount equal to the sum of the following: (A) the amount by which the payments and benefits that would have otherwise been paid by the Savings Bank to the Executive pursuant to Section 5 of the Savings Bank Agreement are reduced by the provisions of Section 6 of the Savings Bank Agreement; (B) twenty (20) percent (or such other percentage equal to the tax rate imposed by Section 4999 of the Code) of the amount by which the Initial Parachute Payment exceeds the Executive's "base amount" from the Employers, as defined in Section 280G(b)(3) of the Code, with the difference between the Initial Parachute Payment and the Executive's base amount being hereinafter referred to as the "Initial Excess Parachute Payment"; and (C) such additional amount (tax allowance) as may be necessary to compensate the Executive for the payment by the Executive of state and federal income and excise taxes on the payment provided under clause (B) above and on any payments under this clause (C). 7 8 In computing such tax allowance, the payment to be made under clause (B) above shall be multiplied by the "gross up percentage" ("GUP"). The GUP shall be determined as follows: Tax Rate GUP = ----------- 1- Tax Rate 8 9 The Tax Rate for purposes of computing the GUP shall be the highest marginal federal and state income and employment-related tax rate, including any applicable excise tax rate, applicable to the Executive in the year in which the payment under clause (B) above is made. (b) Notwithstanding the foregoing, if it shall subsequently be determined in a final judicial determination or a final administrative settlement to which the Executive is a party that the actual excess parachute payment as defined in Section 280G(b)(1) of the Code is different from the Initial Excess Parachute Payment (such different amount being hereafter referred to as the "Final Excess Parachute Payment"), then the Corporation's independent tax counsel or accountants shall determine the amount (the "Adjustment Amount") which either the Executive must pay to the Corporation or the Corporation must pay to the Executive in order to put the Executive (or the Corporation, as the case may be) in the same position the Executive (or the Corporation, as the case may be) would have been if the Initial Excess Parachute Payment had been equal to the Final Excess Parachute Payment. In determining the Adjustment Amount, the independent tax counsel or accountants shall take into account any and all taxes (including any penalties and interest) paid by or for the Executive or refunded to the Executive or for the Executive's benefit. As soon as practicable after the Adjustment Amount has been so determined, the Corporation shall pay the Adjustment Amount to the Executive or the Executive shall repay the Adjustment Amount to the Corporation, as the case may be. (c) In each calendar year that the Executive receives payments of benefits under this Section 6, the Executive shall report on his state and federal income tax returns such information as is consistent with the determination made by the independent tax counsel or accountants of the Corporation as described above. The Corporation shall indemnify and hold the Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorneys' fees, interest, fines and penalties) which the Executive incurs as a result of so reporting such information. The Executive shall promptly notify the Corporation in writing whenever the Executive receives notice of the institution of a judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Section 6 is being reviewed or is in dispute. The Corporation shall assume control at its expense over all legal and accounting matters pertaining to such federal tax treatment (except to the extent necessary or appropriate for the Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this Section 6) and the Executive shall cooperate fully with the Corporation in any such proceeding. The Executive shall not enter into any compromise or settlement or otherwise prejudice any rights the Corporation may have in connection therewith without the prior consent of the Corporation. 7. MITIGATION; EXCLUSIVITY OF BENEFITS. (a) The Executive shall not be required to mitigate the amount of any benefits hereunder by seeking other employment or otherwise, nor shall the amount of any such benefits be reduced by any compensation earned by the Executive as a result of employment by another employers after the Date of Termination or otherwise. 9 10 (b) The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to the Executive upon a termination of employment with the Employers pursuant to employee benefit plans of the Employers or otherwise. 8. WITHHOLDING. All payments required to be made by the Corporation hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Corporation may reasonably determine should be withheld pursuant to any applicable law or regulation. 9. ASSIGNABILITY. The Corporation may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any corporation, bank or other entity with or into which the Corporation may hereafter merge or consolidate or to which the Corporation may transfer all or substantially all of its assets, if in any such case said corporation, bank or other entity shall by operation of law or expressly in writing assume all obligations of the Corporation hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights and obligations hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder. 10. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: To the Corporation: Chairman of the Board First Keystone Financial, Inc. 22 West State Street Media, Pennsylvania 19063 To the Executive: Donald S. Guthrie 2 General Washington Drive Media, Pennsylvania 19063 11. AMENDMENT; WAIVER. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or officers as may be specifically designated by the Board of Directors of the Corporation to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 10 11 12. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise by the substantive laws of the Commonwealth of Pennsylvania. 13. NATURE OF OBLIGATIONS. Nothing contained herein shall create or require the Corporation to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Executive acquires a right to receive benefits from the Corporation hereunder, such right shall be no greater than the right of any unsecured general creditor of the Corporation. 14. HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 15. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the Corporation and the Executive with respect to the matters agreed to herein. All prior agreements between the Corporation and the Executive with respect to the matters agreed to herein, including without limitation the Agreement between the Employers and the Executive dated January 25, 1995, are hereby superseded and shall have no force or effect. Notwithstanding the foregoing, nothing contained in this Agreement shall affect the agreement of even date being entered into between the Savings Bank and the Executive. 11 12 IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: FIRST KEYSTONE FINANCIAL, INC. /s/ Carol Walsh By: /s/ Donald A. Purdy Carol Walsh Donald A. Purdy Chairman of the Board Attest: EXECUTIVE /s/ Carol Walsh By: /s/ Donald S. Guthrie Carol Walsh Donald S. Guthrie, Individually 12 EX-10.4 3 EMPLOYMENT AGREEMENT STEPHEN HENDERSON 05/26/1999 1 EXHIBIT 10.4 AGREEMENT AGREEMENT, dated this 26th day of May 1999, between First Keystone Financial, Inc. (the "Corporation"), a Pennsylvania corporation, and Stephen J. Henderson (the "Executive"). WITNESSETH WHEREAS, the Executive is presently an officer of the Corporation and First Keystone Federal Savings Bank (the "Savings Bank") (together, the "Employers"); WHEREAS, the Employers desire to be ensured of the Executive's continued active participation in the business of the Employers; WHEREAS, the Employers currently have an agreement with the Executive dated January 25, 1995, which is being amended and superseded by this Agreement, and in accordance with the provisions of Office of Thrift Supervision ("OTS") Regulatory Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate agreements with the Executive with respect to his employment by each of the Employers; and WHEREAS, in order to induce the Executive to remain in the employ of the Employers and in consideration of the Executive's agreeing to remain in the employ of the Employers, the parties desire to specify the severance benefits which shall be due the Executive by the Corporation in the event that his employment with the Corporation is terminated under specified circumstances; NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following words and terms shall have the meanings set forth below for the purposes of this Agreement: (a) AVERAGE ANNUAL COMPENSATION. The Executive's "Average Annual Compensation" for purposes of this Agreement shall be deemed to mean the average level of compensation paid to the Executive by the Employers or any subsidiary thereof during the most recent five taxable years preceding the Date of Termination, including Base Salary and benefits and bonuses under any employee benefit plans of the Employers. (b) BASE SALARY. "Base Salary" shall have the meaning set forth in Section 3(a) hereof. (c) CAUSE. Termination of the Executive's employment for "Cause" shall mean termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order or material breach of any provision of this Agreement. 2 (d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not the Corporation is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (e) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated for Cause or for Disability, the date specified in the Notice of Termination, and (ii) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or as specified in such Notice. (g) DISABILITY. Termination by the Corporation of the Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Employers or any subsidiary or, if no such plan applies, which would qualify the Executive for disability benefits under the Federal Social Security System. (h) GOOD REASON. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive following a Change in Control of the Corporation based on: (i) Without the Executive's express written consent, a reduction by the Employers in the Executive's Base Salary as the same may be increased from time to time or, except to the extent permitted by Section 3(b) hereof, a reduction in the package of fringe benefits provided to the Executive, taken as a whole; (ii) The principal executive office of the Employers is relocated outside of the Media, Pennsylvania, area or, without the Executive's express written consent, the Employers require the Executive to be based anywhere other 2 3 than an area in which the Employers' principal executive office is located, except for required travel on business of the Employers to an extent substantially consistent with the Executive's present business travel obligations; (iii) Any purported termination of the Executive's employment for Cause, Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (j) below; or (iv) The failure by the Corporation to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 9 hereof. (i) IRS. IRS shall mean the Internal Revenue Service. (j) NOTICE OF TERMINATION. Any purported termination of the Executive's employment by the Corporation for any reason, including without limitation for Cause, Disability or Retirement, or by the Executive for any reason, including without limitation for Good Reason, shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, (iii) specifies a Date of Termination, which shall be not less than thirty (30) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Corporation's termination of Executive's employment for Cause; and (iv) is given in the manner specified in Section 10 hereof. (k) RETIREMENT. Termination by the Corporation of the Executive's employment based on "Retirement" shall mean voluntary termination by the Executive in accordance with the Employers' retirement policies, including early retirement, generally applicable to their salaried employees. 2. TERM OF EMPLOYMENT. (a) The Corporation hereby employs the Executive as Senior Vice President and Chief Lending Officer of the Corporation and Executive hereby accepts said employment and agrees to render such services to the Corporation on the terms and conditions set forth in this Agreement. The term of employment under this Agreement shall be for three years, commencing on the date of this Agreement and, subject to the requirements of the succeeding sentence, shall be deemed automatically, without further action, to extend for an additional year on each annual anniversary of the date of this Agreement. Prior to the anniversary of the date of this Agreement and each annual anniversary thereafter, the Board of Directors of the Corporation shall consider and review (with appropriate corporate documentation thereof, and after taking into account all relevant factors, 3 4 including the Executive's performance hereunder) extension of the term under this Agreement, and the term shall continue to extend in the manner set forth above unless either the Board of Directors does not approve such extension and provides written notice to the Executive of such event or the Executive gives written notice to the Corporation of the Executive's election not to extend the term, in each case with such written notice to be given not less than thirty (30) days prior to any such anniversary date. References herein to the term of this Agreement shall refer both to the initial term and successive terms. (b) During the term of this Agreement, the Executive shall perform such executive services for the Corporation as may be consistent with his titles and from time to time assigned to him by the Corporation's Board of Directors. 3. COMPENSATION AND BENEFITS. (a) The Employers shall compensate and pay Executive for his services during the term of this Agreement at a minimum base salary of $88,000 per year ("Base Salary"), which may be increased from time to time in such amounts as may be determined by the Board of Directors of the Employers and may not be decreased without the Executive's express written consent. In addition to his Base Salary, the Executive shall be entitled to receive during the term of this Agreement such bonus payments as may be determined by the Board of Directors of the Employers. (b) During the term of the Agreement, Executive shall be entitled to participate in and receive the benefits of any pension or other retirement benefit plan, profit sharing, stock option, employee stock ownership, or other plans, benefits and privileges given to employees and executives of the Employers, to the extent commensurate with his then duties and responsibilities, as fixed by the Board of Directors of the Employers. The Employers shall not make any changes in such plans, benefits or privileges which would adversely affect Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all executive officers of the Employers and does not result in a proportionately greater adverse change in the rights of or benefits to Executive as compared with any other executive officer of the Corporation. Nothing paid to Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary payable to Executive pursuant to Section 3(a) hereof. (c) During the term of this Agreement, Executive shall be entitled to paid annual vacation in accordance with the policies as established from time to time by the Board of Directors of the Employers. Executive shall be entitled to receive any additional compensation from the Employers for failure to take a vacation and shall be able to accumulate unused vacation time from one year to the next. (d) In the event of the Executive's death during the term of this Agreement, his spouse, estate, legal representative or named beneficiaries (as directed by the Executive in writing) shall be paid on a monthly basis the Executive's annual compensation from the Employers at the rate in effect 4 5 at the time of the Executive's death for a period equal to the period then remaining under this Agreement. (e) The Executive's compensation, benefits and expenses shall be paid by the Corporation and the Savings Bank in the same proportion as the time and services actually expended by the Executive on behalf of each respective Employer. 4. EXPENSES. The Employers shall reimburse Executive or otherwise provide for or pay for all reasonable expenses incurred by Executive in furtherance of, or in connection with the business of the Employers, including, but not by way of limitation, automobile (including costs of leasing, insurance, repairs, maintenance, and licensing) and traveling expenses, and all reasonable entertainment expenses (whether incurred at the Executive's residence, while traveling or otherwise), subject to such reasonable documentation and other limitations as may be established by the Board of Directors of the Employers. If such expenses are paid in the first instance by Executive, the Employers shall reimburse the Executive therefor. 5. TERMINATION. (a) The Corporation shall have the right, at any time upon prior Notice of Termination, to terminate the Executive's employment hereunder for any reason, including without limitation termination for Cause or Retirement, and Executive shall have the right, upon prior Notice of Termination, to terminate his employment hereunder for any reason. (b) In the event that (i) Executive's employment is terminated by the Corporation for Cause or Retirement or in the event of the Executive's death, or (ii) Executive terminates his employment hereunder other than for Good Reason, Executive shall have no right pursuant to this Agreement to compensation or other benefits for any period after the applicable Date of Termination except as otherwise provided herein. (c) In the event that (i) Executive's employment is terminated (including termination due to Disability) by the Corporation for other than Cause, Retirement or the Executive's death or (ii) such employment is terminated by the Executive (a) due to a material breach of this Agreement by the Corporation, which breach has not been cured within fifteen (15) days after a written notice of non-compliance has been given by the Executive to the Corporation, or (b) for Good Reason, then the Corporation shall, subject to the provisions of Section 6 hereof, if applicable (A) pay to the Executive, in thirty-six (36) equal monthly installments beginning with the first business day of the month following the Date of Termination, a cash severance amount equal to three (3) times the Executive's Base Salary, and (B) maintain and provide for a period ending at the earlier of (i) the expiration of the remaining term of employment pursuant hereto prior to the Notice of Termination or (ii) the date of the Executive's full-time employment by another employers 5 6 (provided that the Executive is entitled under the terms of such employment to benefits substantially similar to those described in this subparagraph (B)), at no cost to the Executive, the Executive's continued participation in all group insurance, life insurance, health and accident, disability and other employee benefit plans, programs and arrangements in which the Executive was entitled to participate immediately prior to the Date of Termination (other than stock option and restricted stock plans of the Employers), provided that in the event that the Executive's participation in any plan, program or arrangement as provided in this subparagraph (B) is barred, or during such period any such plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Corporation shall arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans, programs and arrangements immediately prior to the Date of Termination. (d) In the event of the failure by the Employers to elect or to re-elect or to appoint or to re-appoint the Executive to the offices of Senior Vice President and Chief Lending Officer of the Corporation and the Savings Bank or a material adverse change made by the Employers in the Executive's functions, duties or responsibilities as Senior Vice President and Chief Lending Officer of the Corporation and the Savings Bank without the Executive's express written consent, the Executive shall be entitled to terminate his employment hereunder and shall be entitled to the payments and benefits provided for in Section 5(c)(A) and (B); however, such termination shall not otherwise constitute a material breach of this Agreement by the Corporation. 6. PAYMENT OF ADDITIONAL BENEFITS UNDER CERTAIN CIRCUMSTANCES. (a) If the payments and benefits pursuant to Section 5 hereof, either alone or together with other payments and benefits which the Executive has the right to receive from the Employers (including, without limitation, the payments and benefits which the Executive would have the right to receive from the Savings Bank pursuant to Section 5 of the Agreement between the Savings Bank and the Executive dated as of the date hereof (the "Savings Bank Agreement"), before giving effect to any reduction in such amounts pursuant to the provisions of Section 6 of the Savings Bank Agreement), would constitute a "parachute payment" as defined in Section 280G(b)(2) of the Code (the "Initial Parachute Payment," which includes the amounts paid pursuant to clause (A) below), then the Corporation shall pay to the Executive, in thirty-six (36) equal monthly installments beginning with the first business day of the month following the Date of Termination or in a lump sum within five business days of the Date of Termination (at the Executive's election), a cash amount equal to the sum of the following: (A) the amount by which the payments and benefits that would have otherwise been paid by the Savings Bank to the Executive pursuant to Section 5 of the Savings Bank Agreement are reduced by the provisions of Section 6 of the Savings Bank Agreement; 6 7 (B) twenty (20) percent (or such other percentage equal to the tax rate imposed by Section 4999 of the Code) of the amount by which the Initial Parachute Payment exceeds the Executive's "base amount" from the Employers, as defined in Section 280G(b)(3) of the Code, with the difference between the Initial Parachute Payment and the Executive's base amount being hereinafter referred to as the "Initial Excess Parachute Payment"; and (C) such additional amount (tax allowance) as may be necessary to compensate the Executive for the payment by the Executive of state and federal income and excise taxes on the payment provided under clause (B) above and on any payments under this clause (C). In computing such tax allowance, the payment to be made under clause (B) above shall be multiplied by the "gross up percentage" ("GUP"). The GUP shall be determined as follows: Tax Rate GUP = ----------- 1- Tax Rate The Tax Rate for purposes of computing the GUP shall be the highest marginal federal and state income and employment-related tax rate, including any applicable excise tax rate, applicable to the Executive in the year in which the payment under clause (B) above is made. (b) Notwithstanding the foregoing, if it shall subsequently be determined in a final judicial determination or a final administrative settlement to which the Executive is a party that the actual excess parachute payment as defined in Section 280G(b)(1) of the Code is different from the Initial Excess Parachute Payment (such different amount being hereafter referred to as the "Final Excess Parachute Payment"), then the Corporation's independent tax counsel or accountants shall determine the amount (the "Adjustment Amount") which either the Executive must pay to the Corporation or the Corporation must pay to the Executive in order to put the Executive (or the Corporation, as the case may be) in the same position the Executive (or the Corporation, as the case may be) would have been if the Initial Excess Parachute Payment had been equal to the Final Excess Parachute Payment. In determining the Adjustment Amount, the independent tax counsel or accountants shall take into account any and all taxes (including any penalties and interest) paid by or for the Executive or refunded to the Executive or for the Executive's benefit. As soon as practicable after the Adjustment Amount has been so determined, the Corporation shall pay the Adjustment Amount to the Executive or the Executive shall repay the Adjustment Amount to the Corporation, as the case may be. (c) In each calendar year that the Executive receives payments of benefits under this Section 6, the Executive shall report on his state and federal income tax returns such information as is consistent with the determination made by the independent tax counsel or accountants of the Corporation as described above. The Corporation shall indemnify and hold the Executive harmless 7 8 from any and all losses, costs and expenses (including without limitation, reasonable attorneys' fees, interest, fines and penalties) which the Executive incurs as a result of so reporting such information. The Executive shall promptly notify the Corporation in writing whenever the Executive receives notice of the institution of a judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Section 6 is being reviewed or is in dispute. The Corporation shall assume control at its expense over all legal and accounting matters pertaining to such federal tax treatment (except to the extent necessary or appropriate for the Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this Section 6) and the Executive shall cooperate fully with the Corporation in any such proceeding. The Executive shall not enter into any compromise or settlement or otherwise prejudice any rights the Corporation may have in connection therewith without the prior consent of the Corporation. 7. MITIGATION; EXCLUSIVITY OF BENEFITS. (a) The Executive shall not be required to mitigate the amount of any benefits hereunder by seeking other employment or otherwise, nor shall the amount of any such benefits be reduced by any compensation earned by the Executive as a result of employment by another employers after the Date of Termination or otherwise. (b) The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to the Executive upon a termination of employment with the Employers pursuant to employee benefit plans of the Employers or otherwise. 8. WITHHOLDING. All payments required to be made by the Corporation hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Corporation may reasonably determine should be withheld pursuant to any applicable law or regulation. 9. ASSIGNABILITY. The Corporation may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any corporation, bank or other entity with or into which the Corporation may hereafter merge or consolidate or to which the Corporation may transfer all or substantially all of its assets, if in any such case said corporation, bank or other entity shall by operation of law or expressly in writing assume all obligations of the Corporation hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights and obligations hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder. 10. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: 8 9 To the Corporation: President First Keystone Financial, Inc. 22 West State Street Media, Pennsylvania 19063 To the Executive: Stephen J. Henderson 325 Spalding Road Wilmington, Delaware 19803 11. AMENDMENT; WAIVER. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or officers as may be specifically designated by the Board of Directors of the Corporation to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 12. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise by the substantive laws of the Commonwealth of Pennsylvania. 13. NATURE OF OBLIGATIONS. Nothing contained herein shall create or require the Corporation to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Executive acquires a right to receive benefits from the Corporation hereunder, such right shall be no greater than the right of any unsecured general creditor of the Corporation. 14. HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 15. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the Corporation and the Executive with respect to the matters agreed to herein. All prior agreements between the Corporation and the Executive with respect to the matters agreed to herein, including without limitation the Agreement between the Employers and the Executive dated January 25, 1995, are hereby superseded and shall have no force or effect. Notwithstanding the foregoing, nothing 9 10 contained in this Agreement shall affect the agreement of even date being entered into between the Savings Bank and the Executive. 10 11 IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: FIRST KEYSTONE FINANCIAL, INC. /s/ Carol Walsh By: /s/ Donald S. Guthrie Carol Walsh Donald S. Guthrie President Attest: EXECUTIVE /s/ Carol Walsh By: /s/ Stephen J. Henderson Carol Walsh Stephen J. Henderson, Individually 11 EX-10.5 4 EMPLOYMENT AGREEMENT THOMAS KELLY 05/26/1999 1 EXHIBIT 10.5 AGREEMENT AGREEMENT, dated this 26th day of May 1999, between First Keystone Financial, Inc. (the "Corporation"), a Pennsylvania corporation, and Thomas M. Kelly (the "Executive"). WITNESSETH WHEREAS, the Executive is presently an officer of the Corporation and First Keystone Federal Savings Bank (the "Savings Bank") (together, the "Employers"); WHEREAS, the Employers desire to be ensured of the Executive's continued active participation in the business of the Employers; WHEREAS, the Employers currently have an agreement with the Executive dated January 25, 1995, which is being amended and superseded by this Agreement, and in accordance with the provisions of Office of Thrift Supervision ("OTS") Regulatory Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate agreements with the Executive with respect to his employment by each of the Employers; and WHEREAS, in order to induce the Executive to remain in the employ of the Employers and in consideration of the Executive's agreeing to remain in the employ of the Employers, the parties desire to specify the severance benefits which shall be due the Executive by the Corporation in the event that his employment with the Corporation is terminated under specified circumstances. NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following words and terms shall have the meanings set forth below for the purposes of this Agreement: (a) AVERAGE ANNUAL COMPENSATION. The Executive's "Average Annual Compensation" for purposes of this Agreement shall be deemed to mean the average level of compensation paid to the Executive by the Employers or any subsidiary thereof during the most recent five taxable years preceding the Date of Termination, including Base Salary and benefits and bonuses under any employee benefit plans of the Employers. (b) BASE SALARY. "Base Salary" shall have the meaning set forth in Section 3(a) hereof. (c) CAUSE. Termination of the Executive's employment for "Cause" shall mean termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order or material breach of any provision of this Agreement. 2 (d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not the Corporation is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (e) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated for Cause or for Disability, the date specified in the Notice of Termination, and (ii) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or as specified in such Notice. (g) DISABILITY. Termination by the Corporation of the Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Employers or any subsidiary or, if no such plan applies, which would qualify the Executive for disability benefits under the Federal Social Security System. (h) GOOD REASON. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive following a Change in Control of the Corporation based on: (i) Without the Executive's express written consent, a reduction by the Employers in the Executive's Base Salary as the same may be increased from time to time or, except to the extent permitted by Section 3(b) hereof, a reduction in the package of fringe benefits provided to the Executive, taken as a whole; (ii) The principal executive office of the Employers is relocated outside of the Media, Pennsylvania, area or, without the Executive's express written consent, the Employers require the Executive to be based anywhere other 2 3 than an area in which the Employers' principal executive office is located, except for required travel on business of the Employers to an extent substantially consistent with the Executive's present business travel obligations; (iii) Any purported termination of the Executive's employment for Cause, Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (j) below; or (iv) The failure by the Corporation to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 9 hereof. (i) IRS. IRS shall mean the Internal Revenue Service. (j) NOTICE OF TERMINATION. Any purported termination of the Executive's employment by the Corporation for any reason, including without limitation for Cause, Disability or Retirement, or by the Executive for any reason, including without limitation for Good Reason, shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, (iii) specifies a Date of Termination, which shall be not less than thirty (30) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Corporation's termination of Executive's employment for Cause; and (iv) is given in the manner specified in Section 10 hereof. (k) RETIREMENT. Termination by the Corporation of the Executive's employment based on "Retirement" shall mean voluntary termination by the Executive in accordance with the Employers' retirement policies, including early retirement, generally applicable to their salaried employees. 2. TERM OF EMPLOYMENT. (a) The Corporation hereby employs the Executive as Executive Vice President, Treasurer and Chief Financial Officer of the Corporation and Executive hereby accepts said employment and agrees to render such services to the Corporation on the terms and conditions set forth in this Agreement. The term of employment under this Agreement shall be for three years, commencing on the date of this Agreement and, subject to the requirements of the succeeding sentence, shall be deemed automatically, without further action, to extend for an additional year on each annual anniversary of the date of this Agreement. Prior to the anniversary of the date of this Agreement and each annual anniversary thereafter, the Board of Directors of the Corporation shall consider and review (with appropriate corporate documentation thereof, and after taking into account 3 4 all relevant factors, including the Executive's performance hereunder) extension of the term under this Agreement, and the term shall continue to extend in the manner set forth above unless either the Board of Directors does not approve such extension and provides written notice to the Executive of such event or the Executive gives written notice to the Corporation of the Executive's election not to extend the term, in each case with such written notice to be given not less than thirty (30) days prior to any such anniversary date. References herein to the term of this Agreement shall refer both to the initial term and successive terms. (b) During the term of this Agreement, the Executive shall perform such executive services for the Corporation as may be consistent with his titles and from time to time assigned to him by the Corporation's Board of Directors. 3. COMPENSATION AND BENEFITS. (a) The Employers shall compensate and pay Executive for his services during the term of this Agreement at a minimum base salary of $134,000 per year ("Base Salary"), which may be increased from time to time in such amounts as may be determined by the Boards of Directors of the Employers and may not be decreased without the Executive's express written consent. In addition to his Base Salary, the Executive shall be entitled to receive during the term of this Agreement such bonus payments as may be determined by the Boards of Directors of the Employers. (b) During the term of the Agreement, Executive shall be entitled to participate in and receive the benefits of any pension or other retirement benefit plan, profit sharing, stock option, employee stock ownership, or other plans, benefits and privileges given to employees and executives of the Employers, to the extent commensurate with his then duties and responsibilities, as fixed by the Boards of Directors of the Employers. The Corporation shall not make any changes in such plans, benefits or privileges which would adversely affect Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all executive officers of the Employers and does not result in a proportionately greater adverse change in the rights of or benefits to Executive as compared with any other executive officer of the Corporation. Nothing paid to Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary payable to Executive pursuant to Section 3(a) hereof. (c) During the term of this Agreement, Executive shall be entitled to not less than five weeks paid annual vacation. Executive shall be entitled to receive any additional compensation from the Employers for failure to take a vacation and shall be able to accumulate unused vacation time from one year to the next. (d) During the term of this Agreement, including any renewal thereof, the Employers shall provide the Executive with a full-sized, four-door automobile for the Executive's use, which automobile shall be replaced during the term hereof and any renewal thereof no less frequently than every three years. 4 5 (e) The Employers shall provide medical insurance or reimburse the Executive for the premiums for comparable medical insurance for the benefit of the Executive and his spouse and minor children during the term of this Agreement and for a period of five years following the termination of this Agreement in accordance with Section 5 hereof, except in the case of a termination of the Executive for Cause. (f) The Employers shall pay for or reimburse Executive with respect to expenses incurred thereby in obtaining dental care for Executive, his spouse and his minor children up to a maximum of $2,500 per person per year, which amount may be increased from time to time as may be determined by the Boards of Directors of the Employers. (g) During the term of this Agreement, the Employers will pay the Executive's annual membership dues at a country club of his choice in an amount up to $7,500 per year, subject to increase from time to time as may be determined by the Boards of Directors of the Employers. In addition, the Employer will pay the Executive's initiation fee at such club. (h) In the event of the Executive's death during the term of this Agreement, his spouse, estate, legal representative or named beneficiaries (as directed by the Executive in writing) shall be paid on a monthly basis the Executive's annual compensation from the Employers at the rate in effect at the time of the Executive's death for a period equal to the period then remaining under this Agreement. (i) The Executive's compensation, benefits and expenses shall be paid by the Corporation and the Savings Bank in the same proportion as the time and services actually expended by the Executive on behalf of each respective Employer. 4. EXPENSES. The Employers shall reimburse Executive or otherwise provide for or pay for all reasonable expenses incurred by Executive in furtherance of, or in connection with the business of the Employers, including, but not by way of limitation, automobile (including costs of leasing, insurance, repairs, maintenance, and licensing) and traveling expenses, and all reasonable entertainment expenses (whether incurred at the Executive's residence, while traveling or otherwise), subject to such reasonable documentation and other limitations as may be established by the Boards of Directors of the Employers. If such expenses are paid in the first instance by Executive, the Employers shall reimburse the Executive therefor. 5. TERMINATION. (a) The Corporation shall have the right, at any time upon prior Notice of Termination, to terminate the Executive's employment hereunder for any reason, including without limitation termination for Cause or Retirement, and Executive shall have the right, upon prior Notice of Termination, to terminate his employment hereunder for any reason. 5 6 (b) In the event that (i) Executive's employment is terminated by the Corporation for Cause or Retirement or in the event of the Executive's death, or (ii) Executive terminates his employment hereunder other than for Good Reason, Executive shall have no right pursuant to this Agreement to compensation or other benefits for any period after the applicable Date of Termination except as otherwise provided herein. (c) In the event that (i) Executive's employment is terminated (including termination due to Disability) by the Corporation for other than Cause, Retirement or the Executive's death or (ii) such employment is terminated by the Executive (a) due to a material breach of this Agreement by the Corporation, which breach has not been cured within fifteen (15) days after a written notice of non-compliance has been given by the Executive to the Corporation, or (b) for Good Reason, then the Corporation shall, subject to the provisions of Section 6 hereof, if applicable (A) pay to the Executive, in thirty-six (36) equal monthly installments beginning with the first business day of the month following the Date of Termination, a cash severance amount equal to three (3) times the Executive's Base Salary, and (B) maintain and provide for a period ending at the earlier of (i) the expiration of the remaining term of employment pursuant hereto prior to the Notice of Termination or (ii) the date of the Executive's full-time employment by another employers (provided that the Executive is entitled under the terms of such employment to benefits substantially similar to those described in this subparagraph (B)), at no cost to the Executive, the Executive's continued participation in all group insurance, life insurance, health and accident, disability and other employee benefit plans, programs and arrangements in which the Executive was entitled to participate immediately prior to the Date of Termination (other than stock option and restricted stock plans of the Employers), provided that in the event that the Executive's participation in any plan, program or arrangement as provided in this subparagraph (B) is barred, or during such period any such plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Corporation shall arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans, programs and arrangements immediately prior to the Date of Termination. (d) In the event of the failure by the Employers to elect or to re-elect or to appoint or to re-appoint the Executive to the offices of Executive Vice President, Treasurer and Chief Financial Officer of the Corporation and Executive Vice President and Chief Financial Officer of the Savings Bank or a material adverse change made by the Employers in the Executive's functions, duties or responsibilities as Executive Vice President, Treasurer and Chief Financial Officer of the Corporation and Executive Vice President and Chief Financial Officer of the Savings Bank without the Executive's express written consent, the Executive shall be entitled to terminate his employment hereunder and shall be entitled to the payments and benefits provided for in Section 5(c)(A) and (B); however, such termination shall not otherwise constitute a material breach of this Agreement by the Corporation. 6 7 6. PAYMENT OF ADDITIONAL BENEFITS UNDER CERTAIN CIRCUMSTANCES. (a) If the payments and benefits pursuant to Section 5 hereof, either alone or together with other payments and benefits which the Executive has the right to receive from the Employers (including, without limitation, the payments and benefits which the Executive would have the right to receive from the Savings Bank pursuant to Section 5 of the Agreement between the Savings Bank and the Executive dated as of the date hereof (the "Savings Bank Agreement"), before giving effect to any reduction in such amounts pursuant to the provision of Section 6 of the Savings Bank Agreement), would constitute a "parachute payment" as defined in Section 280G(b)(2) of the Code (the "Initial Parachute Payment," which includes the amounts paid pursuant to clause (A) below), then the Corporation shall pay to the Executive, in thirty-six (36) equal monthly installments beginning with the first business day of the month following the Date of Termination or in a lump sum within five business days of the Date of Termination (at the Executive's election), a cash amount equal to the sum of the following: (A) the amount by which the payments and benefits that would have otherwise been paid by the Savings Bank to the Executive pursuant to Section 5 of the Savings Bank Agreement are reduced by the provisions of Section 6 of the Savings Bank Agreement; (B) twenty (20) percent (or such other percentage equal to the tax rate imposed by Section 4999 of the Code) of the amount by which the Initial Parachute Payment exceeds the Executive's "base amount" from the Employers, as defined in Section 280G(b)(3) of the Code, with the difference between the Initial Parachute Payment and the Executive's base amount being hereinafter referred to as the "Initial Excess Parachute Payment"; and (C) such additional amount (tax allowance) as may be necessary to compensate the Executive for the payment by the Executive of state and federal income and excise taxes on the payment provided under clause (B) above and on any payments under this clause (C). In computing such tax allowance, the payment to be made under clause (B) above shall be multiplied by the "gross up percentage" ("GUP"). The GUP shall be determined as follows: Tax Rate GUP = ----------- 1- Tax Rate The Tax Rate for purposes of computing the GUP shall be the highest marginal federal and state income and employment-related tax rate, including any applicable excise tax rate, applicable to the Executive in the year in which the payment under clause (B) above is made. (b) Notwithstanding the foregoing, if it shall subsequently be determined in a final judicial determination or a final administrative settlement to which the Executive is a party that the actual excess parachute payment as defined in Section 280G(b)(1) of the Code is different from the 7 8 Initial Excess Parachute Payment (such different amount being hereafter referred to as the "Final Excess Parachute Payment"), then the Corporation's independent tax counsel or accountants shall determine the amount (the "Adjustment Amount") which either the Executive must pay to the Corporation or the Corporation must pay to the Executive in order to put the Executive (or the Corporation, as the case may be) in the same position the Executive (or the Corporation, as the case may be) would have been if the Initial Excess Parachute Payment had been equal to the Final Excess Parachute Payment. In determining the Adjustment Amount, the independent tax counsel or accountants shall take into account any and all taxes (including any penalties and interest) paid by or for the Executive or refunded to the Executive or for the Executive's benefit. As soon as practicable after the Adjustment Amount has been so determined, the Corporation shall pay the Adjustment Amount to the Executive or the Executive shall repay the Adjustment Amount to the Corporation, as the case may be. (c) In each calendar year that the Executive receives payments of benefits under this Section 6, the Executive shall report on his state and federal income tax returns such information as is consistent with the determination made by the independent tax counsel or accountants of the Corporation as described above. The Corporation shall indemnify and hold the Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorneys' fees, interest, fines and penalties) which the Executive incurs as a result of so reporting such information. The Executive shall promptly notify the Corporation in writing whenever the Executive receives notice of the institution of a judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Section 6 is being reviewed or is in dispute. The Corporation shall assume control at its expense over all legal and accounting matters pertaining to such federal tax treatment (except to the extent necessary or appropriate for the Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this Section 6) and the Executive shall cooperate fully with the Corporation in any such proceeding. The Executive shall not enter into any compromise or settlement or otherwise prejudice any rights the Corporation may have in connection therewith without the prior consent of the Corporation. 7. MITIGATION; EXCLUSIVITY OF BENEFITS. (a) The Executive shall not be required to mitigate the amount of any benefits hereunder by seeking other employment or otherwise, nor shall the amount of any such benefits be reduced by any compensation earned by the Executive as a result of employment by another employers after the Date of Termination or otherwise. (b) The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to the Executive upon a termination of employment with the Employers pursuant to employee benefit plans of the Employers or otherwise. 8. WITHHOLDING. All payments required to be made by the Corporation hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other 8 9 payroll deductions as the Corporation may reasonably determine should be withheld pursuant to any applicable law or regulation. 9. ASSIGNABILITY. The Corporation may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any corporation, bank or other entity with or into which the Corporation may hereafter merge or consolidate or to which the Corporation may transfer all or substantially all of its assets, if in any such case said corporation, bank or other entity shall by operation of law or expressly in writing assume all obligations of the Corporation hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights and obligations hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder. 10. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: To the Corporation: President First Keystone Financial, Inc. 22 West State Street Media, Pennsylvania 19063 To the Executive: Thomas M. Kelly 10912 Lockart Road Philadelphia, Pennsylvania 19116 11. AMENDMENT; WAIVER. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or officers as may be specifically designated by the Board of Directors of the Corporation to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 12. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise by the substantive laws of the Commonwealth of Pennsylvania. 13. NATURE OF OBLIGATIONS. Nothing contained herein shall create or require the Corporation to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Executive acquires a right to receive benefits from the Corporation hereunder, such right shall be no greater than the right of any unsecured general creditor of the Corporation. 9 10 14. HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 15. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the Corporation and the Executive with respect to the matters agreed to herein. All prior agreements between the Corporation and the Executive with respect to the matters agreed to herein, including without limitation the Agreement between the Employers and the Executive dated January 25, 1995, are hereby superseded and shall have no force or effect. Notwithstanding the foregoing, nothing contained in this Agreement shall affect the agreement of even date being entered into between the Savings Bank and the Executive. 10 11 IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: FIRST KEYSTONE FINANCIAL, INC. /s/ Carol Walsh By: /s/ Donald S. Guthrie Carol Walsh Donald S. Guthrie President Attest: EXECUTIVE /s/ Carol Walsh By: /s/ Thomas M. Kelly Carol Walsh Thomas M. Kelly, Individually 11 EX-10.6 5 SEVERANCE AGREEMENT ELIZABETH M. MULCAHY 1 Exhibit 10.6 AGREEMENT AGREEMENT, dated this 26th day of May 1999, between First Keystone Financial, Inc. (the "Corporation"), a Pennsylvania corporation, and Elizabeth M. Mulcahy (the "Executive"). WITNESSETH: WHEREAS, the Executive is presently an officer of the Corporation and First Keystone Federal Savings Bank (the "Savings Bank") (together, the "Employers"); WHEREAS, the Employers desire to be ensured of the Executive's continued active participation in the business of the Employers; WHEREAS, the Employers currently have an agreement with the Executive dated January 25, 1995, which is being amended and superseded by this Agreement, and in accordance with the provisions of Office of Thrift Supervision ("OTS") Regulatory Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate agreements with the Executive relating to her employment by each of the Employers; and WHEREAS, in order to induce the Executive to remain in the employ of the Employers and in consideration of the Executive's agreeing to remain in the employ of the Employers, the parties desire to specify the severance benefits which shall be due the Executive by the Corporation in the event that her employment with the Corporation is terminated under specified circumstances; NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following words and terms shall have the meanings set forth below for the purposes of this Agreement: (a) ANNUAL COMPENSATION. The Executive's "Annual Compensation" for purposes of this Agreement shall be deemed to mean the highest level of base salary paid to the Executive by the Employers or any subsidiary thereof during any of the three calendar years ending during the calendar year in which the Date of Termination occurs. (b) CAUSE. Termination of the Executive's employment for "Cause" shall mean termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order. (c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item 2 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not any security of the Corporation is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (d) CODE. Code shall mean the Internal Revenue Code of 1986, as amended. (e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated for Cause or for Disability, the date specified in the Notice of Termination, and (ii) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or as specified in such Notice. (f) DISABILITY. Termination by the Corporation of the Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Employers or any subsidiary or, if no such plan applies, which would qualify the Executive for disability benefits under the Federal Social Security System. (g) GOOD REASON. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive based on: (i) Without the Executive's express written consent, the assignment by the Employers to the Executive of any duties which are materially inconsistent with the Executive's positions, duties, responsibilities and status with the Employers immediately prior to a Change in Control of the Corporation, or a material change in the Executive's reporting responsibilities, titles or offices as an employee and as in effect immediately prior to such a Change in Control, or any removal of the Executive from or any failure to re-elect the Executive to any of such responsibilities, titles or offices, except in connection with the termination of the Executive's employment for Cause, Disability or Retirement or as a result of the Executive's death or by the Executive other than for Good Reason; (ii) Without the Executive's express written consent, a reduction by the Employers in the Executive's base salary as in effect on the date of the Change in Control of the Corporation or as the same may be increased from time to time thereafter or a reduction in the package of fringe benefits provided to the Executive; 2 3 (iii) Any purported termination of the Executive's employment for Cause, Disability of Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (i) below; or (iv) The failure by the Corporation to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 6 hereof. (h) IRS. IRS shall mean the Internal Revenue Service. (i) NOTICE OF TERMINATION. Any purported termination of the Executive's employment by the Corporation for Cause, Disability or Retirement or by the Executive for Good Reason shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, (iii) specifies a Date of Termination, which shall be not less than thirty (30) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Corporation's termination of Executive's employment for Cause, and (iv) is given in the manner specified in Section 7 hereof. (j) RETIREMENT. Termination by the Corporation of the Executive's employment based on "Retirement" shall mean voluntary termination by the Executive in accordance with the Employers' retirement policies, including early retirement, generally applicable to their salaried employees. 2. BENEFITS UPON TERMINATION. If the Executive's employment by the Corporation shall be terminated subsequent to a Change in Control of the Corporation by (i) the Corporation other than for Cause, Retirement, or as a result of the Executive's death, or (ii) the Executive for Good Reason, then the Employers shall, subject to the provisions of Section 3 hereof, if applicable: (a) pay to the Executive, in twenty-four (24) equal monthly installments beginning with the first business day of the month following the Date of Termination, a cash amount equal to two (2) times the Executive's Annual Compensation; and (b) maintain and provide for a period ending at the earlier of (i) two (2) years after the Date of Termination or (ii) the date of the Executive's full-time employment by another employer (provided that the Executive is entitled under the terms of such employment to benefits substantially similar to those described in this subparagraph (b)), at no cost to the Executive, the Executive's continued participation in all group insurance, life insurance, health and accident, disability and other employee benefit plans, programs and arrangements in which the Executive was entitled to participate immediately prior to the Date of Termination (other than retirement plans or stock compensation plans of the Employers), provided that in the event that the Executive's participation in any plan, program or arrangement as provided in this subparagraph (b) is barred, or during such 3 4 period any such plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Employers arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans, programs and arrangements immediately prior to the Date of Termination. 3. PAYMENT OF ADDITIONAL BENEFITS UNDER CERTAIN CIRCUMSTANCES. (a) If the payments and benefits pursuant to Section 2 hereof, either alone or together with other payments and benefits which the Executive has the right to receive from the Employers (including, without limitation, the payments and benefits which the Executive would have the right to receive from the Savings Bank pursuant to Section 2 of the Agreement between the Savings Bank and the Executive dated as of the date hereof (the "Savings Bank Agreement"), before giving effect to any reduction in such amounts pursuant to the provisions of Section 3 of the Savings Bank Agreement), would constitute a "parachute payment" as defined in Section 280G(b)(2) of the Code (the "Initial Parachute Payment," which includes the amounts paid pursuant to clause (A) below), then the Corporation shall pay to the Executive, in twenty-four (24) equal monthly installments beginning with the first business day of the month following the Date of Termination or in a lump sum within five business days of the Date of Termination (at the Executive's election), a cash amount equal to the sum of the following: (A) the amount by which the payments and benefits that would have otherwise been paid by the Savings Bank to the Executive pursuant to Section 2 of the Savings Bank Agreement are reduced by the provisions of Section 3 of the Savings Bank Agreement; (B) twenty (20) percent (or such other percentage equal to the tax rate imposed by Section 4999 of the Code) of the amount by which the Initial Parachute Payment exceeds the Executive's "base amount" from the Employers, as defined in Section 280G(b)(3) of the Code, with the difference between the Initial Parachute Payment and the Executive's base amount being hereinafter referred to as the "Initial Excess Parachute Payment"; and (C) such additional amount (tax allowance) as may be necessary to compensate the Executive for the payment by the Executive of state and federal income and excise taxes on the payment provided under clause (B) above and on any 4 5 payments under this clause (C). In computing such tax allowance, the payment to be made under clause (B) above shall be multiplied by the "gross up percentage" ("GUP"). The GUP shall be determined as follows: Tax Rate GUP = ------------- 1- Tax Rate The Tax Rate for purposes of computing the GUP shall be the highest marginal federal and state income and employment-related tax rate, including any applicable excise tax rate, applicable to the Executive in the year in which the payment under clause (B) above is made. (b) Notwithstanding the foregoing, if it shall subsequently be determined in a final judicial determination or a final administrative settlement to which the Executive is a party that the actual excess parachute payment as defined in Section 280G(b)(1) of the Code is different from the Initial Excess Parachute Payment (such different amount being hereafter referred to as the "Final Excess Parachute Payment"), then the Corporation's independent tax counsel or accountants shall determine the amount (the "Adjustment Amount") which either the Executive must pay to the Corporation or the Corporation must pay to the Executive in order to put the Executive (or the Corporation, as the case may be) in the same position the Executive (or the Corporation, as the case may be) would have been if the Initial Excess Parachute Payment had been equal to the Final Excess Parachute Payment. In determining the Adjustment Amount, the independent tax counsel or accountants shall take into account any and all taxes (including any penalties and interest) paid by or for the Executive or refunded to the Executive or for the Executive's benefit. As soon as practicable after the Adjustment Amount has been so determined, the Corporation shall pay the Adjustment Amount to the Executive or the Executive shall repay the Adjustment Amount to the Corporation, as the case may be. (c) In each calendar year that the Executive receives payments of benefits under this Section 3, the Executive shall report on her state and federal income tax returns such information as is consistent with the determination made by the independent tax counsel or accountants of the Corporation as described above. The Corporation shall indemnify and hold the Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorneys' fees, interest, fines and penalties) which the Executive incurs as a result of so reporting such information. The Executive shall promptly notify the Corporation in writing whenever the Executive receives notice of the institution of a judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Section 3 is being reviewed or is in dispute. The Corporation shall assume control at its expense over all legal and accounting matters pertaining to such federal tax treatment (except to the extent necessary or appropriate for the Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this Section 3) and the Executive shall cooperate fully with the Corporation in any such proceeding. The Executive shall not enter into any 5 6 compromise or settlement or otherwise prejudice any rights the Corporation may have in connection therewith without the prior consent of the Corporation. 4. MITIGATION; EXCLUSIVITY OF BENEFITS. (a) The Executive shall not be required to mitigate the amount of any benefits hereunder by seeking other employment or otherwise, nor shall the amount of any such benefits be reduced by any compensation earned by the Executive as a result of employment by another employer after the Date of Termination or otherwise. (b) The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to the Executive upon a termination of employment with the Employers pursuant to employee benefit plans of the Employers or otherwise. 5. WITHHOLDING. All payments required to be made by the Corporation hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Corporation may reasonably determine should be withheld pursuant to any applicable law or regulation. 6. ASSIGNABILITY. The Corporation may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any corporation, bank or other entity with or into which the Corporation may hereafter merge or consolidate or to which the Corporation may transfer all or substantially all of its assets, if in any such case said corporation, bank or other entity shall by operation of law or expressly in writing assume all obligations of the Corporation hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder. 7. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: To the Corporation: President First Keystone Financial, Inc. 22 West State Street Media, Pennsylvania 19063 To the Executive: Elizabeth M. Mulcahy 218 Fox Road Media, Pennsylvania 19063 8. AMENDMENT; WAIVER. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the 6 7 Executive and such officer or officers as may be specifically designated by the Board of Directors of the Corporation to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise the substantive laws of the Commonwealth of Pennsylvania. 10. NATURE OF EMPLOYMENT AND OBLIGATIONS. (a) Nothing contained herein shall be deemed to create other than a terminable at will employment relationship between the Corporation and the Executive, and the Corporation may terminate the Executive's employment at any time, subject to providing any payments specified herein in accordance with the terms hereof. (b) Nothing contained herein shall create or require the Corporation to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Executive acquires a right to receive benefits from the Corporation hereunder, such right shall be no greater than the right of any unsecured general creditor of the Corporation. 11. TERM OF AGREEMENT. This Agreement shall terminate two (2) years after the date first above written; provided that on or prior to the first anniversary of the date first above written and each anniversary thereafter, the Board of Directors of the Corporation shall consider (with appropriate corporate documentation thereof, and after taking into account all relevant factors, including Executive's performance as an employee) renewal of the term of this Agreement for an additional one (1) year, and the term of this Agreement shall be so extended unless the Board of Directors of the Corporation do not approve such renewal and provide written notice to the Executive, or the Executive gives written notice to the Corporation, thirty (30) days prior to the date of any such anniversary, of such party's or parties' election not to extend the term beyond its then scheduled expiration date; and provided further that, notwithstanding the foregoing to the contrary, this Agreement shall be automatically extended for an additional one (1) year upon a Change in Control of the Corporation. 12. HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 13. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 7 8 14. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 15. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the Corporation and the Executive with respect to the matters agreed to herein. All prior agreements between the Corporation and the Executive with respect to the matters agreed to herein, including without limitation the Agreement between the Employers and the Executive dated January 25, 1995, are hereby superseded and shall have no force or effect. Notwithstanding the foregoing, nothing contained in this Agreement shall affect the agreement of even date being entered into between the Savings Bank and the Executive. 8 9 IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: FIRST KEYSTONE FINANCIAL, INC. /s/ Carol Walsh By:/s/ Donald S. Guthrie Carol Walsh Donald S. Guthrie President Attest: EXECUTIVE /s/ Carol Walsh By:/s/ Elizabeth M. Mulcahy Carol Walsh Elizabeth M. Mulcahy, Individually 9 EX-10.8 6 SEVERANCE AGREEMENT CAROL WALSH 1 EXHIBIT 10.8 AGREEMENT AGREEMENT, dated this 26th day of May 1999, between First Keystone Financial, Inc. (the "Corporation"), a Pennsylvania corporation, and Carol Walsh (the "Executive"). WITNESSETH: WHEREAS, the Executive is presently an officer of the Corporation and First Keystone Federal Savings Bank (the "Savings Bank") (together, the "Employers"); WHEREAS, the Employers desire to be ensured of the Executive's continued active participation in the business of the Employers; WHEREAS, the Employers currently have an agreement with the Executive dated January 25, 1995, which is being amended and superseded by this Agreement, and in accordance with the provisions of Office of Thrift Supervision ("OTS") Regulatory Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate agreements with the Executive relating to her employment by each of the Employers; and WHEREAS, in order to induce the Executive to remain in the employ of the Employers and in consideration of the Executive's agreeing to remain in the employ of the Employers, the parties desire to specify the severance benefits which shall be due the Executive by the Corporation in the event that her employment with the Corporation is terminated under specified circumstances; NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following words and terms shall have the meanings set forth below for the purposes of this Agreement: (a) ANNUAL COMPENSATION. The Executive's "Annual Compensation" for purposes of this Agreement shall be deemed to mean the highest level of base salary paid to the Executive by the Employers or any subsidiary thereof during any of the three calendar years ending during the calendar year in which the Date of Termination occurs. (b) CAUSE. Termination of the Executive's employment for "Cause" shall mean termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order. (c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item 2 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not any security of the Corporation is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (d) CODE. Code shall mean the Internal Revenue Code of 1986, as amended. (e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated for Cause or for Disability, the date specified in the Notice of Termination, and (ii) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or as specified in such Notice. (f) DISABILITY. Termination by the Corporation of the Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Employers or any subsidiary or, if no such plan applies, which would qualify the Executive for disability benefits under the Federal Social Security System. (g) GOOD REASON. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive based on: (i) Without the Executive's express written consent, the assignment by the Employers to the Executive of any duties which are materially inconsistent with the Executive's positions, duties, responsibilities and status with the Employers immediately prior to a Change in Control of the Corporation, or a material change in the Executive's reporting responsibilities, titles or offices as an employee and as in effect immediately prior to such a Change in Control, or any removal of the Executive from or any failure to re-elect the Executive to any of such responsibilities, titles or offices, except in connection with the termination of the Executive's employment for Cause, Disability or Retirement or as a result of the Executive's death or by the Executive other than for Good Reason; (ii) Without the Executive's express written consent, a reduction by the Employers in the Executive's base salary as in effect on the date of the Change in Control of the Corporation or as the same may be increased from time to time thereafter or a reduction in the package of fringe benefits provided to the Executive; 2 3 (iii) Any purported termination of the Executive's employment for Cause, Disability of Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (i) below; or (iv) The failure by the Corporation to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 6 hereof. (h) IRS. IRS shall mean the Internal Revenue Service. (i) NOTICE OF TERMINATION. Any purported termination of the Executive's employment by the Corporation for Cause, Disability or Retirement or by the Executive for Good Reason shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, (iii) specifies a Date of Termination, which shall be not less than thirty (30) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Corporation's termination of Executive's employment for Cause, and (iv) is given in the manner specified in Section 7 hereof. (j) RETIREMENT. Termination by the Corporation of the Executive's employment based on "Retirement" shall mean voluntary termination by the Executive in accordance with the Employers' retirement policies, including early retirement, generally applicable to their salaried employees. 2. BENEFITS UPON TERMINATION. If the Executive's employment by the Corporation shall be terminated subsequent to a Change in Control of the Corporation by (i) the Corporation other than for Cause, Retirement, or as a result of the Executive's death, or (ii) the Executive for Good Reason, then the Employers shall, subject to the provisions of Section 3 hereof, if applicable: (a) pay to the Executive, in twenty-four (24) equal monthly installments beginning with the first business day of the month following the Date of Termination, a cash amount equal to two (2) times the Executive's Annual Compensation; and (b) maintain and provide for a period ending at the earlier of (i) two (2) years after the Date of Termination or (ii) the date of the Executive's full-time employment by another employer (provided that the Executive is entitled under the terms of such employment to benefits substantially similar to those described in this subparagraph (b)), at no cost to the Executive, the Executive's continued participation in all group insurance, life insurance, health and accident, disability and other employee benefit plans, programs and arrangements in which the Executive was entitled to participate immediately prior to the Date of Termination (other than retirement plans or stock compensation plans of the Employers), provided that in the event that the Executive's participation in any plan, program or arrangement as provided in this subparagraph (b) is barred, or during such 3 4 period any such plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Employers arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans, programs and arrangements immediately prior to the Date of Termination. 3. PAYMENT OF ADDITIONAL BENEFITS UNDER CERTAIN CIRCUMSTANCES. (a) If the payments and benefits pursuant to Section 2 hereof, either alone or together with other payments and benefits which the Executive has the right to receive from the Employers (including, without limitation, the payments and benefits which the Executive would have the right to receive from the Savings Bank pursuant to Section 2 of the Agreement between the Savings Bank and the Executive dated as of the date hereof (the "Savings Bank Agreement"), before giving effect to any reduction in such amounts pursuant to the provisions of Section 3 of the Savings Bank Agreement), would constitute a "parachute payment" as defined in Section 280G(b)(2) of the Code (the "Initial Parachute Payment," which includes the amounts paid pursuant to clause (A) below), then the Corporation shall pay to the Executive, in twenty-four (24) equal monthly installments beginning with the first business day of the month following the Date of Termination or in a lump sum within five business days of the Date of Termination (at the Executive's election), a cash amount equal to the sum of the following: (A) the amount by which the payments and benefits that would have otherwise been paid by the Savings Bank to the Executive pursuant to Section 2 of the Savings Bank Agreement are reduced by the provisions of Section 3 of the Savings Bank Agreement; (B) twenty (20) percent (or such other percentage equal to the tax rate imposed by Section 4999 of the Code) of the amount by which the Initial Parachute Payment exceeds the Executive's "base amount" from the Employers, as defined in Section 280G(b)(3) of the Code, with the difference between the Initial Parachute Payment and the Executive's base amount being hereinafter referred to as the "Initial Excess Parachute Payment"; and (C) such additional amount (tax allowance) as may be necessary to compensate the Executive for the payment by the Executive of state and federal income and excise taxes on the payment provided under clause (B) above and on any 4 5 payments under this clause (C). In computing such tax allowance, the payment to be made under clause (B) above shall be multiplied by the "gross up percentage" ("GUP"). The GUP shall be determined as follows: Tax Rate GUP = ------------- 1- Tax Rate The Tax Rate for purposes of computing the GUP shall be the highest marginal federal and state income and employment-related tax rate, including any applicable excise tax rate, applicable to the Executive in the year in which the payment under clause (B) above is made. (b) Notwithstanding the foregoing, if it shall subsequently be determined in a final judicial determination or a final administrative settlement to which the Executive is a party that the actual excess parachute payment as defined in Section 280G(b)(1) of the Code is different from the Initial Excess Parachute Payment (such different amount being hereafter referred to as the "Final Excess Parachute Payment"), then the Corporation's independent tax counsel or accountants shall determine the amount (the "Adjustment Amount") which either the Executive must pay to the Corporation or the Corporation must pay to the Executive in order to put the Executive (or the Corporation, as the case may be) in the same position the Executive (or the Corporation, as the case may be) would have been if the Initial Excess Parachute Payment had been equal to the Final Excess Parachute Payment. In determining the Adjustment Amount, the independent tax counsel or accountants shall take into account any and all taxes (including any penalties and interest) paid by or for the Executive or refunded to the Executive or for the Executive's benefit. As soon as practicable after the Adjustment Amount has been so determined, the Corporation shall pay the Adjustment Amount to the Executive or the Executive shall repay the Adjustment Amount to the Corporation, as the case may be. (c) In each calendar year that the Executive receives payments of benefits under this Section 3, the Executive shall report on her state and federal income tax returns such information as is consistent with the determination made by the independent tax counsel or accountants of the Corporation as described above. The Corporation shall indemnify and hold the Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorneys' fees, interest, fines and penalties) which the Executive incurs as a result of so reporting such information. The Executive shall promptly notify the Corporation in writing whenever the Executive receives notice of the institution of a judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Section 3 is being reviewed or is in dispute. The Corporation shall assume control at its expense over all legal and accounting matters pertaining to such federal tax treatment (except to the extent necessary or appropriate for the Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this Section 3) and the Executive shall cooperate fully with the Corporation in any such proceeding. The Executive shall not enter into any 5 6 compromise or settlement or otherwise prejudice any rights the Corporation may have in connection therewith without the prior consent of the Corporation. 4. MITIGATION; EXCLUSIVITY OF BENEFITS. (a) The Executive shall not be required to mitigate the amount of any benefits hereunder by seeking other employment or otherwise, nor shall the amount of any such benefits be reduced by any compensation earned by the Executive as a result of employment by another employer after the Date of Termination or otherwise. (b) The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to the Executive upon a termination of employment with the Employers pursuant to employee benefit plans of the Employers or otherwise. 5. WITHHOLDING. All payments required to be made by the Corporation hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Corporation may reasonably determine should be withheld pursuant to any applicable law or regulation. 6. ASSIGNABILITY. The Corporation may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any corporation, bank or other entity with or into which the Corporation may hereafter merge or consolidate or to which the Corporation may transfer all or substantially all of its assets, if in any such case said corporation, bank or other entity shall by operation of law or expressly in writing assume all obligations of the Corporation hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder. 7. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: To the Corporation: President First Keystone Financial, Inc. 22 West State Street Media, Pennsylvania 19063 To the Executive: Carol Walsh 10 Sherwood Lane Aston, Pennsylvania 19014 6 7 8. AMENDMENT; WAIVER. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or officers as may be specifically designated by the Board of Directors of the Corporation to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise the substantive laws of the Commonwealth of Pennsylvania. 10. NATURE OF EMPLOYMENT AND OBLIGATIONS. (a) Nothing contained herein shall be deemed to create other than a terminable at will employment relationship between the Corporation and the Executive, and the Corporation may terminate the Executive's employment at any time, subject to providing any payments specified herein in accordance with the terms hereof. (b) Nothing contained herein shall create or require the Corporation to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Executive acquires a right to receive benefits from the Corporation hereunder, such right shall be no greater than the right of any unsecured general creditor of the Corporation. 11. TERM OF AGREEMENT. This Agreement shall terminate two (2) years after the date first above written; provided that on or prior to the first anniversary of the date first above written and each anniversary thereafter, the Board of Directors of the Corporation shall consider (with appropriate corporate documentation thereof, and after taking into account all relevant factors, including Executive's performance as an employee) renewal of the term of this Agreement for an additional one (1) year, and the term of this Agreement shall be so extended unless the Board of Directors of the Corporation do not approve such renewal and provide written notice to the Executive, or the Executive gives written notice to the Corporation, thirty (30) days prior to the date of any such anniversary, of such party's or parties' election not to extend the term beyond its then scheduled expiration date; and provided further that, notwithstanding the foregoing to the contrary, this Agreement shall be automatically extended for an additional one (1) year upon a Change in Control of the Corporation. 12. HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 13. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 7 8 14. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 15. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the Corporation and the Executive with respect to the matters agreed to herein. All prior agreements between the Corporation and the Executive with respect to the matters agreed to herein, including without limitation the Agreement between the Employers and the Executive dated January 25, 1995, are hereby superseded and shall have no force or effect. Notwithstanding the foregoing, nothing contained in this Agreement shall affect the agreement of even date being entered into between the Savings Bank and the Executive. IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: FIRST KEYSTONE FINANCIAL, INC. /s/ Thomas M. Kelly By:/s/ Donald S. Guthrie - ---------------------- ------------------------ Thomas M. Kelly Donald S. Guthrie President Attest: EXECUTIVE /s/ Thomas M. Kelly By:/s/ Carol Walsh - ---------------------- ---------------------- Thomas M. Kelly Carol Walsh, Individually 8 EX-10.12 7 EMPLOYMENT AGREEMENT DONALD GUTHRIE 05/26/1999 1 Exhibit 10.12 AGREEMENT AGREEMENT, dated this 26th day of May 1999, between First Keystone Federal Savings Bank (the "Savings Bank"), a federally chartered savings bank, and Donald S. Guthrie (the "Executive"). WITNESSETH WHEREAS, the Executive is presently an officer of First Keystone Financial, Inc. (the "Corporation") and the Savings Bank (together, the "Employers"); WHEREAS, the Employers desire to be ensured of the Executive's continued active participation in the business of the Employers; WHEREAS, the Employers currently have an agreement with the Executive dated January 25, 1995, which is being amended and superseded by this Agreement, and in accordance with the provisions of Office of Thrift Supervision ("OTS") Regulatory Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate agreements with the Executive with respect to his employment by each of the Employers; and WHEREAS, in order to induce the Executive to remain in the employ of the Employers and in consideration of the Executive's agreeing to remain in the employ of the Employers, the parties desire to specify the severance benefits which shall be due the Executive by the Savings Bank in the event that his employment with the Savings Bank is terminated under specified circumstances. NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following words and terms shall have the meanings set forth below for the purposes of this Agreement: (a) AVERAGE ANNUAL COMPENSATION. The Executive's "Average Annual Compensation" for purposes of this Agreement shall be deemed to mean the average level of compensation paid to the Executive by the Employers or any subsidiary thereof during the most recent five taxable years preceding the Date of Termination, including Base Salary and benefits and bonuses under any employee benefit plans of the Employers. (b) BASE SALARY. "Base Salary" shall have the meaning set forth in Section 3(a) hereof. (c) CAUSE. Termination of the Executive's employment for "Cause" shall mean termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any 2 law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order or material breach of any provision of this Agreement. (d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not the Corporation is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (e) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated for Cause or for Disability, the date specified in the Notice of Termination, and (ii) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or as specified in such Notice. (g) DISABILITY. Termination by the Savings Bank of the Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Employers or any subsidiary or, if no such plan applies, which would qualify the Executive for disability benefits under the Federal Social Security System. (h) GOOD REASON. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive following a Change in Control of the Corporation based on: (i) Without the Executive's express written consent, a reduction by the Employers in the Executive's Base Salary as the same may be increased from time to time or, except to the extent permitted by Section 3(b) hereof, a reduction in the package of fringe benefits provided to the Executive, taken as a whole; (ii) The principal executive office of the Employers is relocated outside of the Media, Pennsylvania, area or, without the Executive's express written 2 3 consent, the Employers require the Executive to be based anywhere other than an area in which the Employers' principal executive office is located, except for required travel on business of the Employers to an extent substantially consistent with the Executive's present business travel obligations; (iii) Any purported termination of the Executive's employment for Cause, Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (j) below; or (iv) The failure by the Savings Bank to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 9 hereof. (i) IRS. IRS shall mean the Internal Revenue Service. (j) NOTICE OF TERMINATION. Any purported termination of the Executive's employment by the Savings Bank for any reason, including without limitation for Cause, Disability or Retirement, or by the Executive for any reason, including without limitation for Good Reason, shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, (iii) specifies a Date of Termination, which shall be not less than thirty (30) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Savings Bank's termination of Executive's employment for Cause; and (iv) is given in the manner specified in Section 10 hereof. (k) RETIREMENT. Termination by the Savings Bank of the Executive's employment based on "Retirement" shall mean voluntary termination by the Executive in accordance with the Employers' retirement policies, including early retirement, generally applicable to their salaried employees. 2. TERM OF EMPLOYMENT. (a) The Savings Bank hereby employs the Executive as President and Chief Executive Officer of the Savings Bank and Executive hereby accepts said employment and agrees to render such services to the Savings Bank on the terms and conditions set forth in this Agreement. The term of employment under this Agreement shall be for three years, commencing on the date of this Agreement and, subject to the requirements of the succeeding sentence, shall be deemed automatically, without further action, to extend for an additional year on each annual anniversary of the date of this Agreement. Prior to the anniversary of the date of this Agreement and each annual anniversary thereafter, the Board of Directors of the Savings Bank shall consider and review (with 3 4 appropriate corporate documentation thereof, and after taking into account all relevant factors, including the Executive's performance hereunder) extension of the term under this Agreement, and the term shall continue to extend in the manner set forth above unless either the Board of Directors does not approve such extension and provides written notice to the Executive of such event or the Executive gives written notice to the Savings Bank of the Executive's election not to extend the term, in each case with such written notice to be given not less than thirty (30) days prior to any such anniversary date. References herein to the term of this Agreement shall refer both to the initial term and successive terms. (b) During the term of this Agreement, the Executive shall perform such executive services for the Savings Bank as may be consistent with his titles and from time to time assigned to him by the Savings Bank's Board of Directors. 3. COMPENSATION AND BENEFITS. (a) The Employers shall compensate and pay Executive for his services during the term of this Agreement at a minimum base salary of $180,000 per year ("Base Salary"), which may be increased from time to time in such amounts as may be determined by the Boards of Directors of the Employers and may not be decreased without the Executive's express written consent. In addition to his Base Salary, the Executive shall be entitled to receive during the term of this Agreement such bonus payments as may be determined by the Boards of Directors of the Employers. (b) During the term of the Agreement, Executive shall be entitled to participate in and receive the benefits of any pension or other retirement benefit plan, profit sharing, stock option, employee stock ownership, or other plans, benefits and privileges given to employees and executives of the Employers, to the extent commensurate with his then duties and responsibilities, as fixed by the Boards of Directors of the Employers. The Savings Bank shall not make any changes in such plans, benefits or privileges which would adversely affect Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all executive officers of the Savings Bank and does not result in a proportionately greater adverse change in the rights of or benefits to Executive as compared with any other executive officer of the Savings Bank. Nothing paid to Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary payable to Executive pursuant to Section 3(a) hereof. (c) During the term of this Agreement, the Executive shall be entitled to not less than six weeks paid annual vacation. The Executive shall be entitled to receive any additional compensation from the Employers for failure to take a vacation and shall be able to accumulate unused vacation time from one year to the next. (d) During the term of this Agreement, including any renewal thereof, the Employers shall provide the Executive with a full-sized, four-door automobile for the Executive's use, which automobile shall be replaced during the term hereof and any renewal thereof no less frequently than every three years. 4 5 (e) The Employers shall provide medical insurance for the benefit of the Executive and his spouse until the Executive shall have attained the age of 69; furthermore, in the event of the death of the Executive prior to attaining age 69, the Employers shall provide the Executive's spouse with said medical insurance until such spouse is eligible for state or federal government subsidized medical benefits, but in no event shall such spouse be entitled to said medical insurance after attaining age 69. (f) The Employers shall pay for or reimburse Executive with respect to expenses incurred thereby in obtaining dental care for Executive and his spouse up to a maximum of $2,500 per person per year, which amount may be increased from time to time as may be determined by the Boards of Directors of the Employers. (g) During the term of this Agreement, the Employers will pay the Executive's annual membership dues at the Spring Haven Country Club or such other club of his choice in an amount up to $7,500 per year, subject to increase from time to time as may be determined by the Boards of Directors of the Employers. (h) In the event of the Executive's death during the term of this Agreement, his spouse, estate, legal representative or named beneficiaries (as directed by the Executive in writing) shall be paid on a monthly basis the Executive's annual compensation from the Employers at the rate in effect at the time of the Executive's death for a period equal to the period then remaining under this Agreement. (i) The Executive's compensation, benefits and expenses shall be paid by the Corporation and the Savings Bank in the same proportion as the time and services actually expended by the Executive on behalf of each respective Employer. 4. EXPENSES. The Employers shall reimburse Executive or otherwise provide for or pay for all reasonable expenses incurred by Executive in furtherance of, or in connection with the business of the Employers, including, but not by way of limitation, automobile (including costs of leasing, insurance, repairs, maintenance, and licensing) and traveling expenses, and all reasonable entertainment expenses (whether incurred at the Executive's residence, while traveling or otherwise), subject to such reasonable documentation and other limitations as may be established by the Boards of Directors of the Employers. If such expenses are paid in the first instance by Executive, the Employers shall reimburse the Executive therefor. 5. TERMINATION. (a) The Savings Bank shall have the right, at any time upon prior Notice of Termination, to terminate the Executive's employment hereunder for any reason, including without limitation termination for Cause or Retirement, and Executive shall have the right, upon prior Notice of Termination, to terminate his employment hereunder for any reason. 5 6 (b) In the event that (i) Executive's employment is terminated by the Savings Bank for Cause or Retirement or in the event of the Executive's death, or (ii) Executive terminates his employment hereunder other than for Good Reason, Executive shall have no right pursuant to this Agreement to compensation or other benefits for any period after the applicable Date of Termination except as otherwise provided herein. (c) In the event that (i) Executive's employment is terminated (including termination due to Disability) by the Savings Bank for other than Cause, Retirement or the Executive's death or (ii) such employment is terminated by the Executive (a) due to a material breach of this Agreement by the Savings Bank, which breach has not been cured within fifteen (15) days after a written notice of non-compliance has been given by the Executive to the Savings Bank, or (b) for Good Reason, then the Savings Bank shall, subject to the provisions of Section 6 hereof, if applicable (A) pay to the Executive, in thirty-six (36) equal monthly installments beginning with the first business day of the month following the Date of Termination, a cash severance amount equal to three (3) times the Executive's Base Salary, and (B) maintain and provide for a period ending at the earlier of (i) the expiration of the remaining term of employment pursuant hereto prior to the Notice of Termination or (ii) the date of the Executive's full-time employment by another employers (provided that the Executive is entitled under the terms of such employment to benefits substantially similar to those described in this subparagraph (B)), at no cost to the Executive, the Executive's continued participation in all group insurance, life insurance, health and accident, disability and other employee benefit plans, programs and arrangements in which the Executive was entitled to participate immediately prior to the Date of Termination (other than stock option and restricted stock plans of the Employers), provided that in the event that the Executive's participation in any plan, program or arrangement as provided in this subparagraph (B) is barred, or during such period any such plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Savings Bank shall arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans, programs and arrangements immediately prior to the Date of Termination. (d) In the event of the failure by the Employers to elect or to re-elect or to appoint or to re-appoint the Executive to the offices of President and Chief Executive Officer of the Corporation and the Savings Bank or a material adverse change made by the Employers in the Executive's functions, duties or responsibilities as President and Chief Executive Officer of the Corporation and the Savings Bank without the Executive's express written consent, the Executive shall be entitled to terminate his employment hereunder and shall be entitled to the payments and benefits provided for in Section 5(c)(A) and (B); however, such termination shall not otherwise constitute a material breach of this Agreement by the Savings Bank. 6 7 6. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and benefits pursuant to Section 5 hereof, either alone or together with other payments and benefits which Executive has the right to receive from the Savings Bank, would constitute a "parachute payment" under Section 280G of the Code, the payments and benefits pursuant to Section 5 hereof shall be reduced, in the manner determined by the Executive, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits under Section 5 being non-deductible to the Savings Bank pursuant to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. The parties hereto agree that the payments and benefits payable pursuant to this Agreement to the Executive upon termination shall be limited to three times the Executive's Average Annual Compensation in accordance with the provisions of OTS Regulatory Bulletin 27a. The determination of any reduction in the payments and benefits to be made pursuant to Section 5 shall be based upon the opinion of independent tax counsel selected by the Savings Bank's independent public accountants and paid by the Savings Bank. Such counsel shall be reasonably acceptable to the Savings Bank and the Executive; shall promptly prepare the foregoing opinion, but in no event later than thirty (30) days from the Date of Termination; and may use such actuaries as such counsel deems necessary or advisable for the purpose. In the event that the Savings Bank and/or the Executive do not agree with the opinion of such counsel, (i) the Savings Bank shall pay to the Executive the maximum amount of payments and benefits pursuant to Section 5, as selected by the Executive, which such opinion indicates that there is a high probability do not result in any of such payments and benefits being non-deductible to the Savings Bank and subject to the imposition of the excise tax imposed under Section 4999 of the Code and (ii) the Savings Bank may request, and Executive shall have the right to demand that the Savings Bank request, a ruling from the IRS as to whether the disputed payments and benefits pursuant to Section 5 hereof have such consequences. Any such request for a ruling from the IRS shall be promptly prepared and filed by the Savings Bank, but in no event later than thirty (30) days from the date of the opinion of counsel referred to above, and shall be subject to Executive's approval prior to filing, which shall not be unreasonably withheld. The Savings Bank and Executive agree to be bound by any ruling received from the IRS and to make appropriate payments to each other to reflect any such rulings, together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. Nothing contained herein shall result in a reduction of any payments or benefits to which the Executive may be entitled upon termination of employment under any circumstances other than as specified in this Section 6, or a reduction in the payments and benefits specified in Section 5 below zero. 7. MITIGATION; EXCLUSIVITY OF BENEFITS. (a) The Executive shall not be required to mitigate the amount of any benefits hereunder by seeking other employment or otherwise, nor shall the amount of any such benefits be reduced by any compensation earned by the Executive as a result of employment by another employers after the Date of Termination or otherwise. (b) The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to the Executive upon a termination of employment with the Employers pursuant to employee benefit plans of the Employers or otherwise. 7 8 8. WITHHOLDING. All payments required to be made by the Savings Bank hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Savings Bank may reasonably determine should be withheld pursuant to any applicable law or regulation. 9. ASSIGNABILITY. The Savings Bank may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any corporation, bank or other entity with or into which the Savings Bank may hereafter merge or consolidate or to which the Savings Bank may transfer all or substantially all of its assets, if in any such case said corporation, bank or other entity shall by operation of law or expressly in writing assume all obligations of the Savings Bank hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights and obligations hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder. 10. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: To the Savings Bank: Chairman of the Board First Keystone Federal Savings Bank 22 West State Street Media, Pennsylvania 19063 To the Executive: Donald S. Guthrie 2 General Washington Drive Media, Pennsylvania 19063 11. AMENDMENT; WAIVER. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or officers as may be specifically designated by the Board of Directors of the Savings Bank to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 12. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise by the substantive laws of the Commonwealth of Pennsylvania. 13. NATURE OF OBLIGATIONS. Nothing contained herein shall create or require the Savings Bank to create a trust of any kind to fund any benefits which may be payable hereunder, and to the 8 9 extent that the Executive acquires a right to receive benefits from the Savings Bank hereunder, such right shall be no greater than the right of any unsecured general creditor of the Savings Bank. 14. HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 15. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. REGULATORY ACTIONS. The following provisions shall be applicable to the parties to the extent that they are required to be included in employment agreements between a savings association and its employees pursuant to Section 563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R. Section 563.39(b), or any successor thereto, and shall be controlling in the event of a conflict with any other provision of this Agreement, including without limitation Section 5 hereof. (a) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Savings Bank's affairs pursuant to notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")(12 U.S.C. Sections 1818(e)(3) and 1818(g)(1)), the Savings Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Savings Bank may, in its discretion: (i) pay Executive all or part of the compensation withheld while its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (b) If the Executive is removed from office and/or permanently prohibited from participating in the conduct of the Savings Bank's affairs by an order issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sections 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. (c) If the Savings Bank is in default, as defined in Section 3(x)(1) of the FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall terminate as of the date of default, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. (d) All obligations under this Agreement shall be terminated pursuant to 12 C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that continuation of the Agreement for the 9 10 continued operation of the Savings Bank is necessary): (i) by the Director of the OTS, or his/her designee, at the time the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to provide assistance to or on behalf of the Savings Bank under the authority contained in Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii) by the Director of the OTS, or his/her designee, at the time the Director or his/her designee approves a supervisory merger to resolve problems related to operation of the Savings Bank or when the Savings Bank is determined by the Director of the OTS to be in an unsafe or unsound condition, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. 18. REGULATORY PROHIBITION. Notwithstanding any other provision of this Agreement to the contrary, any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any regulations promulgated thereunder. 19. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the Savings Bank and the Executive with respect to the matters agreed to herein. All prior agreements between the Savings Bank and the Executive with respect to the matters agreed to herein, including without limitation the Agreement between the Employers and the Executive dated January 25, 1995, are hereby superseded and shall have no force or effect. Notwithstanding the foregoing, nothing contained in this Agreement shall affect the agreement of even date being entered into between the Corporation and the Executive. 10 11 IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: FIRST KEYSTONE FEDERAL SAVINGS BANK /s/ Carol Walsh By: /s/ Donald A. Purdy - ------------------------ ------------------------------- Carol Walsh Donald A. Purdy Chairman of the Board Attest: EXECUTIVE /s/ Carol Walsh By: /s/ Donald S. Guthrie - ------------------------ ------------------------------- Carol Walsh Donald S. Guthrie, Individually 11 EX-10.13 8 EMPLOYMENT AGREEMENT STEPHEN HENDERSON 05/26/1999 1 Exhibit 10.13 AGREEMENT AGREEMENT, dated this 26th day of May 1999, between First Keystone Federal Savings Bank (the "Savings Bank"), a federally chartered savings bank, and Stephen J. Henderson (the "Executive"). WITNESSETH WHEREAS, the Executive is presently an officer of First Keystone Financial, Inc. (the "Corporation") and the Savings Bank (together, the "Employers"); WHEREAS, the Employers desire to be ensured of the Executive's continued active participation in the business of the Employers; WHEREAS, the Employers currently have an agreement with the Executive dated January 25, 1995, which is being amended and superseded by this Agreement, and in accordance with the provisions of Office of Thrift Supervision ("OTS") Regulatory Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate agreements with the Executive with respect to his employment by each of the Employers; and WHEREAS, in order to induce the Executive to remain in the employ of the Employers and in consideration of the Executive's agreeing to remain in the employ of the Employers, the parties desire to specify the severance benefits which shall be due the Executive by the Savings Bank in the event that his employment with the Savings Bank is terminated under specified circumstances. NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following words and terms shall have the meanings set forth below for the purposes of this Agreement: (a) AVERAGE ANNUAL COMPENSATION. The Executive's "Average Annual Compensation" for purposes of this Agreement shall be deemed to mean the average level of compensation paid to the Executive by the Employers or any subsidiary thereof during the most recent five taxable years preceding the Date of Termination, including Base Salary and benefits and bonuses under any employee benefit plans of the Employers. (b) BASE SALARY. "Base Salary" shall have the meaning set forth in Section 3(a) hereof. (c) CAUSE. Termination of the Executive's employment for "Cause" shall mean termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any 2 law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order or material breach of any provision of this Agreement. (d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not the Corporation is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (e) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated for Cause or for Disability, the date specified in the Notice of Termination, and (ii) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or as specified in such Notice. (g) DISABILITY. Termination by the Savings Bank of the Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Employers or any subsidiary or, if no such plan applies, which would qualify the Executive for disability benefits under the Federal Social Security System. (h) GOOD REASON. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive following a Change in Control of the Corporation based on: (i) Without the Executive's express written consent, a reduction by the Employers in the Executive's Base Salary as the same may be increased from time to time or, except to the extent permitted by Section 3(b) hereof, a reduction in the package of fringe benefits provided to the Executive, taken as a whole; (ii) The principal executive office of the Employers is relocated outside of the Media, Pennsylvania, area or, without the Executive's express written 2 3 consent, the Employers require the Executive to be based anywhere other than an area in which the Employers' principal executive office is located, except for required travel on business of the Employers to an extent substantially consistent with the Executive's present business travel obligations; (iii) Any purported termination of the Executive's employment for Cause, Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (j) below; or (iv) The failure by the Savings Bank to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 9 hereof. (i) IRS. IRS shall mean the Internal Revenue Service. (j) NOTICE OF TERMINATION. Any purported termination of the Executive's employment by the Savings Bank for any reason, including without limitation for Cause, Disability or Retirement, or by the Executive for any reason, including without limitation for Good Reason, shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, (iii) specifies a Date of Termination, which shall be not less than thirty (30) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Savings Bank's termination of Executive's employment for Cause; and (iv) is given in the manner specified in Section 10 hereof. (k) RETIREMENT. Termination by the Savings Bank of the Executive's employment based on "Retirement" shall mean voluntary termination by the Executive in accordance with the Employers' retirement policies, including early retirement, generally applicable to their salaried employees. 2. TERM OF EMPLOYMENT. (a) The Savings Bank hereby employs the Executive as Senior Vice President and Chief Lending Officer of the Savings Bank and Executive hereby accepts said employment and agrees to render such services to the Savings Bank on the terms and conditions set forth in this Agreement. The term of employment under this Agreement shall be for three years, commencing on the date of this Agreement and, subject to the requirements of the succeeding sentence, shall be deemed automatically, without further action, to extend for an additional year on each annual anniversary of the date of this Agreement. Prior to the anniversary of the date of this Agreement and each annual anniversary thereafter, the Board of Directors of the Savings Bank shall consider and review (with 3 4 appropriate corporate documentation thereof, and after taking into account all relevant factors, including the Executive's performance hereunder) extension of the term under this Agreement, and the term shall continue to extend in the manner set forth above unless either the Board of Directors does not approve such extension and provides written notice to the Executive of such event or the Executive gives written notice to the Savings Bank of the Executive's election not to extend the term, in each case with such written notice to be given not less than thirty (30) days prior to any such anniversary date. References herein to the term of this Agreement shall refer both to the initial term and successive terms. (b) During the term of this Agreement, the Executive shall perform such executive services for the Savings Bank as may be consistent with his titles and from time to time assigned to him by the Savings Bank's Board of Directors. 3. COMPENSATION AND BENEFITS. (a) The Employers shall compensate and pay Executive for his services during the term of this Agreement at a minimum base salary of $88,000 per year ("Base Salary"), which may be increased from time to time in such amounts as may be determined by the Board of Directors of the Employers and may not be decreased without the Executive's express written consent. In addition to his Base Salary, the Executive shall be entitled to receive during the term of this Agreement such bonus payments as may be determined by the Board of Directors of the Employers. (b) During the term of the Agreement, Executive shall be entitled to participate in and receive the benefits of any pension or other retirement benefit plan, profit sharing, stock option, employee stock ownership, or other plans, benefits and privileges given to employees and executives of the Employers, to the extent commensurate with his then duties and responsibilities, as fixed by the Board of Directors of the Employers. The Employers shall not make any changes in such plans, benefits or privileges which would adversely affect Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all executive officers of the Employers and does not result in a proportionately greater adverse change in the rights of or benefits to Executive as compared with any other executive officer of the Savings Bank. Nothing paid to Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary payable to Executive pursuant to Section 3(a) hereof. (c) During the term of this Agreement, Executive shall be entitled to paid annual vacation in accordance with the policies as established from time to time by the Board of Directors of the Employers. Executive shall be entitled to receive any additional compensation from the Employers for failure to take a vacation and shall be able to accumulate unused vacation time from one year to the next. (d) In the event of the Executive's death during the term of this Agreement, his spouse, estate, legal representative or named beneficiaries (as directed by the Executive in writing) shall be paid on a monthly basis the Executive's annual compensation from the Employers at the rate in effect 4 5 at the time of the Executive's death for a period equal to the period then remaining under this Agreement. (e) The Executive's compensation, benefits and expenses shall be paid by the Corporation and the Savings Bank in the same proportion as the time and services actually expended by the Executive on behalf of each respective Employer. 4. EXPENSES. The Employers shall reimburse Executive or otherwise provide for or pay for all reasonable expenses incurred by Executive in furtherance of, or in connection with the business of the Employers, including, but not by way of limitation, automobile (including costs of leasing, insurance, repairs, maintenance, and licensing) and traveling expenses, and all reasonable entertainment expenses (whether incurred at the Executive's residence, while traveling or otherwise), subject to such reasonable documentation and other limitations as may be established by the Board of Directors of the Employers. If such expenses are paid in the first instance by Executive, the Employers shall reimburse the Executive therefor. 5. TERMINATION. (a) The Savings Bank shall have the right, at any time upon prior Notice of Termination, to terminate the Executive's employment hereunder for any reason, including without limitation termination for Cause or Retirement, and Executive shall have the right, upon prior Notice of Termination, to terminate his employment hereunder for any reason. (b) In the event that (i) Executive's employment is terminated by the Savings Bank for Cause or Retirement or in the event of the Executive's death, or (ii) Executive terminates his employment hereunder other than for Good Reason, Executive shall have no right pursuant to this Agreement to compensation or other benefits for any period after the applicable Date of Termination except as otherwise provided herein. (c) In the event that (i) Executive's employment is terminated (including termination due to Disability) by the Savings Bank for other than Cause, Retirement or the Executive's death or (ii) such employment is terminated by the Executive (a) due to a material breach of this Agreement by the Savings Bank, which breach has not been cured within fifteen (15) days after a written notice of non-compliance has been given by the Executive to the Savings Bank, or (b) for Good Reason, then the Savings Bank shall, subject to the provisions of Section 6 hereof, if applicable (A) pay to the Executive, in thirty-six (36) equal monthly installments beginning with the first business day of the month following the Date of Termination, a cash severance amount equal to three (3) times the Executive's Base Salary, and (B) maintain and provide for a period ending at the earlier of (i) the expiration of the remaining term of employment pursuant hereto prior to the Notice 5 6 of Termination or (ii) the date of the Executive's full-time employment by another employers (provided that the Executive is entitled under the terms of such employment to benefits substantially similar to those described in this subparagraph (B)), at no cost to the Executive, the Executive's continued participation in all group insurance, life insurance, health and accident, disability and other employee benefit plans, programs and arrangements in which the Executive was entitled to participate immediately prior to the Date of Termination (other than stock option and restricted stock plans of the Employers), provided that in the event that the Executive's participation in any plan, program or arrangement as provided in this subparagraph (B) is barred, or during such period any such plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Savings Bank shall arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans, programs and arrangements immediately prior to the Date of Termination. (d) In the event of the failure by the Employers to elect or to re-elect or to appoint or to re-appoint the Executive to the offices of Senior Vice President and Chief Lending Officer of the Savings Bank or a material adverse change made by the Employers in the Executive's functions, duties or responsibilities as Senior Vice President and Chief Lending Officer of the Savings Bank without the Executive's express written consent, the Executive shall be entitled to terminate his employment hereunder and shall be entitled to the payments and benefits provided for in Section 5(c)(A) and (B); however, such termination shall not otherwise constitute a material breach of this Agreement by the Savings Bank. 6. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and benefits pursuant to Section 5 hereof, either alone or together with other payments and benefits which Executive has the right to receive from the Savings Bank, would constitute a "parachute payment" under Section 280G of the Code, the payments and benefits pursuant to Section 5 hereof shall be reduced, in the manner determined by the Executive, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits under Section 5 being non-deductible to the Savings Bank pursuant to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. The parties hereto agree that the payments and benefits payable pursuant to this Agreement to the Executive upon termination shall be limited to three times the Executive's Average Annual Compensation in accordance with the provisions of OTS Regulatory Bulletin 27a. The determination of any reduction in the payments and benefits to be made pursuant to Section 5 shall be based upon the opinion of independent tax counsel selected by the Savings Bank's independent public accountants and paid by the Savings Bank. Such counsel shall be reasonably acceptable to the Savings Bank and the Executive; shall promptly prepare the foregoing opinion, but in no event later than thirty (30) days from the Date of Termination; and may use such actuaries as such counsel deems necessary or advisable for the purpose. In the event that the Savings Bank and/or the Executive do not agree with the opinion of such counsel, (i) the Savings Bank shall pay to the Executive the maximum amount of payments and benefits pursuant to Section 5, as selected by the Executive, which such opinion indicates that there is a high probability do not result 6 7 in any of such payments and benefits being non-deductible to the Savings Bank and subject to the imposition of the excise tax imposed under Section 4999 of the Code and (ii) the Savings Bank may request, and Executive shall have the right to demand that the Savings Bank request, a ruling from the IRS as to whether the disputed payments and benefits pursuant to Section 5 hereof have such consequences. Any such request for a ruling from the IRS shall be promptly prepared and filed by the Savings Bank, but in no event later than thirty (30) days from the date of the opinion of counsel referred to above, and shall be subject to Executive's approval prior to filing, which shall not be unreasonably withheld. The Savings Bank and Executive agree to be bound by any ruling received from the IRS and to make appropriate payments to each other to reflect any such rulings, together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. Nothing contained herein shall result in a reduction of any payments or benefits to which the Executive may be entitled upon termination of employment under any circumstances other than as specified in this Section 6, or a reduction in the payments and benefits specified in Section 5 below zero. 7. MITIGATION; EXCLUSIVITY OF BENEFITS. (a) The Executive shall not be required to mitigate the amount of any benefits hereunder by seeking other employment or otherwise, nor shall the amount of any such benefits be reduced by any compensation earned by the Executive as a result of employment by another employers after the Date of Termination or otherwise. (b) The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to the Executive upon a termination of employment with the Employers pursuant to employee benefit plans of the Employers or otherwise. 8. WITHHOLDING. All payments required to be made by the Savings Bank hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Savings Bank may reasonably determine should be withheld pursuant to any applicable law or regulation. 9. ASSIGNABILITY. The Savings Bank may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any corporation, bank or other entity with or into which the Savings Bank may hereafter merge or consolidate or to which the Savings Bank may transfer all or substantially all of its assets, if in any such case said corporation, bank or other entity shall by operation of law or expressly in writing assume all obligations of the Savings Bank hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights and obligations hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder. 10. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: 7 8 To the Savings Bank: President First Keystone Federal Savings Bank 22 West State Street Media, Pennsylvania 19063 To the Executive: Stephen J. Henderson 325 Spalding Road Wilmington, Delaware 19803 11. AMENDMENT; WAIVER. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or officers as may be specifically designated by the Board of Directors of the Savings Bank to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 12. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise by the substantive laws of the Commonwealth of Pennsylvania. 13. NATURE OF OBLIGATIONS. Nothing contained herein shall create or require the Savings Bank to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Executive acquires a right to receive benefits from the Savings Bank hereunder, such right shall be no greater than the right of any unsecured general creditor of the Savings Bank. 14. HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 15. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. REGULATORY ACTIONS. The following provisions shall be applicable to the parties to the extent that they are required to be included in employment agreements between a savings association and its employees pursuant to Section 563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R. Section 563.39(b), or any successor thereto, and shall be controlling in the 8 9 event of a conflict with any other provision of this Agreement, including without limitation Section 5 hereof. (a) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Savings Bank's affairs pursuant to notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")(12 U.S.C. Sections 1818(e)(3) and 1818(g)(1)), the Savings Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Savings Bank may, in their discretion: (i) pay Executive all or part of the compensation withheld while its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (b) If the Executive is removed from office and/or permanently prohibited from participating in the conduct of the Savings Bank's affairs by an order issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sections 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. (c) If the Savings Bank is in default, as defined in Section 3(x)(1) of the FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall terminate as of the date of default, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. (d) All obligations under this Agreement shall be terminated pursuant to 12 C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that continuation of the Agreement for the continued operation of the Savings Bank is necessary): (i) by the Director of the OTS, or his/her designee, at the time the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to provide assistance to or on behalf of the Savings Bank under the authority contained in Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii) by the Director of the OTS, or his/her designee, at the time the Director or his/her designee approves a supervisory merger to resolve problems related to operation of the Savings Bank or when the Savings Bank is determined by the Director of the OTS to be in an unsafe or unsound condition, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. 18. REGULATORY PROHIBITION. Notwithstanding any other provision of this Agreement to the contrary, any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any regulations promulgated thereunder. 19. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the Savings Bank and the Executive with respect to the matters agreed to herein. All prior agreements between the Savings Bank and the Executive with respect to the matters agreed to herein, including without limitation the Agreement between the Employers and the Executive dated January 25, 1995, 9 10 are hereby superseded and shall have no force or effect. Notwithstanding the foregoing, nothing contained in this Agreement shall affect the agreement of even date being entered into between the Corporation and the Executive. 10 11 IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: FIRST KEYSTONE FEDERAL SAVINGS BANK /s/ Carol Walsh By:/s/ Donald S. Guthrie - -------------------------- ---------------------------------- Carol Walsh Donald S. Guthrie President Attest: EXECUTIVE /s/ Carol Walsh By:/s/ Stephen J. Henderson - -------------------------- ---------------------------------- Carol Walsh Stephen J. Henderson, Individually 11 EX-10.14 9 EMPLOYMENT AGREEMENT THOMAS KELLY 05/26/1999 1 Exhibit 10.14 AGREEMENT AGREEMENT, dated this 26th day of May 1999, between First Keystone Federal Savings Bank (the "Savings Bank"), a federally chartered savings bank, and Thomas M. Kelly (the "Executive"). WITNESSETH WHEREAS, the Executive is presently an officer of First Keystone Financial, Inc. (the "Corporation") and the Savings Bank (together, the "Employers"); WHEREAS, the Employers desire to be ensured of the Executive's continued active participation in the business of the Employers; WHEREAS, the Employers currently have an agreement with the Executive dated January 25, 1995, which is being amended and superseded by this Agreement, and in accordance with the provisions of Office of Thrift Supervision ("OTS") Regulatory Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate agreements with the Executive with respect to his employment by each of the Employers; and WHEREAS, in order to induce the Executive to remain in the employ of the Employers and in consideration of the Executive's agreeing to remain in the employ of the Employers, the parties desire to specify the severance benefits which shall be due the Executive by the Savings Bank in the event that his employment with the Savings Bank is terminated under specified circumstances. NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following words and terms shall have the meanings set forth below for the purposes of this Agreement: (a) AVERAGE ANNUAL COMPENSATION. The Executive's "Average Annual Compensation" for purposes of this Agreement shall be deemed to mean the average level of compensation paid to the Executive by the Employers or any subsidiary thereof during the most recent five taxable years preceding the Date of Termination, including Base Salary and benefits and bonuses under any employee benefit plans of the Employers. (b) BASE SALARY. "Base Salary" shall have the meaning set forth in Section 3(a) hereof. (c) CAUSE. Termination of the Executive's employment for "Cause" shall mean termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any 2 law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order or material breach of any provision of this Agreement. (d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not the Corporation is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (e) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated for Cause or for Disability, the date specified in the Notice of Termination, and (ii) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or as specified in such Notice. (g) DISABILITY. Termination by the Savings Bank of the Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Employers or any subsidiary or, if no such plan applies, which would qualify the Executive for disability benefits under the Federal Social Security System. (h) GOOD REASON. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive following a Change in Control of the Corporation based on: (i) Without the Executive's express written consent, a reduction by the Employers in the Executive's Base Salary as the same may be increased from time to time or, except to the extent permitted by Section 3(b) hereof, a reduction in the package of fringe benefits provided to the Executive, taken as a whole; (ii) The principal executive office of the Employers is relocated outside of the Media, Pennsylvania, area or, without the Executive's express written 2 3 consent, the Employers require the Executive to be based anywhere other than an area in which the Employers' principal executive office is located, except for required travel on business of the Employers to an extent substantially consistent with the Executive's present business travel obligations; (iii) Any purported termination of the Executive's employment for Cause, Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (j) below; or (iv) The failure by the Savings Bank to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 9 hereof. (i) IRS. IRS shall mean the Internal Revenue Service. (j) NOTICE OF TERMINATION. Any purported termination of the Executive's employment by the Savings Bank for any reason, including without limitation for Cause, Disability or Retirement, or by the Executive for any reason, including without limitation for Good Reason, shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, (iii) specifies a Date of Termination, which shall be not less than thirty (30) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Savings Bank's termination of Executive's employment for Cause; and (iv) is given in the manner specified in Section 10 hereof. (k) RETIREMENT. Termination by the Savings Bank of the Executive's employment based on "Retirement" shall mean voluntary termination by the Executive in accordance with the Employers' retirement policies, including early retirement, generally applicable to their salaried employees. 2. TERM OF EMPLOYMENT. (a) The Savings Bank hereby employs the Executive as Executive Vice President, Treasurer and Chief Financial Officer of the Savings Bank and Executive hereby accepts said employment and agrees to render such services to the Savings Bank on the terms and conditions set forth in this Agreement. The term of employment under this Agreement shall be for three years, commencing on the date of this Agreement and, subject to the requirements of the succeeding sentence, shall be deemed automatically, without further action, to extend for an additional year on each annual anniversary of the date of this Agreement. Prior to the anniversary of the date of this Agreement and each annual anniversary thereafter, the Board of Directors of the Savings Bank shall 3 4 consider and review (with appropriate corporate documentation thereof, and after taking into account all relevant factors, including the Executive's performance hereunder) extension of the term under this Agreement, and the term shall continue to extend in the manner set forth above unless either the Board of Directors does not approve such extension and provides written notice to the Executive of such event or the Executive gives written notice to the Savings Bank of the Executive's election not to extend the term, in each case with such written notice to be given not less than thirty (30) days prior to any such anniversary date. References herein to the term of this Agreement shall refer both to the initial term and successive terms. (b) During the term of this Agreement, the Executive shall perform such executive services for the Savings Bank as may be consistent with his titles and from time to time assigned to him by the Savings Bank's Board of Directors. 3. COMPENSATION AND BENEFITS. (a) The Employers shall compensate and pay Executive for his services during the term of this Agreement at a minimum base salary of $134,000 per year ("Base Salary"), which may be increased from time to time in such amounts as may be determined by the Boards of Directors of the Employers and may not be decreased without the Executive's express written consent. In addition to his Base Salary, the Executive shall be entitled to receive during the term of this Agreement such bonus payments as may be determined by the Boards of Directors of the Employers. (b) During the term of the Agreement, Executive shall be entitled to participate in and receive the benefits of any pension or other retirement benefit plan, profit sharing, stock option, employee stock ownership, or other plans, benefits and privileges given to employees and executives of the Employers, to the extent commensurate with his then duties and responsibilities, as fixed by the Boards of Directors of the Employers. The Savings Bank shall not make any changes in such plans, benefits or privileges which would adversely affect Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all executive officers of the Employers and does not result in a proportionately greater adverse change in the rights of or benefits to Executive as compared with any other executive officer of the Savings Bank. Nothing paid to Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary payable to Executive pursuant to Section 3(a) hereof. (c) During the term of this Agreement, Executive shall be entitled to not less than five weeks paid annual vacation. Executive shall be entitled to receive any additional compensation from the Employers for failure to take a vacation and shall be able to accumulate unused vacation time from one year to the next. (d) During the term of this Agreement, including any renewal thereof, the Employers shall provide the Executive with a full-sized, four-door automobile for the Executive's use, which automobile shall be replaced during the term hereof and any renewal thereof no less frequently than every three years. 4 5 (e) The Employers shall provide medical insurance or reimburse the Executive for the premiums for comparable medical insurance for the benefit of the Executive and his spouse and minor children during the term of this Agreement and for a period of five years following the termination of this Agreement in accordance with Section 5 hereof, except in the case of a termination of the Executive for Cause. (f) The Employers shall pay for or reimburse Executive with respect to expenses incurred thereby in obtaining dental care for Executive, his spouse and his minor children up to a maximum of $2,500 per person per year, which amount may be increased from time to time as may be determined by the Boards of Directors of the Employers. (g) During the term of this Agreement, the Employers will pay the Executive's annual membership dues at a country club of his choice in an amount up to $7,500 per year, subject to increase from time to time as may be determined by the Boards of Directors of the Employers. In addition, the Employer will pay the Executive's initiation fee at such club. (h) In the event of the Executive's death during the term of this Agreement, his spouse, estate, legal representative or named beneficiaries (as directed by the Executive in writing) shall be paid on a monthly basis the Executive's annual compensation from the Employers at the rate in effect at the time of the Executive's death for a period equal to the period then remaining under this Agreement. (i) The Executive's compensation, benefits and expenses shall be paid by the Corporation and the Savings Bank in the same proportion as the time and services actually expended by the Executive on behalf of each respective Employer. 4. EXPENSES. The Employers shall reimburse Executive or otherwise provide for or pay for all reasonable expenses incurred by Executive in furtherance of, or in connection with the business of the Employers, including, but not by way of limitation, automobile (including costs of leasing, insurance, repairs, maintenance, and licensing) and traveling expenses, and all reasonable entertainment expenses (whether incurred at the Executive's residence, while traveling or otherwise), subject to such reasonable documentation and other limitations as may be established by the Boards of Directors of the Employers. If such expenses are paid in the first instance by Executive, the Employers shall reimburse the Executive therefor. 5. TERMINATION. (a) The Savings Bank shall have the right, at any time upon prior Notice of Termination, to terminate the Executive's employment hereunder for any reason, including without limitation termination for Cause or Retirement, and Executive shall have the right, upon prior Notice of Termination, to terminate his employment hereunder for any reason. 5 6 (b) In the event that (i) Executive's employment is terminated by the Savings Bank for Cause or Retirement or in the event of the Executive's death, or (ii) Executive terminates his employment hereunder other than for Good Reason, Executive shall have no right pursuant to this Agreement to compensation or other benefits for any period after the applicable Date of Termination except as otherwise provided herein. (c) In the event that (i) Executive's employment is terminated (including termination due to Disability) by the Savings Bank for other than Cause, Retirement or the Executive's death or (ii) such employment is terminated by the Executive (a) due to a material breach of this Agreement by the Savings Bank, which breach has not been cured within fifteen (15) days after a written notice of non-compliance has been given by the Executive to the Savings Bank, or (b) for Good Reason, then the Savings Bank shall, subject to the provisions of Section 6 hereof, if applicable (A) pay to the Executive, in thirty-six (36) equal monthly installments beginning with the first business day of the month following the Date of Termination, a cash severance amount equal to three (3) times the Executive's Base Salary, and (B) maintain and provide for a period ending at the earlier of (i) the expiration of the remaining term of employment pursuant hereto prior to the Notice of Termination or (ii) the date of the Executive's full-time employment by another employers (provided that the Executive is entitled under the terms of such employment to benefits substantially similar to those described in this subparagraph (B)), at no cost to the Executive, the Executive's continued participation in all group insurance, life insurance, health and accident, disability and other employee benefit plans, programs and arrangements in which the Executive was entitled to participate immediately prior to the Date of Termination (other than stock option and restricted stock plans of the Employers), provided that in the event that the Executive's participation in any plan, program or arrangement as provided in this subparagraph (B) is barred, or during such period any such plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Savings Bank shall arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans, programs and arrangements immediately prior to the Date of Termination. (d) In the event of the failure by the Employers to elect or to re-elect or to appoint or to re-appoint the Executive to the offices of Executive Vice President, Treasurer and Chief Financial Officer of the Corporation and Executive Vice President and Chief Financial Officer of the Savings Bank or a material adverse change made by the Employers in the Executive's functions, duties or responsibilities as Senior Vice President, Treasurer and Chief Financial Officer of the Corporation and Executive Vice President and Chief Financial Officer of the Savings Bank without the Executive's express written consent, the Executive shall be entitled to terminate his employment hereunder and shall be entitled to the payments and benefits provided for in Section 5(c)(A) and (B); however, such termination shall not otherwise constitute a material breach of this Agreement by the Savings Bank. 6 7 6. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and benefits pursuant to Section 5 hereof, either alone or together with other payments and benefits which Executive has the right to receive from the Savings Bank, would constitute a "parachute payment" under Section 280G of the Code, the payments and benefits pursuant to Section 5 hereof shall be reduced, in the manner determined by the Executive, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits under Section 5 being non-deductible to the Savings Bank pursuant to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. The parties hereto agree that the payments and benefits payable pursuant to this Agreement to the Executive upon termination shall be limited to three times the Executive's Average Annual Compensation in accordance with the provisions of OTS Regulatory Bulletin 27a. The determination of any reduction in the payments and benefits to be made pursuant to Section 5 shall be based upon the opinion of independent tax counsel selected by the Savings Bank's independent public accountants and paid by the Savings Bank. Such counsel shall be reasonably acceptable to the Savings Bank and the Executive; shall promptly prepare the foregoing opinion, but in no event later than thirty (30) days from the Date of Termination; and may use such actuaries as such counsel deems necessary or advisable for the purpose. In the event that the Savings Bank and/or the Executive do not agree with the opinion of such counsel, (i) the Savings Bank shall pay to the Executive the maximum amount of payments and benefits pursuant to Section 5, as selected by the Executive, which such opinion indicates that there is a high probability do not result in any of such payments and benefits being non-deductible to the Savings Bank and subject to the imposition of the excise tax imposed under Section 4999 of the Code and (ii) the Savings Bank may request, and Executive shall have the right to demand that the Savings Bank request, a ruling from the IRS as to whether the disputed payments and benefits pursuant to Section 5 hereof have such consequences. Any such request for a ruling from the IRS shall be promptly prepared and filed by the Savings Bank, but in no event later than thirty (30) days from the date of the opinion of counsel referred to above, and shall be subject to Executive's approval prior to filing, which shall not be unreasonably withheld. The Savings Bank and Executive agree to be bound by any ruling received from the IRS and to make appropriate payments to each other to reflect any such rulings, together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. Nothing contained herein shall result in a reduction of any payments or benefits to which the Executive may be entitled upon termination of employment under any circumstances other than as specified in this Section 6, or a reduction in the payments and benefits specified in Section 5 below zero. 7. MITIGATION; EXCLUSIVITY OF BENEFITS. (a) The Executive shall not be required to mitigate the amount of any benefits hereunder by seeking other employment or otherwise, nor shall the amount of any such benefits be reduced by any compensation earned by the Executive as a result of employment by another employers after the Date of Termination or otherwise. 7 8 (b) The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to the Executive upon a termination of employment with the Employers pursuant to employee benefit plans of the Employers or otherwise. 8. WITHHOLDING. All payments required to be made by the Savings Bank hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Savings Bank may reasonably determine should be withheld pursuant to any applicable law or regulation. 9. ASSIGNABILITY. The Savings Bank may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any corporation, bank or other entity with or into which the Savings Bank may hereafter merge or consolidate or to which the Savings Bank may transfer all or substantially all of its assets, if in any such case said corporation, bank or other entity shall by operation of law or expressly in writing assume all obligations of the Savings Bank hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights and obligations hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder. 10. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: To the Savings Bank: President First Keystone Federal Savings Bank 22 West State Street Media, Pennsylvania 19063 To the Executive: Thomas M. Kelly 10912 Lockart Road Philadelphia, Pennsylvania 19116 11. AMENDMENT; WAIVER. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or officers as may be specifically designated by the Board of Directors of the Savings Bank to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 12. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise by the substantive laws of the Commonwealth of Pennsylvania. 8 9 13. NATURE OF OBLIGATIONS. Nothing contained herein shall create or require the Savings Bank to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Executive acquires a right to receive benefits from the Savings Bank hereunder, such right shall be no greater than the right of any unsecured general creditor of the Savings Bank. 14. HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 15. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. REGULATORY ACTIONS. The following provisions shall be applicable to the parties to the extent that they are required to be included in employment agreements between a savings association and its employees pursuant to Section 563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R. Section 563.39(b), or any successor thereto, and shall be controlling in the event of a conflict with any other provision of this Agreement, including without limitation Section 5 hereof. (a) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Savings Bank's affairs pursuant to notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")(12 U.S.C. Sections 1818(e)(3) and 1818(g)(1)), the Savings Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Savings Bank may, in its discretion: (i) pay Executive all or part of the compensation withheld while its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (b) If the Executive is removed from office and/or permanently prohibited from participating in the conduct of the Savings Bank's affairs by an order issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sections 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. (c) If the Savings Bank is in default, as defined in Section 3(x)(1) of the FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall terminate as of the date of default, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. 9 10 (d) All obligations under this Agreement shall be terminated pursuant to 12 C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that continuation of the Agreement for the continued operation of the Savings Bank is necessary): (i) by the Director of the O TS, or his/her designee, at the time the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to provide assistance to or on behalf of the Savings Bank under the authority contained in Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii) by the Director of the OTS, or his/her designee, at the time the Director or his/her designee approves a supervisory merger to resolve problems related to operation of the Savings Bank or when the Savings Bank is determined by the Director of the OTS to be in an unsafe or unsound condition, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. 18. REGULATORY PROHIBITION. Notwithstanding any other provision of this Agreement to the contrary, any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any regulations promulgated thereunder. 19. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the Savings Bank and the Executive with respect to the matters agreed to herein. All prior agreements between the Savings Bank and the Executive with respect to the matters agreed to herein, including without limitation the Agreement between the Employers and the Executive dated January 25, 1995, are hereby superseded and shall have no force or effect. Notwithstanding the foregoing, nothing contained in this Agreement shall affect the agreement of even date being entered into between the Corporation and the Executive. 10 11 IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: FIRST KEYSTONE FEDERAL SAVINGS BANK /s/ Carol Walsh By: /s/ Donald S. Guthrie - -------------------------- ---------------------------------- Carol Walsh Donald S. Guthrie President Attest: EXECUTIVE /s/ Carol Walsh By: /s/ Thomas M. Kelly - -------------------------- ---------------------------------- Carol Walsh Thomas M. Kelly, Individually 11 EX-10.15 10 SEVERANCE AGREEMENT ELIZABETH MULCAHY 1 Exhibit 10.15 AGREEMENT AGREEMENT, dated this 26th day of May 1999, between First Keystone Federal Savings Bank (the "Savings Bank"), a federally chartered savings bank, and Elizabeth M. Mulcahy (the "Executive"). WITNESSETH: WHEREAS, the Executive is presently an officer of First Keystone Financial, Inc. (the "Corporation") and the Savings Bank (together, the "Employers"); WHEREAS, the Employers desire to be ensured of the Executive's continued active participation in the business of the Employers; WHEREAS, the Employers currently have an agreement with the Executive dated January 25, 1995, which is being amended and superseded by this Agreement, and in accordance with the provisions of Office of Thrift Supervision ("OTS") Regulatory Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate agreements with the Executive relating to her employment by each of the Employers; and WHEREAS, in order to induce the Executive to remain in the employ of the Employers and in consideration of the Executive's agreeing to remain in the employ of the Employers, the parties desire to specify the severance benefits which shall be due the Executive by the Savings Bank in the event that her employment with the Savings Bank is terminated under specified circumstances; NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following words and terms shall have the meanings set forth below for the purposes of this Agreement: (a) ANNUAL COMPENSATION. The Executive's "Annual Compensation" for purposes of this Agreement shall be deemed to mean the highest level of base salary paid to the Executive by the Employers or any subsidiary thereof during any of the three calendar years ending during the calendar year in which the Date of Termination occurs. (b) CAUSE. Termination of the Executive's employment for "Cause" shall mean termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order. 2 (c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not any security of the Corporation is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (d) CODE. Code shall mean the Internal Revenue Code of 1986, as amended. (e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated for Cause or for Disability, the date specified in the Notice of Termination, and (ii) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or as specified in such Notice. (f) DISABILITY. Termination by the Savings Bank of the Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Employers or any subsidiary or, if no such plan applies, which would qualify the Executive for disability benefits under the Federal Social Security System. (g) GOOD REASON. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive based on: (i) Without the Executive's express written consent, the assignment by the Employers to the Executive of any duties which are materially inconsistent with the Executive's positions, duties, responsibilities and status with the Employers immediately prior to a Change in Control of the Corporation, or a material change in the Executive's reporting responsibilities, titles or offices as an employee and as in effect immediately prior to such a Change in Control, or any removal of the Executive from or any failure to re-elect the Executive to any of such responsibilities, titles or offices, except in connection with the termination of the Executive's employment for Cause, Disability or Retirement or as a result of the Executive's death or by the Executive other than for Good Reason; (ii) Without the Executive's express written consent, a reduction by the Employers in the Executive's base salary as in effect on the date of the Change in Control of 2 3 the Corporation or as the same may be increased from time to time thereafter or a reduction in the package of fringe benefits provided to the Executive; (iii) Any purported termination of the Executive's employment for Cause, Disability of Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (i) below; or (iv) The failure by the Savings Bank to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 6 hereof. (h) IRS. IRS shall mean the Internal Revenue Service. (i) NOTICE OF TERMINATION. Any purported termination of the Executive's employment by the Savings Bank for Cause, Disability or Retirement or by the Executive for Good Reason shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, (iii) specifies a Date of Termination, which shall be not less than thirty (30) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Savings Bank's termination of Executive's employment for Cause, and (iv) is given in the manner specified in Section 7 hereof. (j) RETIREMENT. Termination by the Savings Bank of the Executive's employment based on "Retirement" shall mean voluntary termination by the Executive in accordance with the Employers' retirement policies, including early retirement, generally applicable to their salaried employees. 2. BENEFITS UPON TERMINATION. If the Executive's employment by the Savings Bank shall be terminated subsequent to a Change in Control of the Corporation by (i) the Savings Bank other than for Cause, Retirement, or as a result of the Executive's death, or (ii) the Executive for Good Reason, then the Employers shall, subject to the provisions of Section 3 hereof, if applicable: (a) pay to the Executive, in twenty-four (24) equal monthly installments beginning with the first business day of the month following the Date of Termination, a cash amount equal to two (2) times the Executive's Annual Compensation; and (b) maintain and provide for a period ending at the earlier of (i) two (2) years after the Date of Termination or (ii) the date of the Executive's full-time employment by another employer (provided that the Executive is entitled under the terms of such employment to benefits substantially similar to those described in this subparagraph (b)), at no cost to the Executive, the Executive's continued participation in all group insurance, life insurance, health and accident, disability and other employee benefit plans, programs and arrangements in which the Executive was entitled to 3 4 participate immediately prior to the Date of Termination (other than retirement plans or stock compensation plans of the Employers), provided that in the event that the Executive's participation in any plan, program or arrangement as provided in this subparagraph (b) is barred, or during such period any such plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Employers arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans, programs and arrangements immediately prior to the Date of Termination. 3. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and benefits pursuant to Section 2 hereof, either alone or together with other payments and benefits which Executive has the right to receive from the Savings Bank would constitute a "parachute payment" under Section 28OG of the Code, the payments and benefits payable by the Savings Bank pursuant to Section 2 hereof shall be reduced, in the manner determined by the Executive, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits under Section 2 being non-deductible to the Savings Bank pursuant to Section 28OG of the Code and subject to the excise tax imposed under Section 4999 of the Code. The parties hereto agree that the payments and benefits payable pursuant to this Agreement to the Executive upon termination shall be limited to three times the Executive's Average Annual Compensation in accordance with the provisions of OTS Regulatory Bulletin 27a. The determination of any reduction in the payments and benefits to be made pursuant to Section 2 shall be based upon the opinion of independent tax counsel selected by the Savings Bank's independent public accountants and paid for by the Savings Bank. Such counsel shall be reasonably acceptable to the Savings Bank and the Executive; shall promptly prepare the foregoing opinion, but in no event later than thirty (30) days from the Date of Termination; and may use such actuaries as such counsel deems necessary or advisable for the purpose. In the event that the Savings Bank and/or the Executive do not agree with the opinion of such counsel, (i) the Savings Bank shall pay to the Executive the maximum amount of payments and benefits pursuant to Section 2, as selected by the Executive, which such opinion indicates that there is a high probability do not result in any of such payments and benefits being non-deductible to the Savings Bank and subject to the imposition of the excise tax imposed under Section 4999 of the Code and (ii) the Savings Bank may request, and Executive shall have the right to demand that the Savings Bank requests, a ruling from the IRS as to whether the disputed payments and benefits pursuant to Section 2 hereof have such consequences. Any such request for a ruling from the IRS shall be promptly prepared and filed by the Savings Bank, but in no event later than thirty (30) days from the date of the opinion of counsel referred to above, and shall be subject to Executive's approval prior to filing, which shall not be unreasonably withheld. The Savings Bank and Executive agree to be bound by any ruling received from the IRS and to make appropriate payments to each other to reflect any such rulings, together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. Nothing contained herein shall result in a reduction of any payments or benefits to which the Executive may be entitled upon termination of employment other than pursuant to Section 2 hereof, or a reduction in the payments and benefits specified in Section 2 below zero. 4. MITIGATION; EXCLUSIVITY OF BENEFITS. 4 5 (a) The Executive shall not be required to mitigate the amount of any benefits hereunder by seeking other employment or otherwise, nor shall the amount of any such benefits be reduced by any compensation earned by the Executive as a result of employment by another employer after the Date of Termination or otherwise. (b) The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to the Executive upon a termination of employment with the Employers pursuant to employee benefit plans of the Employers or otherwise. 5. WITHHOLDING. All payments required to be made by the Savings Bank hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Savings Bank may reasonably determine should be withheld pursuant to any applicable law or regulation. 6. ASSIGNABILITY. The Savings Bank may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any corporation, bank or other entity with or into which the Savings Bank may hereafter merge or consolidate or to which the Savings Bank may transfer all or substantially all of its assets, if in any such case said corporation, bank or other entity shall by operation of law or expressly in writing assume all obligations of the Savings Bank hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder. 7. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: To the Savings Bank: President First Keystone Federal Savings Bank 22 West State Street Media, Pennsylvania 19063 To the Executive: Elizabeth M. Mulcahy 218 Fox Road Media, Pennsylvania 19063 8. AMENDMENT; WAIVER. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or officers as may be specifically designated by the Board of Directors of the Savings Bank to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to 5 6 be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise the substantive laws of the Commonwealth of Pennsylvania. 10. NATURE OF EMPLOYMENT AND OBLIGATIONS. (a) Nothing contained herein shall be deemed to create other than a terminable at will employment relationship between the Savings Bank and the Executive, and the Savings Bank may terminate the Executive's employment at any time, subject to providing any payments specified herein in accordance with the terms hereof. (b) Nothing contained herein shall create or require the Savings Bank to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Executive acquires a right to receive benefits from the Savings Bank hereunder, such right shall be no greater than the right of any unsecured general creditor of the Savings Bank. 11. TERM OF AGREEMENT. This Agreement shall terminate two (2) years after the date first above written; provided that on or prior to the first anniversary of the date first above written and each anniversary thereafter, the Board of Directors of the Savings Bank shall consider (with appropriate corporate documentation thereof, and after taking into account all relevant factors, including Executive's performance as an employee) renewal of the term of this Agreement for an additional one (1) year, and the term of this Agreement shall be so extended unless the Board of Directors of the Savings Bank do not approve such renewal and provide written notice to the Executive, or the Executive gives written notice to the Savings Bank, thirty (30) days prior to the date of any such anniversary, of such party's or parties' election not to extend the term beyond its then scheduled expiration date; and provided further that, notwithstanding the foregoing to the contrary, this Agreement shall be automatically extended for an additional one (1) year upon a Change in Control of the Corporation. 12. HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 13. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 14. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 6 7 15. REGULATORY PROHIBITION. Notwithstanding any other provision of this Agreement to the contrary, the obligations of the Savings Bank hereunder shall be suspended in the event that the FDIC prohibits or limits, by regulation or order, any payment hereunder pursuant to Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)). 16. REGULATORY ACTIONS. The following provisions shall be applicable to the parties to the extent that they are required to be included in agreements between a savings association and its employees pursuant to Section 563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R. Section 563.39(b), or any successor thereto, and shall be controlling in the event of a conflict with any other provision of this Agreement. (a) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Savings Bank's affairs pursuant to notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")(12 U.S,C. Sections 1818(e)(3) and 1818(g)(1)), the Savings Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Savings Bank may, in its discretion: (i) pay Executive all or part of the compensation withheld while its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (b) If the Executive is removed from office and/or permanently prohibited from participating in the conduct of the Savings Bank's affairs by an order issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C, Sections 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. (c) If the Savings Bank is in default, as defined in Section 3(x)(1) of the FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall terminate as of the date of default, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. (d) All obligations under this Agreement shall be terminated pursuant to 12 C,F,R, Section 563.39(b)(5) (except to the extent that it is determined that continuation of the Agreement for the continued operation of the Savings Bank is necessary): (i) by the Director of the OTS, or his/her designee, at the time the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to provide assistance to or on behalf of the Savings Bank under the authority contained in Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii) by the Director of the OTS, or his/her designee, at the time the Director or his/her designee approves a supervisory merger to resolve problems related to operation of the Savings Bank or when the Savings Bank is determined by the Director of the OTS to be in an unsafe or unsound condition, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. 7 8 17. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the Savings Bank and the Executive with respect to the matters agreed to herein. All prior agreements between the Savings Bank and the Executive with respect to the matters agreed to herein, including without limitation the Agreement between the Employers and the Executive dated January 25, 1995, are hereby superseded and shall have no force or effect. Notwithstanding the foregoing, nothing contained in this Agreement shall affect the agreement of even date being entered into between the Corporation and the Executive. IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: FIRST KEYSTONE FEDERAL SAVINGS BANK /s/ Carol Walsh By:/s/ Donald S. Guthrie - --------------------- ---------------------------------- Donald S. Guthrie President Attest: EXECUTIVE /s/ Carol Walsh By:/s/ Elizabeth M. Mulcahy - --------------------- ---------------------------------- Elizabeth M. Mulcahy, Individually 8 EX-10.16 11 SEVERANCE AGREEMENT CAROL WALSH 1 Exhibit 10.16 AGREEMENT AGREEMENT, dated this 26th day of May 1999, between First Keystone Federal Savings Bank (the "Savings Bank"), a federally chartered savings bank, and Carol Walsh (the "Executive"). WITNESSETH: WHEREAS, the Executive is presently an officer of First Keystone Financial, Inc. (the "Corporation") and the Savings Bank (together, the "Employers"); WHEREAS, the Employers desire to be ensured of the Executive's continued active participation in the business of the Employers; WHEREAS, the Employers currently have an agreement with the Executive dated January 25, 1995, which is being amended and superseded by this Agreement, and in accordance with the provisions of Office of Thrift Supervision ("OTS") Regulatory Bulletin 27a, the Corporation and the Savings Bank desire to enter into separate agreements with the Executive relating to her employment by each of the Employers; and WHEREAS, in order to induce the Executive to remain in the employ of the Employers and in consideration of the Executive's agreeing to remain in the employ of the Employers, the parties desire to specify the severance benefits which shall be due the Executive by the Savings Bank in the event that her employment with the Savings Bank is terminated under specified circumstances. NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following words and terms shall have the meanings set forth below for the purposes of this Agreement: (a) ANNUAL COMPENSATION. The Executive's "Annual Compensation" for purposes of this Agreement shall be deemed to mean the highest level of base salary paid to the Executive by the Employers or any subsidiary thereof during any of the three calendar years ending during the calendar year in which the Date of Termination occurs. (b) CAUSE. Termination of the Executive's employment for "Cause" shall mean termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order. 2 (c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not any security of the Corporation is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (d) CODE. Code shall mean the Internal Revenue Code of 1986, as amended. (e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Executive's employment is terminated for Cause or for Disability, the date specified in the Notice of Termination, and (ii) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or as specified in such Notice. (f) DISABILITY. Termination by the Savings Bank of the Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Employers or any subsidiary or, if no such plan applies, which would qualify the Executive for disability benefits under the Federal Social Security System. (g) GOOD REASON. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive based on: (i) Without the Executive's express written consent, the assignment by the Employers to the Executive of any duties which are materially inconsistent with the Executive's positions, duties, responsibilities and status with the Employers immediately prior to a Change in Control of the Corporation, or a material change in the Executive's reporting responsibilities, titles or offices as an employee and as in effect immediately prior to such a Change in Control, or any removal of the Executive from or any failure to re-elect the Executive to any of such responsibilities, titles or offices, except in connection with the termination of the Executive's employment for Cause, Disability or Retirement or as a result of the Executive's death or by the Executive other than for Good Reason; (ii) Without the Executive's express written consent, a reduction by the Employers in the Executive's base salary as in effect on the date of the Change in Control of 2 3 the Corporation or as the same may be increased from time to time thereafter or a reduction in the package of fringe benefits provided to the Executive; (iii) Any purported termination of the Executive's employment for Cause, Disability of Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (i) below; or (iv) The failure by the Savings Bank to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 6 hereof. (h) IRS. IRS shall mean the Internal Revenue Service. (i) NOTICE OF TERMINATION. Any purported termination of the Executive's employment by the Savings Bank for Cause, Disability or Retirement or by the Executive for Good Reason shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, (iii) specifies a Date of Termination, which shall be not less than thirty (30) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Savings Bank's termination of Executive's employment for Cause, and (iv) is given in the manner specified in Section 7 hereof. (j) RETIREMENT. Termination by the Savings Bank of the Executive's employment based on "Retirement" shall mean voluntary termination by the Executive in accordance with the Employers' retirement policies, including early retirement, generally applicable to their salaried employees. 2. BENEFITS UPON TERMINATION. If the Executive's employment by the Savings Bank shall be terminated subsequent to a Change in Control of the Corporation by (i) the Savings Bank other than for Cause, Retirement, or as a result of the Executive's death, or (ii) the Executive for Good Reason, then the Employers shall, subject to the provisions of Section 3 hereof, if applicable: (a) pay to the Executive, in twenty-four (24) equal monthly installments beginning with the first business day of the month following the Date of Termination, a cash amount equal to two (2) times the Executive's Annual Compensation; and (b) maintain and provide for a period ending at the earlier of (i) two (2) years after the Date of Termination or (ii) the date of the Executive's full-time employment by another employer (provided that the Executive is entitled under the terms of such employment to benefits substantially similar to those described in this subparagraph (b)), at no cost to the Executive, the Executive's continued participation in all group insurance, life insurance, health and accident, disability and other employee benefit plans, programs and arrangements in which the Executive was entitled to 3 4 participate immediately prior to the Date of Termination (other than retirement plans or stock compensation plans of the Employers), provided that in the event that the Executive's participation in any plan, program or arrangement as provided in this subparagraph (b) is barred, or during such period any such plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Employers arrange to provide the Executive with benefits substantially similar to those which the Executive was entitled to receive under such plans, programs and arrangements immediately prior to the Date of Termination. 3. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and benefits pursuant to Section 2 hereof, either alone or together with other payments and benefits which Executive has the right to receive from the Savings Bank would constitute a "parachute payment" under Section 28OG of the Code, the payments and benefits payable by the Savings Bank pursuant to Section 2 hereof shall be reduced, in the manner determined by the Executive, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits under Section 2 being non-deductible to the Savings Bank pursuant to Section 28OG of the Code and subject to the excise tax imposed under Section 4999 of the Code. The parties hereto agree that the payments and benefits payable pursuant to this Agreement to the Executive upon termination shall be limited to three times the Executive's Average Annual Compensation in accordance with the provisions of OTS Regulatory Bulletin 27a. The determination of any reduction in the payments and benefits to be made pursuant to Section 2 shall be based upon the opinion of independent tax counsel selected by the Savings Bank's independent public accountants and paid for by the Savings Bank. Such counsel shall be reasonably acceptable to the Savings Bank and the Executive; shall promptly prepare the foregoing opinion, but in no event later than thirty (30) days from the Date of Termination; and may use such actuaries as such counsel deems necessary or advisable for the purpose. In the event that the Savings Bank and/or the Executive do not agree with the opinion of such counsel, (i) the Savings Bank shall pay to the Executive the maximum amount of payments and benefits pursuant to Section 2, as selected by the Executive, which such opinion indicates that there is a high probability do not result in any of such payments and benefits being non-deductible to the Savings Bank and subject to the imposition of the excise tax imposed under Section 4999 of the Code and (ii) the Savings Bank may request, and Executive shall have the right to demand that the Savings Bank requests, a ruling from the IRS as to whether the disputed payments and benefits pursuant to Section 2 hereof have such consequences. Any such request for a ruling from the IRS shall be promptly prepared and filed by the Savings Bank, but in no event later than thirty (30) days from the date of the opinion of counsel referred to above, and shall be subject to Executive's approval prior to filing, which shall not be unreasonably withheld. The Savings Bank and Executive agree to be bound by any ruling received from the IRS and to make appropriate payments to each other to reflect any such rulings, together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. Nothing contained herein shall result in a reduction of any payments or benefits to which the Executive may be entitled upon termination of employment other than pursuant to Section 2 hereof, or a reduction in the payments and benefits specified in Section 2 below zero. 4. MITIGATION; EXCLUSIVITY OF BENEFITS. 4 5 (a) The Executive shall not be required to mitigate the amount of any benefits hereunder by seeking other employment or otherwise, nor shall the amount of any such benefits be reduced by any compensation earned by the Executive as a result of employment by another employer after the Date of Termination or otherwise. (b) The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to the Executive upon a termination of employment with the Employers pursuant to employee benefit plans of the Employers or otherwise. 5. WITHHOLDING. All payments required to be made by the Savings Bank hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Savings Bank may reasonably determine should be withheld pursuant to any applicable law or regulation. 6. ASSIGNABILITY. The Savings Bank may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any corporation, bank or other entity with or into which the Savings Bank may hereafter merge or consolidate or to which the Savings Bank may transfer all or substantially all of its assets, if in any such case said corporation, bank or other entity shall by operation of law or expressly in writing assume all obligations of the Savings Bank hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder. 7. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: To the Savings Bank: President First Keystone Federal Savings Bank 22 West State Street Media, Pennsylvania 19063 To the Executive: Carol Walsh 10 Sherwood Lane Aston, Pennsylvania 19014 8. AMENDMENT; WAIVER. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or officers as may be specifically designated by the Board of Directors of the Savings Bank to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to 5 6 be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise the substantive laws of the Commonwealth of Pennsylvania. 10. NATURE OF EMPLOYMENT AND OBLIGATIONS. (a) Nothing contained herein shall be deemed to create other than a terminable at will employment relationship between the Savings Bank and the Executive, and the Savings Bank may terminate the Executive's employment at any time, subject to providing any payments specified herein in accordance with the terms hereof. (b) Nothing contained herein shall create or require the Savings Bank to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Executive acquires a right to receive benefits from the Savings Bank hereunder, such right shall be no greater than the right of any unsecured general creditor of the Savings Bank. 11. TERM OF AGREEMENT. This Agreement shall terminate two (2) years after the date first above written; provided that on or prior to the first anniversary of the date first above written and each anniversary thereafter, the Board of Directors of the Savings Bank shall consider (with appropriate corporate documentation thereof, and after taking into account all relevant factors, including Executive's performance as an employee) renewal of the term of this Agreement for an additional one (1) year, and the term of this Agreement shall be so extended unless the Board of Directors of the Savings Bank do not approve such renewal and provide written notice to the Executive, or the Executive gives written notice to the Savings Bank, thirty (30) days prior to the date of any such anniversary, of such party's or parties' election not to extend the term beyond its then scheduled expiration date; and provided further that, notwithstanding the foregoing to the contrary, this Agreement shall be automatically extended for an additional one (1) year upon a Change in Control of the Corporation. 12. HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 13. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 14. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 6 7 15. REGULATORY PROHIBITION. Notwithstanding any other provision of this Agreement to the contrary, the obligations of the Savings Bank hereunder shall be suspended in the event that the FDIC prohibits or limits, by regulation or order, any payment hereunder pursuant to Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)). 16. REGULATORY ACTIONS. The following provisions shall be applicable to the parties to the extent that they are required to be included in agreements between a savings association and its employees pursuant to Section 563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R. Section 563.39(b), or any successor thereto, and shall be controlling in the event of a conflict with any other provision of this Agreement. (a) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Savings Bank's affairs pursuant to notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")(12 U.S,C. Sections 1818(e)(3) and 1818(g)(1)), the Savings Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Savings Bank may, in its discretion: (i) pay Executive all or part of the compensation withheld while its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (b) If the Executive is removed from office and/or permanently prohibited from participating in the conduct of the Savings Bank's affairs by an order issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C, Sections 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. (c) If the Savings Bank is in default, as defined in Section 3(x)(1) of the FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall terminate as of the date of default, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. (d) All obligations under this Agreement shall be terminated pursuant to 12 C,F,R, Section 563.39(b)(5) (except to the extent that it is determined that continuation of the Agreement for the continued operation of the Savings Bank is necessary): (i) by the Director of the OTS, or his/her designee, at the time the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to provide assistance to or on behalf of the Savings Bank under the authority contained in Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii) by the Director of the OTS, or his/her designee, at the time the Director or his/her designee approves a supervisory merger to resolve problems related to operation of the Savings Bank or when the Savings Bank is determined by the Director of the OTS to be in an unsafe or unsound condition, but vested rights of the Executive and the Savings Bank as of the date of termination shall not be affected. 7 8 17. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the Savings Bank and the Executive with respect to the matters agreed to herein. All prior agreements between the Savings Bank and the Executive with respect to the matters agreed to herein, including without limitation the Agreement between the Employers and the Executive dated January 25, 1995, are hereby superseded and shall have no force or effect. Notwithstanding the foregoing, nothing contained in this Agreement shall affect the agreement of even date being entered into between the Corporation and the Executive. 8 9 IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: FIRST KEYSTONE FEDERAL SAVINGS BANK /s/ Thomas M. Kelly By:/s/ Donald S. Guthrie - --------------------- ------------------------ Thomas M. Kelly Donald S. Guthrie President Attest: EXECUTIVE /s/ Thomas M. Kelly By:/s/ Carol Walsh - --------------------- ------------------------ Thomas M. Kelly Carol Walsh, Individually 9 EX-13 12 ANNUAL REPORT 1 EXHIBIT 13 FIRST KEYSTONE FINANCIAL, INC. [COIN] "NOTHING HAPPENS UNLESS FIRST A DREAM" -CARL SANDBURG ANNUAL REPORT 1999 2 As we approach the millennium, we look to the challenges that lie ahead as opportunities to improve our services, expand our line of products, develop the potential of our employees, and explore the yet unknown expanses of the financial world. Donald S. Guthrie President 3 a Message to Our Shareholders - -------------------------------------------------------------------------------- Dear Shareholders: More than 100 years ago, the founders of First Keystone Financial envisioned a community bank that would serve the needs of the working man by helping him purchase a home, build a business, and save for his family and his own retirement. Today, as we approach the dawn of a new era, we salute our predecessors who had the forethought to develop the building and loan association concept, and all the visionaries who have marked this century with achievements such as television, computers and space exploration. As we stand at the starting line of a new millennium, it is now clearer than ever that mankind is only limited by its imagination and its ability to learn from the lessons of its past. At First Keystone, we have prepared ourselves for the journey into the future by taking on the challenges brought with the rapidly changing times. We began preparations for the Year 2000 upgrade of the Company's computer hardware and software system early in 1998, formed strategic alliances in 1999 to offer our customers more services including a complete line of insurance products, and we plan to introduce Internet Banking in the Year 2000. We challenge our employees to continue to provide the Bank's customers with the products and services needed to make banking more convenient and efficient while providing the Company's shareholders with increased value. [PHOTO] Donald S. Guthrie President and Chief Executive Officer It is with respect for all that has been accomplished in this past century, and with wonder at the possibilities ahead, that I report on the Company's performance for fiscal 1999. [PHOTO] Thomas M. Kelly, Executive Vice President and Chief Financial Officer, reviews a design for the new home page for the Bank's website which will introduce internet banking during the Year 2000. I am pleased to report that for the year ended September 30, 1999, First Keystone continued to achieve record earnings. Net income increased to $2.8 million and diluted earnings per share increased to $1.32 per share as compared to $1.23 per share for the prior fiscal year. Total assets grew to $450 million at year-end compared to $416 million at the previous year-end. Asset growth was attributed primarily to growth of the Company's loan portfolio. The Company's net loan portfolio increased by $28 million to $226 million at 4 September 30, 1999. As we continue to implement our strategic business plan, we are particularly pleased with the impressive growth in the origination of commercial real estate and construction loans. Asset growth was partially funded by an increase in the Bank's core deposits. The increase of 11.7%, or $11 million, in core deposits can be attributed to the Bank's successful efforts to cross-sell existing customers, acquire new households through targeted direct mail campaigns, and open new ancillary deposit accounts by further developing the Bank's commercial business lending relationships. During the first quarter of fiscal year 1999, the Board of Directors unanimously approved to increase the quarterly dividends paid to the Company's shareholders by 20% reflecting First Keystone's commitment to enhancing shareholder value. [PHOTO] Robert Hosier, Vice President of Management Information Services, spearheaded the Bank's Y2K compliance program and alleviated customers' fears of the Big Bad Wolf. I encourage you to read the Company's complete financial review presented in this annual report. One of the highlights includes a 35% reduction in the Company's ratio of non-performing assets and troubled debt restructurings to total assets as a result of the completion of a real estate development project. In addition, I am pleased to report that the Company's financial performance remains strong as evidenced through earnings improvement and the continued repurchase of its stock in the open market. These factors contributed to the Company's slight increase in return on equity at year-end despite a sluggish market in the financial services sector. During the next fiscal year, we plan to introduce internet banking, open the Bank's seventh full service office in Chester Heights, Pennsylvania, and further develop the strategic alliances formed through the Company's subsidiaries to provide insurance services and title insurance. These subsidiaries will provide additional financial services to both bank and non-bank customers and will directly impact the bottom line by contributing to non-interest income. Thank you for the trust and confidence that you have placed in our management team. We will continue to work hard to increase the value of your investment. [PHOTO] With the bank well prepared for the millennium,"Who's afraid of Y2K?" was an appropriate and fun theme for this year's Delaware County Halloween Parade in Media. The parade was sponsored by First Keystone Federal. Sincerely, /s/Donald S. Guthrie Donald S. Guthrie President and Chief Executive Officer 5 YEAR IN REVIEW We're More than Y2K OK Recognizing the importance of upgrading the Bank's computer system to properly read dates in a four-digit system, management began dedicating significant resources to this potential problem in early 1998. In accordance with the Bank's Y2K Compliance Plan, the Bank has run complete diagnostic tests on its computer system, all necessary hardware and software has been updated, and testing with the Bank's primary service provider has produced excellent results. In addition, the Bank has hosted numerous customer informational seminars on the topic, and we are confident that these efforts will result in a seamless transition into the new millennium for its customers. FORMING STRATEGIC ALLIANCES TO MAKE FINANCIAL MATTERS EASIER Understanding that, for many of us, time has become one of our most valuable assets, the Bank has added to the convenience of one-stop shopping for residential and commercial loans by also offering title insurance services through its investment in a title insurance agency. Now, with just one quick telephone call, our customers can feel confident that their title insurance will be completed efficiently and professionally. Another natural extension of services is the ability to offer a full array of insurance products. Through First Keystone Insurance Services, LLC, a subsidiary of the Bank, Bank customers can receive valuable discounts on the purchase of long-term health care, life, automobile, home and commercial insurance products. These strategic alliances enable the Bank to provide its customers with excellent service, competitive prices and time saving convenience on many financial products while providing the Company with a more diversified income stream that is less dependent on interest income. CONCENTRATING ON COMMERCIAL, CONSTRUCTION AND CONSUMER LENDING With a strong economy helping to pave the way, commercial real estate lending and commercial business loans enjoyed a robust year with outstanding balances increasing from $22 million at September 30, 1998 to $33 million at September 30, 1999. This 50% increase in the portfolio helped to provide many small businesses with the financing they needed to [PHOTO] A group of Russian delegates, brought to the United States by Congressman Curt Weldon, attended a meeting with First Keystone Federal Vice President of Lending Elizabeth Gibson to learn mortgage processing and underwriting skills. With the information gathered from this and other meetings with bank officials and business leaders throughout Delaware County, they will use their knowledge to help institute business and economic changes in their country. 6 [PHOTO] Mary Wentz, Vice President of Construction Loans and Bud Amentt, Vice President of Commercial Lending work together to provide commercial real estate lending and commercial business loans throughout Chester and Delaware Counties. Shown above, they are on the construction site of the new Fox Roach Realtor office in Media. expand, while providing the Company with solid returns on its investments. The tremendous growth in this department is a result of increased market penetration, and greater customer awareness that First Keystone is a source for commercial financing. Continued strong activity in new residential construction was spurred by both record low interest rates and the expansion of public sewer and water in many of the markets the Bank serves. In addition, the ability to offer permanent commercial loan financing has also enhanced the construction lending portfolio. First Keystone continues to maintain its market share in this extremely competitive arena because of its proven expertise, active presence in the trade associations and solid reputation with area builders. First mortgage lending remains an important aspect of the Bank's portfolio mix, and management recognizes that traditional residential lending will always be a staple among its lending products. However, increased emphasis is being placed on originating consumer loans, as well as first and second mortgages to subprime borrowers. The origination of consumer loans provides greater interest rate spreads than single-family residential loans while the origination of subprime loans generates increased fee income as they are sold into the capital markets for a premium. BANKING SERVICES DELIVERED IN A MULTITUDE OF MEDIUMS First Keystone is meeting the needs of our customers by providing access to bank products through a multitude of mediums. These include the expansion of branch offices, increased options and services through its telephone banking system, and Internet banking which will be introduced in fiscal year 2000. The Company's goal remains to provide its banking customers with a multitude of financial services while striving to enhance shareholder value. First Keystone continues to face these challenges with foresight and strong leadership. The latest branch office that opened in December 1999 in Chester Heights, Pennsylvania is located in the most explosive growth area in Delaware County. The Bank's 24/7 banking telephone system, Keystone Direct, continues to expand its services and the number of transactions increases monthly. Internet banking will be launched during the new fiscal year, and management recognizes that this new service will not only assist the Bank in remaining competitive in the financial industry, but will serve as an aggressive tool to attract a younger demographic group than its current client base. [PHOTO] The newest branch of First Keystone Federal opened in December 1999 in Chester Heights, PA. 7 First Keystone Financial, Inc. and Subsidiaries SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The selected consolidated financial and other data of First Keystone Financial, Inc. set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related Notes, appearing elsewhere herein.
AT OR FOR THE YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (dollars in thousands, except per share data) SELECTED FINANCIAL DATA: Total assets $ 450,126 $ 415,863 $ 373,430 $ 294,241 $ 280,979 Loans receivable, net 226,375 198,343 188,289 167,530 158,002 Mortgage-related securities held to maturity 14,497 18,769 20,707 23,221 60,294 Investment securities held to maturity 10,000 16,532 10,710 Assets held for sale: Mortgage-related securities 113,046 115,486 104,472 60,211 19,538 Investment securities 44,315 40,621 10,211 Loans 1,792 2,799 4,577 2,447 57 Real estate owned 297 1,663 1,672 1,557 465 Deposits 260,826 247,311 227,918 219,205 223,753 Borrowings 142,437 120,878 99,987 46,740 28,411 Stockholders' equity 23,904 26,664 24,752 23,084 24,463 Non-performing assets 3,477 5,367 3,749 6,909 3,621 ========= ========= ========= =========== ========= SELECTED OPERATIONS DATA: Interest income $ 28,694 $ 27,393 $ 22,750 $ 19,837 $ 18,295 Interest expense 16,956 15,625 12,639 10,932 10,767 --------- --------- --------- --------- --------- Net interest income 11,738 11,768 10,111 8,905 7,528 Provision for loan losses 259 186 239 1,250 52 --------- --------- --------- --------- --------- Net interest income after provision for loan losses 11,479 11,582 9,872 7,655 7,476 Other income (expense): Service charges and other fees 934 898 972 1,047 1,029 Net gain on sales of interest-earning assets 616 577 285 203 113 Net gain on sale of other assets 1 46 Net gain (loss) on real estate activities (113) (25) 7 2 (44) Other 350 57 40 56 89 Operating expenses 9,501 9,059 6,921 8,645 7,036 -------- --------- -------- --------- --------- Income (loss) before income taxes, extraordinary item and cumulative effect of change in accounting principle 3,765 4,031 4,301 318 1,627 Income tax expense (benefit) 917 1,250 1,664 (567) 504 --------- --------- --------- ---------- --------- Net income $ 2,848 $ 2,781 $ 2,637 $ 885(2) $ 1,123 ========= ========= ========= =========== ========= Diluted earnings per common share(1) $ 1.32 $ 1.23 $ 1.13 $ .37(2) $ .37 ========= ========= ========= =========== =========
(1) Adjusted for the effect of a 2 for 1 stock split declared December 4, 1997. (2) Includes the effects of the one-time SAIF special assessment. The effects of the assessment increased operating expenses and decreased income before income taxes by $1.4 million. The effects of the assessment also decreased net income and earnings per share by $876,000 and $.74, respectively. 5 8 First Keystone Financial, Inc. and Subsidiaries SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
AT OR FOR THE YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- SELECTED OPERATING RATIOS: (3) Average yield earned on interest-earning assets 7.15% 7.40% 7.54% 7.45% 7.37% Average rate paid on interest-bearing liabilities 4.49% 4.68 4.48 4.42 4.62 Average interest rate spread 2.65% 2.72 3.07 3.03 2.75 Net interest margin 2.98% 3.18 3.35 3.34 3.03 Ratio of interest-earning assets to interest-bearing liabilities 107.91 110.80 106.82 107.65 106.55 Net interest income after provision for loan losses to operating expenses 120.82 127.84 142.64 88.55(4) 106.25 Operating expenses as a percent of average assets 2.23 2.37 2.21 3.14(4) 2.73 Return on average assets 0.67 0.73 0.84 0.32(4) 0.44 Return on average equity 11.18 11.13 11.46 3.92(4) 5.59 Ratio of average equity to average assets 5.99 6.54 7.36 8.20 7.80 Full-service offices at end of period 6 6 5 5 5 ====== ====== ====== ======= ====== ASSET QUALITY RATIOS: (5) Non-performing loans as a percent of gross loans receivable 1.39% 1.85% 1.09% 3.15% 1.98% Non-performing assets as a percent of total assets 0.77 1.29 1.00 2.35 1.29 Allowance for loan losses as a percent of gross loans receivable 0.84 0.87 0.86 1.54 0.93 Allowance for loan losses as a percent of non-performing loans 60.63 46.92 78.38 49.03 47.12 Net loans charged-off to average interest-earning loans receivable 0.03 0.04 0.68 0.07 0.07 ====== ====== ====== ======= ====== CAPITAL RATIOS: (5) (6) Tangible capital ratio 8.17% 8.27% 8.12% 7.67% 8.23% Core capital ratio 8.17 8.27 8.12 7.67 8.23 Risk-based capital ratio 18.80 21.09 19.91 17.24 17.82 ====== ====== ====== ======= ======
(3) Adjusted for the effects of tax-free investments (4) Includes the effects of the one-time SAIF special assessment of $1.4 million. Excluding the one-time effects, the ratio of net interest income after provision for loan losses to operating expenses and operating expenses as a percent of average assets ratios were 106.04% and 2.62%, respectively. In addition, return of average assets and return on average equity were .64% and 7.79%, respectively, excluding the special assessment. (5) Asset Quality Ratios and Capital Ratios are end of period ratios, except for charge-offs to average loans. With the exception of end of period ratios, all ratios are based on average daily balances during the indicated periods. (6) Regulatory capital ratios of the Company's wholly-owned subsidiary, First Keystone Federal Savings Bank. LOANS RECEIVABLE Commercial Business 1% Single Family 69% Construction 8% Non-Residential 13% Consumer Equity 8% Other 1% DEPOSIT ACCOUNTS Non-Interest Bearing Accounts 3% Money Market Demand Accounts 7% Passbook Accounts 16% New Accounts 13% Certificates of Deposit 61% 6 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL First Keystone Financial, Inc. (the "Company") is the holding company for its wholly owned subsidiary, First Keystone Federal Savings Bank (the "Bank"). For purposes of this discussion, First Keystone Financial, Inc., including its wholly owned subsidiaries, will be referred to as the "Company". The Company is a community oriented banking organization that focuses on providing customer and business services within its primary market area, consisting of Delaware and Chester counties in the state of Pennsylvania. The following discussion should be read in conjunction with the Company's consolidated financial statements presented elsewhere herein. The primary asset of the Company is its investment in the Bank and, accordingly, the discussion below with respect to results of operations relates primarily to the Bank. The Company's results of operations depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, which principally consist of loans, mortgage-related securities and investment securities, and interest expense on interest-bearing liabilities, which principally consist of deposits and Federal Home Loan Bank ("FHLB") advances. The Company's results of operations also are affected by the provision for loan losses, resulting from management's assessment of the adequacy of the allowance for loan losses, the level of its non-interest income, including service charges and other fees as well as gains and losses from the sale of certain assets, the level of its operating expenses, and income tax expense. ASSET AND LIABILITY MANAGEMENT The principal objective of the Company's asset and liability management is to evaluate the interest rate risk existing in certain assets and liabilities, determine the level of risk appropriate given the Company's business focus, operating environment, capital and liquidity requirements and performance objectives, establish prudent asset concentration guidelines, and manage the risk consistent with Board approved guidelines. Through asset and liability management, the Company seeks to reduce both the vulnerability and volatility of its operations to changes in interest rates and to manage the ratio of interest-rate sensitive assets to interest-rate sensitive liabilities within specified maturities or repricing periods. The Company's actions in this regard are taken under the guidance of the Asset/Liability Committee ("ALCO"), which is chaired by the Chief Financial Officer and comprised of members of the Company's senior management. The ALCO meets on a monthly basis to review, among other things, liquidity and cash flow needs, current market conditions and interest rate environment, the sensitivity to changes in interest rates of the Company's assets and liabilities, the book and market values of assets and liabilities, unrealized gains and losses, and the purchase and sale activity and maturities of investments, deposits and borrowings. In addition, the pricing of the Company's residential loans and deposits is reviewed at least weekly while the pricing of loans originated for sale in the secondary market is reviewed daily. The ALCO reports to the Company's Board of Directors no less than once a quarter. The Company's primary asset/liability monitoring tool consists of various asset/liability simulation models, which are prepared on a quarterly basis and are designed to capture the dynamics of the balance sheet as well as rate and spread movements and to quantify variations in net interest income under different interest rate scenarios. A more conventional but limited Asset/Liability monitoring tool involves an analysis of the extent to which assets and liabilities are interest rate sensitive and measures an institution's interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. Conversely, during a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. While a conventional gap measure may be useful, it is limited in its ability to predict trends in future earnings. It makes no presumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the interest rate environment. 7 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For purposes of the table below, annual prepayment assumptions range from 9% to 15% for fixed-rate mortgage loans and mortgage-related securities and 5% to 15% for adjustable-rate mortgage loans and mortgage-related securities. Passbook and statement savings accounts are assumed to decay at a rate of 14.0% per year. Money market ("MMDA") are assumed to decay at a rate of 30% per year. Negotiable order of withdrawal ("NOW") accounts are assumed to decay at a rate of 20% per year. First Keystone's passbook, statement savings, MMDA and NOW accounts are generally subject to immediate withdrawal. However, management considers a portion of these deposits to be core deposits having significantly longer effective maturities based upon the Bank's experience in retaining such deposits in changing interest rate environments. Management believes that the assumptions used by it to evaluate the vulnerability of the Bank's operations to changes in interest rates are conservative and considers them reasonable. However, the interest rate sensitivity of the Bank's assets and liabilities as portrayed in the table below could vary substantially if different assumptions are used or actual experience differs from the assumptions used in the table. The Company also utilizes an analysis of the market value of portfolio equity, which addresses the estimated change in the Company's equity value arising from movements in interest rates. The market value of portfolio equity is estimated by valuing the Company's assets and liabilities under different interest rate scenarios. The extent to which assets gain or lose value in relation to gains or losses of liabilities as interest rates increase or decrease determines the appreciation or depreciation in equity on a market value basis. Market value analysis is intended to evaluate the impact of immediate and sustained shifts of the current yield curve upon the market value of the Company's current balance sheet. See Item 7A in the Company's Annual Report on Form 10-K. The following table summarizes the anticipated maturities or repricing of the Company's interest-earning assets and interest-bearing liabilities as of September 30, 1999, based on the information and assumptions set forth above.
MORE THAN MORE THAN WITHIN SIX TO ONE YEAR THREE OVER SIX TWELVE TO THREE YEARS TO FIVE MONTHS MONTHS YEARS FIVE YEARS YEARS TOTAL ------ ------ ----- ---------- ----- ----- (Dollars in thousands) Interest-earning assets: Loans receivable, net(1) $ 61,292 $ 35,858 $ 44,010 $ 30,896 $ 51,140 $ 223,196 Mortgage-related securities 13,980 8,890 28,722 24,718 51,233 127,543 Loans held for sale 1,792 1,792 Investment securities 10,645 4,994 34,833 50,472 Interest-earning deposits 17,005 17,005 --------- --------- --------- --------- --------- --------- Total interest-earning assets $ 104,714 $ 44,748 $ 77,726 $ 55,614 $ 137,206 $ 420,008 --------- --------- --------- --------- --------- --------- Interest-bearing liabilities: Deposits $ 85,613 $ 57,271 $ 66,178 $ 36,250 $ 15,514 $ 260,826 Borrowed funds 72,180 34,300 20,500 10,000 5,457 142,437 --------- --------- --------- --------- --------- --------- Total interest-bearing liabilities $ 157,793 $ 91,571 $ 86,678 $ 46,250 $ 20,971 $ 403,263 --------- --------- --------- --------- --------- --------- Excess (deficiency) of interest-earning assets over interest-bearing liabilities $ (53,079) $ (46,823) $ (8,952) $ 9,364 $ 116,235 $ 16,745 ========= ========= ========= ========= ========= ========= Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities $ (53,079) $ (99,902) $(108,854) $ (99,490) $ 16,745 ========= ========= ========= ========= ========= Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities as a percentage of total assets (11.79)% (22.19)% (24.18)% (22.10)% 3.72% ========= ========= ========= ========= =========
(1) Balances have been reduced for non-accruing loans, which amounted $3.2 million at September 30, 1999. 8 11 MD&A management's discussion and analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHANGES IN FINANCIAL CONDITION GENERAL. Total assets of the Company increased by $34.3 million, or 8.2%, from $415.9 million at September 30, 1998 to $450.1 million at September 30, 1999. The increase reflected primarily growth in loans receivable and, to a lessor extent, prepaid expenses and other assets, which consist primarily of the Bank's purchase of Bank Owned Life Insurance ("BOLI") products. The asset growth was funded by increases in customer deposits and advances from the FHLB of Pittsburgh. Asset growth was also funded by a modest increase in retained earnings. CASH AND INVESTMENTS. Cash and investments (including investments available for sale) decreased by $417,000, or .6%, to $64.3 million at September 30, 1999 compared to $64.7 million at September 30, 1998. The decrease was primarily due to use of the Company's liquid assets and the proceeds from investments to fund increases in the Company's loan portfolio. LOANS HELD FOR SALE AND LOANS RECEIVABLE, NET. Aggregate loans receivable (loans receivable, net, and loans held for sale) increased $27.0 million or 13.4% to $228.2 million at September 30, 1999 compared to $201.1 million at September 30, 1998. Single-family mortgage loans increased $18.7 million, or 12.6%, while an increased focus on the origination of multi-family and commercial real estate mortgages increased the balance of such loans to $11.4 million, or 52.0%, for the year ended September 30, 1999. MORTGAGE-RELATED SECURITIES AND MORTGAGE-RELATED SECURITIES AVAILABLE FOR SALE. Mortgage-related securities and mortgage-related securities available for sale decreased in the aggregate by $6.8 million, or 5.0%, to $127.5 million at September 30, 1999 compared to $134.3 million at September 30, 1998. The decrease was the result of the Company's continued emphasis on loan originations. NON-PERFORMING ASSETS. The Company's total non-performing loans (including troubled debt restructurings) and real estate owned decreased $1.9 million or 35.2% from $5.4 million, or 1.0%, of total assets at September 30, 1998 to $3.5 million, or .8%, of total assets at September 30, 1999. The decrease in the non-performing assets was primarily due to the completion in fiscal 1999 of the Company's only real estate development project. Real estate owned decreased by $1.4 million to $297,000, or .07%, of total assets at September 30, 1999 as compared to $1.7 million, or .40%, of total assets at September 30, 1998. Non-performing assets consist primarily of single-family residential loans. DEPOSITS. Deposits increased by $13.5 million, or 5.5%, from $247.3 million at September 30, 1998 to $260.8 million at September 30, 1999. This increase was primarily due to a $10.6 million, or 11.7%, increase in the Company's core accounts, NOW, passbook, and MMDA accounts, as a result of the Company's continued emphasis on these deposit accounts. Certificates of deposit also increased by $3.0 million, or 1.9%, in the current fiscal year. BORROWINGS. The Company's total borrowings increased $21.6 million to $142.4 million at September 30, 1999 from $120.9 million at September 30, 1998. The FHLB advances were used to fund loan growth and had a weighted average interest rate of 5.4% at September 30, 1999. See Note 10 to the Consolidated Financial Statements for further information. EQUITY. At September 30, 1999, total stockholders' equity was $23.9 million, or 5.3% of total assets, compared to $26.7 million, or 6.4%, of total assets at September 30, 1998. The $2.8 million decrease was due to the combination of a decrease of $4.5 million in unrealized gains on available for sale securities as well as the cost of the Company's stock repurchases and dividends paid aggregating $1.6 million offset, in part, by the Company's net income of $2.8 million. The decrease in the unrealized gains on available for sale securities was due to general increases in market interest rates. 9 12 MD&A management's discussion and analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Average Balances, Net Interest Income and Yields Earned and Rates Paid. The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the indicated periods and yields were adjusted for the effects of tax-free investments.
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------------------- 1999 1998 YIELD/COST ------------------------------------------------------------------- AT AVERAGE Average SEPT. 30, AVERAGE YIELD/ Average Yield/ 1999 BALANCE INTEREST COST Balance Interest Cost -------------------------------------------------------------------------------- (Dollars in Thousands) Interest-earning assets: Loans receivable(1)(2) 7.69% $ 218,784 $ 17,366 7.94% $ 197,776 $ 16,447 8.32% Mortgage-related securities(2) 6.66 127,572 7,965 6.24 123,283 8,029 6.51 Investment securities(2) 6.80 49,273 3,363 6.83 38,475 2,607 6.78 Other interest-earning assets 5.51 11,600 414 3.57 10,585 488 4.61 --------- -------- -------- -------- Total interest-earning assets 7.19 407,229 $ 29,108 7.15 370,119 $27,571 7.45 ---- -------- ---- -------- ---- Noninterest-earning assets 18,261 11,608 --------- --------- Total assets $ 425,490 $ 381,727 ========= ========= Interest-bearing liabilities: Deposits 3.96 $ 255,536 $ 10,265 4.02 $ 234,937 $ 9,937 4.23 FHLB advances and other borrowings 5.50 121,829 6,691 5.49 99,092 5,688 5.74 --------- -------- --------- -------- Total interest-bearing liabilities 4.50 377,365 16,956 4.49 334,029 15,625 4.68 ---- -------- -------- Interest rate spread 2.68 2.65 2.77 ---- ---- ---- Noninterest-bearing liabilities 22,643 22,730 --------- --------- Total liabilities 400,008 356,759 Stockholders' equity 25,482 24,968 --------- --------- Total liabilities and stockholders' equity $ 425,490 $ 381,727 ========= ========= Net interest-earning assets $ 29,864 $ 36,090 ========= ========= Net interest income/net interest margin(3) 12,152 2.98% 11,946 2.23% ==== ==== Less: tax equivalent adjustments (414) (178) -------- -------- Net interest income $ 11,738 $ 11,768 ======== ======== Ratio of average interest-earning assets to average interest-bearing liabilities 107.91% 110.80% ====== ======
YEAR ENDED SEPTEMBER 30, ------------------------------- 1997 ------------------------------- Average Average Yield/ Balance Interest Cost ------- -------- ---- (Dollars in Thousands) Interest-earning assets: Loans receivable(1) (2) $179,566 $ 14,737 8.21% Mortgage-related securities(2) 92,393 6,197 6.71 Investment securities(2) 21,774 1,478 6.79 Other interest-earning assets 7,793 338 4.34 -------- -------- Total interest-earning assets 301,526 $ 22,750 7.54 -------- ---- Noninterest-earning assets 11,193 -------- Total assets $312,719 ======== Interest-bearing liabilities: Deposits $221,140 $ 9,182 4.15 FHLB advances and other borrowings 61,124 3,457 5.65 -------- -------- Total interest-bearing liabilities 282,264 12,639 4.47 -------- Interest rate spread 3.07 ---- Noninterest-bearing liabilities 7,453 -------- Total liabilities 289,717 Stockholders' equity 23,002 -------- Total liabilities and stockholders' equity $312,719 ======== Net interest-earning assets $ 19,262 ======== Net interest income/net interest margin(3) $ 10,111 3.35% ==== Less: tax equivalent adjustments -------- Net interest income $ 10,111 ======== Ratio of average interest-earning assets to average interest-bearing liabilities 106.82% ======
(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. 10 13 management's discussion and analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RATE/VOLUME ANALYSIS. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Company's interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume), and (iii) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
Year Ended September 30, --------------------------------------------------------------------------------- 1999 vs. 1998 1998 vs. 1997 --------------------------------------------------------------------------------- Increase (Decrease) Increase (Decrease) Due To Due To --------------------------------------------------------------------------------- Total Increase Total Increase Rate Volume (Decrease) Rate Volume (Decrease) ---- ------ ---------- ---- ------ ---------- Interest-earnings assets: Loans receivable(1) $ (689) $1,608 $ 919 $ 198 $1,512 $1,710 Mortgage-related securities(1) (409) 345 (64) (174) 2,006 1,832 Investment securities (1) (2) 19 737 756 (3) 1,132 1,129 Other interest-earning assets (129) 55 (74) 22 128 150 ------- ------ ------- ------ ------ ------ Total interest-earning assets (1,208) 2,745 1,537 43 4,778 4,821 ------- ------ ------- ------ ------ ------ Interest-bearing liabilities: Deposits (440) 768 328 174 581 755 FHLB advances and other borrowings (169) 1,172 1,003 (2) 2,233 2,231 ------- ------ ------- ------ ------ ------ Total interest-bearing liabilities (609) 1,940 1,331 172 2,814 2,986 ------- ------ ------- ------ ------ ------ Increase (decrease) in net interest income $ (599) $ 805 $ 206 $(129) $1,964 $1,835 ======= ====== ======= ====== ====== ======
(1) Includes assets classified as either available for sale or held for sale. (2) The above table is presented on a taxable equivalent basis. RESULTS OF OPERATIONS GENERAL. The Company reported net income of $2.8 million, $2.8 million and $2.6 million for the years ended September 30, 1999, 1998 and 1997, respectively. The $67,000 increase in net income for the year ended September 30, 1999 compared to the year ended September 30, 1998 was primarily due to a $279,000, or 18.5%, increase in other income, and a $333,000 decrease in income tax expense offset, in part, by a $442,000, or 4.9%, increase in operating expenses. The $144,000 increase in net income for the year ended September 30, 1998 compared to the year ended September 30, 1997 was primarily due to a $1.7 million, or 16.4%, increase in net interest income, a $158,000, or 11.7%, increase in other income and a $414,000 decrease in income tax expense partially offset by a $2.1 million, or 30.9%, increase in operating expenses. The increase in operating expenses for the year ended September 30, 1998 was primarily due to the minority interest expense related to the issuance of trust preferred securities. NET INTEREST INCOME. Net interest income is determined by the interest rate spread (the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. All ratios are reported on a fully tax equivalent basis. The Company's average interest-rate spread was 2.65%, 2.72% and 3.07% during the years ended September 30, 1999, 1998 and 1997, respectively. The Company's interest-rate spread was 2.68% at September 30, 1999. The Company's net interest margin (net interest income as a percentage of average interest-earning assets) was 2.98%, 3.23% and 3.35% during the years ended September 30, 1999, 1998 and 1997, respectively. In fiscal 1999 and 1998, the Company's net interest spread and net interest margin were impacted by the relatively flat yield curve in which assets have repriced downward to a greater degree than liabilities in the declining interest rate environment that existed. Net interest income declined slightly to $11.7 million in fiscal 1999 as compared to $11.8 million in fiscal 1998. The reason for the decrease was a greater increase in total interest expense than in total interest income. Net interest income increased by $1.7 million, or 16.4%, in the year ended September 30, 1998 to $11.8 million compared to $10.1 million in fiscal 1997. The reason for such increase was a $4.6 million, or 20.4%, increase in interest income partially offset by a $3.0 million, or 23.6%, increase in interest expense. 11 14 management's discussion and analysis - -------------------------------------------------------------------------------- OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTEREST INCOME. The $1.3 million, or 4.7%, increase in total interest income during the year ended September 30, 1999 as compared to fiscal 1998 was primarily due to a $919,000, or 5.6%, increase in interest income from loans as a result of a $21.0 million, or 10.6%, increase in the average balance of the loan portfolio offset, in part, by a 38 basis point (with 100 basis points being equal to 1.0%) decrease in the yield earned thereon. The increase in the average balance was due to increased loan originations in both single-family, commercial business and commercial real estate loans as part of the Company's continued emphasis on expanding its loan portfolio. The decline in yield was due to the low rate environment in fiscal 1999 resulting in the refinancing of higher yielding loans into lower yielding products. Additionally, interest income on mortgage-related securities, investments and other interest-earning assets increased $382,000, or 3.5%, due to a $16.1 million, or 9.3%, increase in the aggregate average balance thereof offset by a 22 basis point decrease in the average yield earned. The increase in the average balances of such assets was due to the ongoing leveraging of the Company's capital base as part of the implementation of its strategic plan and the decrease in the yield earned was due to the declining interest rate environment experienced during fiscal 1999. Total interest income amounted to $27.4 million for the year ended September 30, 1998 compared to $22.8 million for the year ended September 30, 1997. The primary reason for the increase in the 1998 period was a $2.9 million, or 36.6%, increase in interest income from mortgage-related securities, investments and other interest-earning assets as a result of a $50.4 million, or 41.3%, increase in the aggregate average balance thereof. Such increase was partially offset by a 22 basis point decrease in the yield earned thereon. The increase in the average balances was due to increased leveraging of the Company's capital base while the decrease in the yield reflected the declining interest rate environment existing during fiscal 1998 compared to 1997. In addition, interest income from loans increased $1.7 million, or 11.6%, due to a $18.2 million, or 10.1%, increase in the average loan balance and a 11 basis point increase in the yield earned thereon. The increase in the average balance of the loan portfolio in fiscal 1998 reflected increased originations of primarily fixed-rate single family loans held in portfolio. INTEREST EXPENSE. Total interest expense amounted to $17.0 million for the year ended September 30, 1999 as compared to $15.6 million for fiscal 1998. The $1.4 million, or 8.5%, increase in interest expense in fiscal 1999 compared to fiscal 1998 was due to a $1.0 million increase in interest expense on borrowings and a $328,000 increase in interest expense on deposits. The increase in interest expense on borrowings was due to a $22.7 million increase in the average balance partially offset by a 25 basis point decline in the average rate paid on borrowings. The increase in interest paid on deposits was due to a $20.6 million increase in the average balance of deposits offset by a 21 basis point decline in the average rate paid on deposits. The increased level of borrowings and deposits was used to fund loan originations and the purchase of mortgage-related and investment securities. The decrease in the average rate paid on deposits and borrowings was due to general market interest rate fluctuations. Total interest expense increased by $3.0 million, or 23.6%, in the year ended September 30, 1998 compared to fiscal 1997. The reason for such increase was a $2.2 million increase in interest expense on borrowings and $755,000 increase in interest expense on deposits. The increase in interest expense on borrowings was due to a $38.0 million increase in the average balance of total borrowings and a 9 basis point increase in the average rate paid thereon. The increase in interest paid on deposits was due to a $13.8 million increase in the average balance of deposits combined with an 8 basis point increase in the average rate paid. The increased level of deposits and borrowings was used to fund loan originations and purchases of investment securities. The modest increase in the rates paid on deposits and borrowings was due to general market interest rate fluctuations. PROVISIONS FOR LOAN LOSSES. Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, the volume and type of lending conducted by the Company, the amount of the Company's classified assets, the status of past due principal and interest payments, general economic conditions, particularly as they relate to the Company's primary market area, and other factors related to the collectibility of the Company's loan and loans held for sale portfolios. Management of the Company assesses the allowance for loan losses on a monthly basis and makes provisions for loan losses as deemed appropriate in order to maintain the adequacy of the allowance for loan losses. For the year ended September 30, 1999, the provision for loan losses amounted to $259,000 as compared to $186,000 for fiscal 1998. For the year ended September 30, 1997, the provision for loan losses was $239,000. At September 30, 1999, the Company's allowance for loan losses amounted to 60.6% of total non-performing loans and .81% of gross loans receivable. Although management of the Company believes that the Company's allowance for loan losses was adequate 12 15 management's discussion and analysis - -------------------------------------------------------------------------------- OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS at September 30, 1999, based on facts and circumstances available to it, there can be no assurances that additions to such allowance will not be necessary in future periods, which would adversely affect the Company's results of operations for such periods. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's provision for loan losses and the carrying value of its other non-performing assets based on their judgments about information available to them at the time of their examination. OTHER INCOME. For the year ended September 30, 1999, the Company reported other income of $1.8 million compared to $1.5 million for the year ended September 30, 1998. The primary reason for the $279,000, or 18.5%, increase in other income in fiscal 1999 was a $274,000 increase in other income and a $36,000 increase in service charges and other fees, partially offset by a $106,000 increase in the cost of real estate operations. Also contributing to the increase in other income was a $240,000 increase in the gain on sale of investments and mortgage-related securities as the Company sought to take advantage of certain market opportunities partially offset by a decrease in the gain on sale of loans of $201,000 due to the record refinancings processed in the prior fiscal year. The increase in other income is due to the Bank's purchase of Bank Owned Life Insurance Policies which were purchased to offset current employee benefit plan costs. The $158,000, or 11.7%, increase in other income for the year ended September 30, 1998 as compared to fiscal 1997 was due to a $241,000 increase in net gain on sales of mortgage loans held for sale and a $51,000 gain on the sale of investments and mortgage-related securities partially offset by a decrease of $74,000 in service charges and other fees. The increase in gains on sales of loans for fiscal 1998 reflected the Company's increased emphasis on the origination and sale, servicing released, of non-conforming loans. See Note 6 to the Consolidated Financial Statements. OPERATING EXPENSES. Operating expenses include compensation and employee benefits, occupancy and equipment expense, Federal Deposit Insurance Corporation ("FDIC") deposit insurance premiums, data processing expense and other items. Operating expenses increased $442,000, or 4.9%, to $9.5 million for the year ended September 30, 1999 compared to the year ended September 30, 1998. The primary reason for the increase in operating expenses in fiscal 1999 was a $350,000 provision for real estate owned losses primarily related to the Bank real estate development project. Also contributing to the increase in operating expenses were modest increases in occupancy and equipment, professional fees, bank service charges, data processing and advertising expenses offset in part by a decrease in salaries and employee benefits. Operating expenses increased $2.1 million, or 30.9%, for the year ended September 30, 1998 compared to the year ended September 30, 1997 and amounted to $9.1 million in fiscal 1998 compared to $6.9 million in fiscal 1997. The primary reason for the substantially higher level of operating expenses for fiscal 1998 was the $1.6 million minority interest in expense of subsidiary relating to the issuance of trust preferred securities by the Company. See Note 20 to the Consolidated Financial Statements for further information regarding the trust preferred securities. Also contributing to the increase was a $468,000, or 14.7% increase in compensation expense, a $241,000, or 30.2% increase in other expenses, and a $155,000, or 18.1%, increase in occupancy and equipment expense partially offset by a $153,000, or 20.9%, decrease in professional fees and a $62,000, or 30.0%, decrease in FDIC insurance premiums. Expansion of the branch network, through the opening of a new branch office, contributed to both the increased occupancy and equipment expense and compensation expense. Compensation expense also increased due to general salary increases as well as increased costs associated with the market value accounting for the employee stock ownership plan in accordance with AICPA Statement of Position 93-6. The increase in other expenses was due to a provision established for the Company's real estate owned property. INCOME TAXES. The Company recognized income tax expenses of $917,000, or 24.4%, of pre-tax income, for the year ended September 30, 1999, compared to $1.3 million, or 31.0%, of pre-tax income, for the year ended September 30, 1998. The Company recognized income tax expenses of $1.7 million, or 38.7% of pre-tax income, for fiscal 1997. The primary reason for the decrease in the percentage of tax expense in fiscal 1999 and 1998 was the reduction in state income taxes combined with the increase in tax-free income resulting from purchases of tax-exempt securities and insurance, as the Company employed various strategies to reduce both federal and state income taxes. 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, prepayments and maturities of outstanding loans and mortgage-related securities, sales of loans, maturities of investment securities and other short-term investments, borrowings and funds provided from operations. 13 16 management's discussion and analysis - -------------------------------------------------------------------------------- OF FINANCIAL CONDITION AND RESULTS OF 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 the ability to obtain advances from the FHLB of Pittsburgh through several credit programs with the FHLB in amounts not to exceed the Bank's maximum borrowing capacity and subject to certain conditions, including holding a predetermined amount of FHLB stock as collateral. As an additional source of funds, the Company has access to the Federal Reserve discount window, but only after it has exhausted its access to the FHLB of Pittsburgh. At September 30, 1999, the Company had $123.1 million of outstanding advances from the FHLB of Pittsburgh. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer term basis, the Company maintains a strategy of investing in various lending products and mortgage-related securities. The Company uses its sources of funds primarily to meet its ongoing commitments, to pay maturing savings certificates and savings withdrawals, fund loan commitments and maintain a portfolio of mortgage-related and investment securities. At September 30, 1999, the total of approved loan commitments outstanding amounted to $6.4 million. At the same date, commitments under unused lines of credit and loans in process on construction loans amounted to $22.2 million. Certificates of deposit scheduled to mature in one year or less at September 30, 1999 totalled $122.6 million. Based upon its historical experience, management believes that a significant portion of maturing deposits will remain with the Company. The Company is required by the Office of Thrift Supervision ("OTS") to maintain average daily balances of liquid assets, defined as a ratio of cash and certain marketable securities that can be readily converted into cash to total deposits and short-term borrowings, of 4% to assure its ability to meet demand for withdrawals and repayment of short-term borrowings. The Company's liquidity ratio under these guidelines was 6.32% at September 30, 1999. The OTS requires that the Bank meet minimum regulatory tangible, core, tier 1 risk-based and total risk-based capital requirements. At September 30, 1999, the Bank exceeded all regulatory capital requirements and was deemed a well capitalized institution for regulatory purposes. See Note 13 to the Consolidated Financial Statements. The Company's assets consist primarily of its investment in the Bank and investments in various corporate debt and equity instruments. Its only material source of income consists of earnings from its investment in the Bank and interest and dividends earned on other investments. The Company, as a separately incorporated holding company, has no significant operations other than serving as the sole stockholder of the Bank and paying interest to its subsidiary, First Keystone Capital Trust I, for junior subordinated debt in conjunction with the issuance of trust preferred securities. On an unconsolidated basis, the Company has no paid employees. The expenses primarily incurred by the Company relate to its reporting obligations under the Securities Exchange Act of 1934, related expenses incurred as a publicly traded company, and expenses relating to the issuance of the trust preferred securities and the junior subordinated debentures issued in connection therewith. Management believes that the Company has adequate liquidity available to respond to its liquidity demands. Under applicable federal regulations, the Bank may pay dividends within certain limits after providing written notice to the OTS. See Note 21 to the Consolidated Financial Statements. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. This statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This statement is effective for fiscal years beginning after June 15, 2000, and will not be applied retroactively to financial statements of prior periods. Management of the Company does not believe this statement will have a material impact on the Company's financial position or results of operations when adopted. 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 require 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. 14 17 management's discussion and analysis - -------------------------------------------------------------------------------- OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 prices 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. YEAR 2000 ISSUES (YEAR 2000 READINESS DISCLOSURE STATEMENT) 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 this continual 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 59 priority 2 (effects employee's ability to service customers) third party vendors. Of such priority 1 and priority 2 vendors, the Company has been informed that 100% 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 and related testing of the system was completed by March 31, 1999. 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 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 (notwithstanding their assurances to the contrary), 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 September 30, 1999, the Company had contacted all of its commercial credit customers (85 borrowers with loans outstanding aggregating $28.2 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 15 18 management's discussion and analysis - -------------------------------------------------------------------------------- OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 all mission critical test plans and contingency plans to ensure the reasonableness of the plans including a Liquidity Contingency Plan to address the potential liquidity issues that federal banking regulations have raised. These plans include ordering extra currency, utilizing lines of credit, holding more liquid investments in order to provide the Bank with the ability to maintain smooth operations in the event of abnormally large withdrawals of funds by consumers concerned with the effect of the advent of the Year 2000. Testing began on mission critical systems in August 1998 and was completed by September 30, 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, 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 paid $25,000 to participate in the data service processor's Year 2000 testing. FORWARD LOOKING STATEMENTS In this Report, the Company has included certain "forward looking statements" concerning the future operations of the Company. It is management's desire to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. This statement is for the express purpose of availing the Company of the protections of such safe harbor with respect to all "forward looking statements" contained in this Report. The Company has used "forward looking statements" to describe the future plans and strategies including management's expectations of the Company's Year 2000 readiness and future financial results. Management's ability to predict results or the effect of future plans and strategy is inherently uncertain. Factors that could affect results include interest rate trends, competition, the general economic climate in Delaware and Chester Counties, the mid-Atlantic region and the country as a whole, loan delinquency rates, changes in federal and state regulation, Year 2000 uncertainties and other uncertainties described in the Company's filings with the Securities and Exchange Commission, including its Form 10-K for the year ended September 30, 1999. These factors should be considered in evaluating the "forward looking statements", and undue reliance should not be placed on such statements. 16 19 [Deloitte & Touche Logo] DELOITTE & TOUCHE LLP Telephone: (215) 246-2300 Twenty-Fourth Floor Facsimile: (215) 569-2441 1700 Market Street Philadelphia, Pennsylvania 19103-3984 INDEPENDENT AUDITORS' REPORT Board of Directors First Keystone Financial, Inc. and Subsidiaries Media, Pennsylvania 19063 We have audited the accompanying consolidated statements of financial condition of First Keystone Financial, Inc. and Subsidiaries (the "Company") as of September 30, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of First Keystone Financial, Inc. and Subsidiaries at September 30, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999 in accordance with generally accepted accounting principles. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania November 5, 1999 - --------------- DELOITTE TOUCHE TOHMATSU 17 20 FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share data)
September 30 1999 1998 ---- ---- ASSETS Cash and amounts due from depository institutions $ 3,010 $ 2,457 Interest-bearing deposits with depository institutions 17,005 21,669 --------- --------- Total cash and cash equivalents 20,015 24,126 Investment securities available for sale 44,315 40,621 Mortgage-related securities available for sale 113,046 115,486 Loans held for sale 1,792 2,799 Mortgage-related securities held to maturity -- at amortized cost (approximate fair value of $14,100 and $18,700 at September 30, 1999 and 1998, respectively) 14,497 18,769 Loans receivable -- net 226,375 198,343 Accrued interest receivable 3,096 3,117 Real estate owned 297 1,663 Federal Home Loan Bank stock -- at cost 6,157 5,079 Office properties and equipment -- net 3,076 2,612 Deferred income taxes 2,749 283 Prepaid expenses and other assets 14,711 2,965 --------- --------- Total Assets $ 450,126 $ 415,863 ========= ========= LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 260,826 $ 247,311 Advances from Federal Home Loan Bank 123,137 101,578 Securities sold under agreements to repurchase 19,300 19,300 Accrued interest payable 2,321 1,683 Advances from borrowers for taxes and insurance 946 1,036 Accounts payable and accrued expenses 3,492 2,091 --------- --------- Total liabilities 410,022 372,999 --------- --------- 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; September 30, 1999 and 1998, 2,251,716 and 2,329,216 shares, respectively 14 14 Additional paid in capital 13,408 13,204 Common stock acquired by stock benefit plans (1,531) (1,789) Treasury stock at cost, 468,284 and 390,784 shares at September 30, 1999 and 1998, respectively (5,622) (4,575) Accumulated other comprehensive (loss) income (2,992) 1,487 Retained earnings -- partially restricted 20,627 18,323 --------- --------- Total stockholders' equity 23,904 26,664 --------- --------- Total Liabilities, Minority Interest in Subsidiary and Stockholders' Equity $ 450,126 $ 415,863 ========= =========
See notes to consolidated financial statements. 18 21 FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
YEAR ENDED SEPTEMBER 30 ---------------------------------- 1999 1998 1997 ---- ---- ---- INTEREST INCOME: Interest on: Loans $ 17,366 $ 16,447 $ 14,737 Mortgage-related securities 7,965 8,029 6,197 Investments 2,949 2,429 1,478 Interest-bearing deposits 414 488 338 -------- -------- -------- TOTAL INTEREST INCOME 28,694 27,393 22,750 -------- -------- -------- INTEREST EXPENSE: Interest on: Deposits 10,265 9,937 9,182 Federal Home Loan Bank advances 5,511 4,206 3,381 Securities sold under agreements to repurchase 1,180 1,482 76 -------- -------- -------- TOTAL INTEREST EXPENSE 16,956 15,625 12,639 -------- -------- -------- Net interest income 11,738 11,768 10,111 Provision for loan losses 259 186 239 -------- -------- -------- Net interest income after provision for loan losses 11,479 11,582 9,872 -------- -------- -------- OTHER INCOME (LOSS): Service charges and other fees 934 898 972 Net gain on sale of: Investments and mortgage-related securities 291 51 Loans held for sale 325 526 285 Real estate owned 25 7 32 Other assets 1 46 Real estate operations (138) (32) (25) Other income 350 57 40 -------- -------- -------- TOTAL OTHER INCOME 1,787 1,508 1,350 -------- -------- -------- OPERATING EXPENSES: Salaries and employee benefits 3,567 3,642 3,174 Occupancy and equipment 1,030 1,013 858 Professional fees 617 580 733 Federal deposit insurance premium 147 145 207 Bank service charges 445 417 384 Data processing 386 360 335 Advertising 322 293 280 Provision for real estate owned losses 350 200 Minority interest in expense of subsidiary 1,571 1,571 153 Other 1,066 838 797 -------- -------- -------- TOTAL OPERATING EXPENSES 9,501 9,059 6,921 -------- -------- -------- Income before income tax expense 3,765 4,031 4,301 Income tax expense 917 1,250 1,664 -------- -------- -------- NET INCOME $ 2,848 $ 2,781 $ 2,637 ======== ======== ======== EARNINGS PER COMMON SHARE: Basic $ 1.40 $ 1.31 $ 1.20 Diluted $ 1.32 $ 1.23 $ 1.13 ======== ======== ========
See notes to consolidated financial statements. 19 22 FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (dollars in thousands)
COMMON STOCK ACQUIRED BY ACCUMULATED RETAINED ADDITIONAL STOCK OTHER EARNINGS- TOTAL COMMON PAID-IN BENEFIT TREASURY COMPREHENSIVE PARTIALLY STOCKHOLDERS' STOCK CAPITAL PLANS STOCK INCOME (LOSS) RESTRICTED EQUITY ----- ------- ----- ----- ------------- ---------- ------ Balance at October 1, 1996 $ 14 $ 12,659 $(1,437) $(1,288) $ (494) $ 13,630 $ 23,084 Comprehensive income: Net income 2,637 2,637 Other comprehensive income, net of tax: Net unrealized gain on securities, net of reclassification adjustment(1) 902 902 Comprehensive income 3,539 Common stock acquired by stock benefit plans (775) (775) ESOP stock committed to be released 33 33 Excess of fair value above cost of ESOP and RRP shares committed to be released 237 237 RRP amortization 141 141 Exercise of stock options 11 11 Purchase of treasury stock (1,268) (1,268) Dividends paid (250) (250) ------ -------- ------- ------- -------- -------- -------- Balance at September 30, 1997 14 12,896 (2,038) (2,545) 408 16,017 24,752 Comprehensive income: Net income 2,781 2,781 Other comprehensive income, net of tax: Net unrealized gain on securities, net of reclassification adjustment(1) 1,079 1,079 Comprehensive income 3,860 ESOP stock committed to be released 108 108 Excess of fair value above cost of ESOP and RRP shares committed to be released 308 308 RRP amortization 141 141 Exercise of stock options 6 6 Purchase of treasury stock (2,036) (2,036) Dividends paid (475) (475) ------ -------- ------- ------- -------- -------- -------- Balance at September 30, 1998 14 13,204 (1,789) (4,575) 1,487 18,323 26,664 Comprehensive income: Net income 2,848 2,848 Other comprehensive income, net of tax: Net unrealized loss on securities net of reclassification adjustment(1) (4,479) (4,479) Comprehensive income (loss) (1,631) ESOP stock committed to be released 117 117 Excess of fair value above cost of ESOP and RRP shares committed to be released 204 204 RRP amortization 141 141 Purchase of treasury stock (1,047) (1,047) Dividends paid (544) (544) ------ -------- ------- ------- -------- -------- -------- Balance at September 30, 1999 $ 14 $ 13,408 $(1,531) $(5,622) $ (2,992) $ 20,627 $ 23,904 ====== ======== ======= ======= ======== ======== ========
(1) Disclosure of reclassification amount, net of tax for the years ended: 1999 1998 1997 ------- ------ ----- Net unrealized (depreciation) appreciation arising during the year $(4,671) $1,113 $ 902 Less: Reclassification adjustment for net gains included in net income 192 34 ------- ------ ----- Net unrealized (loss) gain on securities $(4,479) $1,079 $ 902 ======= ====== =====
See notes to consolidated financial statements. 20 23 FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
YEAR ENDED SEPTEMBER 30 -------------------------------- 1999 1998 1997 ---- ---- ---- OPERATING ACTIVITIES: Net income $ 2,848 $ 2,781 $ 2,637 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for depreciation and amortization 444 453 364 Amortization of discounts (288) (609) (872) Gain on sales of: Loans held for sale (325) (526) (285) Investment securities available for sale (4) Mortgage-related securities available for sale (291) (47) Real estate owned (25) (7) (32) Other assets (1) (46) Provision for loan losses 259 186 239 Provision for real estate owned losses 350 200 Amortization of stock benefit plans 462 563 422 Changes in assets and liabilities which provided (used) cash: Origination of loans held for sale (46,199) (56,398) (37,209) Loans sold in the secondary market 47,206 58,176 35,079 Deferred income taxes (140) (112) 862 Accrued interest receivable 21 (552) (161) Prepaid expenses and other assets (11,746) (590) (740) Accrued interest payable 638 108 74 Accounts payable and accrued expenses 1,401 6 (705) -------- -------- -------- Net cash (used in) provided by operating activities (5,385) 3,627 (373) -------- -------- -------- INVESTING ACTIVITIES: Loans originated (96,238) (64,979) (56,049) Purchases of: Investment securities held to maturity (2,000) (12,000) Investment securities available for sale (24,949) (40,892) (6,030) Mortgage-related securities held to maturity (2,687) Mortgage-related securities available for sale (45,895) (52,422) (51,654) Purchase of FHLB stock (1,078) (1,310) (1,432) Proceeds from sales of investment and mortgage-related securities available for sale 6,791 20,299 Proceeds from sales of real estate owned 2,373 1,451 944 Proceeds from sales of other assets 30 101 Principal collected on loans 67,481 55,694 35,418 Proceeds from maturities, calls or repayments of: Investment securities available for sale 12,075 5,070 12,500 Mortgage-related securities available for sale 44,031 28,129 9,243 Investment securities held to maturity 12,000 2,000 Mortgage-related securities held to maturity 4,221 4,663 2,483 Purchase of property and equipment (908) (542) (409) Net expenditures on real estate acquired through foreclosure and in development (23) (1,462) (734) -------- -------- -------- Net cash used in investing activities (32,119) (38,958) (65,619) -------- -------- -------- FINANCING ACTIVITIES: Net increase in deposit accounts 13,515 19,393 8,713 Net proceeds from FHLB and other borrowings 21,559 20,891 53,247 Net (decrease) increase in advances from borrowers for taxes and insurance (90) 123 (8) Proceeds from issuance of capital securities 16,200 Common stock acquired by stock benefit plans (775) Purchase of treasury stock (1,047) (2,036) (1,268) Cash dividends (544) (475) (250) -------- -------- -------- Net cash provided by financing activities 33,393 37,896 75,859 -------- -------- -------- (Decrease) increase in cash and cash equivalents (4,111) 2,565 9,867 Cash and cash equivalents at beginning of year 24,126 21,561 11,694 -------- -------- -------- Cash and cash equivalents at end of year $ 20,015 $ 24,126 $ 21,561 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for interest on deposits and borrowings $ 16,318 $ 15,517 $ 12,600 Cash payments of income taxes 915 1,150 630 Transfers of loans receivable into real estate owned 1,317 207 411 ======== ======== ========
See notes to consolidated financial statements. 21 24 NOTES TO CONSOLIDATED STATEMENTS - -------------------------------------------------------------------------------- 1. NATURE OF OPERATIONS AND ORGANIZATION STRUCTURE - -------------------------------------------------------------------------------- On September 21, 1994, the Board of Directors of First Keystone Federal Savings Bank (the "Bank") adopted a plan of conversion to convert from a federally chartered mutual savings bank to a federally chartered capital stock savings bank with the concurrent formation of a holding company (the "Conversion"). The Conversion was completed on January 25, 1995 with the issuance by the holding company, First Keystone Financial, Inc. (the "Company"), of 1,360,000 shares of its common stock in a public offering to the Bank's eligible depositors and borrowers, members of the general public and the Bank's employee stock ownership plan (the "ESOP"). In exchange for the net conversion proceeds of $11.5 million, less $1.0 million retained by the Company, the Company acquired 100% of the issued and outstanding capital stock of the Bank. The Bank is principally in the business of attracting deposits through its branch offices and investing those deposits together with funds from borrowings and operations in single-family residential, commercial real estate and commercial business loans. The Bank is primarily supervised and regulated by the Office of Thrift Supervision ("OTS"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company, the Bank, and the Company's and the Bank's wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE Securities held to maturity are carried at amortized cost only if the Company has the positive intent and ability to hold these securities to maturity. Securities available for sale are carried at fair value with resulting unrealized gains or losses recorded to equity, net of tax. For the years ended September 30, 1999 and 1998, the Company did not maintain a trading portfolio. ALLOWANCE FOR LOAN LOSSES An allowance for loan losses is maintained at a level that management considers adequate to provide for probable losses based upon an evaluation of known and inherent risks in the loan portfolio. Management's evaluation of the portfolio is based upon past loss experience, current economic conditions and other relevant factors. While management uses the best information available to make such evaluation, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. The Company accounts for impaired loans in accordance with Statement of Financial Accounting Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan" and No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." Impaired loans are predominantly measured based on the fair value of the collateral. The provision for loan losses charged to expense is based upon past loan loss experience and an evaluation of probable losses and impairment existing in the current loan and lease portfolio. A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan. An insignificant delay or insignificant shortfall in amounts of payments does not necessarily result in the loan being identified as impaired. For this purpose, delays less than 90 days are considered to be insignificant. Large groups of smaller balance homogeneous loans, including residential real estate and consumer loans, are collectively evaluated for impairment, except for loans restructured under a troubled debt restructuring. MORTGAGE BANKING ACTIVITIES The Company originates mortgage loans held for investment and for sale. At origination, the mortgage loan is identified as either held for sale or for investment. Mortgage loans held for sale are carried at the lower of cost or forward committed contracts (which approximates market), determined on a net aggregate basis. 22 25 NOTES TO CONSOLIDATED STATEMENTS (continued) - -------------------------------------------------------------------------------- At September 30, 1999, 1998, and 1997, loans serviced for others totalled approximately $77,186, $96,275 and $114,554, respectively. Servicing loans for others consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and processing foreclosures. Loan servicing income is recorded on a cash basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees. The Company has fiduciary responsibility for related escrow and custodial funds aggregating approximately $720 and $824 at September 30, 1999 and 1998, respectively. The Company assesses the retained interest in the servicing asset or liability associated with the sold loans based on the relative fair values. The servicing asset or liability is amortized in proportion to and over the period of estimated net servicing income or net servicing loss, as appropriate. Assessment of the fair value of the retained interest is performed on a continuing basis. INCOME RECOGNITION ON LOANS Interest on loans is credited to income when earned. Accrual of loan interest is discontinued and a reserve established on existing accruals if management believes after considering, among other things, economic and business conditions and collection efforts, that the borrowers' financial condition is such that collection of interest is doubtful. REAL ESTATE OWNED Real estate owned consists of properties acquired by foreclosure or deed in-lieu-of foreclosure. These assets are initially recorded at the lower of carrying value of the loan or estimated fair value less selling costs at the time of foreclosure and at the lower of the new cost basis or net realizable value thereafter. The amounts recoverable from real estate owned could differ materially from the amounts used in arriving at the net carrying value of the assets at the time of foreclosure because of future market factors beyond the control of the Company. Costs relating to the development and improvement of real estate owned properties are capitalized and those relating to holding the property are charged to expense. OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment are recorded at cost. Depreciation is computed using the straight-line method over the expected useful lives of the assets. The costs of maintenance and repairs are expensed as they are incurred, and renewals and betterments are capitalized. INCOME TAXES Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. INTEREST RATE RISK At September 30, 1999 and 1998, the Company's assets consist primarily of assets that earned interest at either adjustable or fixed interest rates and the average life of which is long term. Those assets were funded primarily with shorter-term liabilities that have interest rates which vary over time with market rates and certain call features that are impacted by changes in market rates. Since the assets and liabilities reprice at different times, the Company is exposed to interest rate risk. EARNINGS PER SHARE Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding. Diluted earnings per common share is computed based on the weighted average number of shares of common stock outstanding, increased by the number of common shares that are assumed to have been purchased with the proceeds from the exercise of stock options. The calculation of the weighted average shares, after giving effect to the stock split, was as follows:
Year Ended September 30 ------------------------------------------ 1999 1998 1997 ------------------------------------------ Average common share outstanding 2,043,780 2,130,712 2,198,453 Increase in shares due to options - diluted basis 76,724 135,100 125,316 --------- --------- --------- Adjusted shares outstanding - diluted 2,120,504 2,265,812 2,323,769 --------- --------- ---------
ACCOUNTING FOR STOCK OPTIONS The Company accounts for stock options in accordance with SFAS No. 123 "Accounting for Stock-Based Compensation," which allows an entity to choose between the intrinsic value method, as defined in Accounting Principals Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" or the fair value method of accounting for stock-based compensation described in SFAS No. 123. An entity using the intrinsic value method must disclose pro forma net income and earnings per share as if the stock-based compensation was accounted 23 26 NOTES TO CONSOLIDATED STATEMENTS (continued) - -------------------------------------------------------------------------------- for using the fair value method. The Company continues to account for stock-based compensation using the intrinsic value method and has not recognized compensation expense under this method. OTHER COMPREHENSIVE INCOME In 1999, the Company adopted SFAS No. 130 "Reporting Comprehensive Income." This statement requires the Company to present, as a component of comprehensive income, the amounts from transactions and other events which currently are excluded from the statement of income and are recorded directly to stockholders' equity. STATEMENT OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from depository institutions and interest-bearing deposits with depository institutions. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. This statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This statement is effective for fiscal years beginning after June 15, 2000, and will not be applied retroactively to financial statements of prior periods. Management of the Company does not believe this statement will have a material impact on the Company's financial position or results of operations when adopted. RECLASSIFICATIONS Certain reclassifications have been made to the September 30, 1998 and 1997 consolidated financial statements to conform with the September 30, 1999 presentation. Such reclassifications had no impact on the reported net income. 3. INVESTMENT SECURITIES - -------------------------------------------------------------------------------- The amortized cost and approximate fair value of investment securities are as follows:
September 30, 1999 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value ------------------------------------------------------ Available for Sale: U.S. Treasury securities and securities of U.S. Government agencies: 1 to 5 years $ 5,746 $ 94 $ 5,652 5 to 10 years 6,994 214 6,780 Municipal obligations 18,924 $ 1 1,052 17,873 Corporate bonds 4,909 270 4,639 Mutual funds 2,000 28 1,972 Preferred stocks 5,534 286 5,248 Other equity investments 2,390 239 2,151 ------- ---- ------ -------- Total $46,497 $ 1 $2,183 $ 44,315 ======= ==== ====== ========
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 ======= ===== ===== =======
For the years ended September 30, 1999 and 1998, gross realized gains on sales of investment securities available for sale amounted to $161 and $12, respectively. Gross realized losses on sales of investment securities available for sale amounted to $8 for the year ended September 30, 1998. 24 27 NOTES TO CONSOLIDATED STATEMENTS (continued) - -------------------------------------------------------------------------------- 4. MORTGAGE-RELATED SECURITIES - -------------------------------------------------------------------------------- Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:
September 30, 1999 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gain Loss Fair Value -------------------------------------------------------- Available for Sale: FHLMC pass-through certificates $ 11,927 $ 81 $ 174 $ 11,834 FNMA pass-through certificates 32,795 37 877 31,955 GNMA pass-through certificates 34,639 75 755 33,959 Collateralized mortgage obligations 36,054 111 867 35,298 -------- -------- ------- --------- Total $ 115,415 $ 304 $ 2,673 $ 113,046 ========= ======== ======= ========= Held to Maturity: FHLMC pass-through certificates $ 3,156 $ 11 $ 67 $ 3,100 FNMA pass-through certificates 6,832 232 6,600 Collateralized mortgage obligations 4,509 109 4,400 -------- -------- ------- --------- Total $ 14,497 $ 11 $ 408 $ 14,100 ======== ======== ======= =========
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 securities which are repaid in accordance with a predetermined priority. The underlying collateral of the securities are loans which are primarily insured by FHLMC, FNMA, and GNMA. Mortgage-related securities with a carrying value of $37,504 and $27,846 were pledged as collateral for public funds on deposit, treasury tax and loan processing and financings at September 30, 1999 and 1998, respectively (see Notes 9 and 11). For the year ended September 30, 1998, gross realized gains and losses on sales of mortgage-related securities available for sale amounted to $83 and $36, respectively. 25 28 NOTES TO CONSOLIDATED STATEMENTS (continued) 5. ACCRUED INTEREST RECEIVABLE The following is a summary of accrued interest receivable by category:
September 30 ------------------------ 1999 1998 ------ ------ Loans $1,602 $1,542 Mortgage-related securities 755 823 Investment securities 739 752 ------ ------ Total $3,096 $3,117 ====== ======
6. LOANS RECEIVABLE Loans receivable consist of the following:
September 30 ------------------------------- 1999 1998 --------- --------- Real estate loans: Single-family $ 166,802 $ 148,088 Construction and land 18,426 15,858 Multi-family and commercial 31,188 20,563 Consumer loans: Home equity and lines of credit 18,624 19,609 Deposit 243 181 Education 365 449 Other 1,080 1,429 Commercial loans 2,190 1,390 --------- --------- Total loans 238,918 207,567 Loans in process (9,005) (5,781) Allowance for loan losses (1,928) (1,738) Deferred loan fees (1,610) (1,705) --------- --------- Loans receivable -- net $ 226,375 $ 198,343 ========= =========
The Company originates loans primarily in its local market area of Delaware and Chester Counties, Pennsylvania to borrowers that share similar attributes. This concentration of credit exposes the Company to a higher degree of risk associated with this economic region. The Company also participates in the origination and sale of nonagency, non-conforming sub-prime loans to the secondary market. The Company recognized gains on sale of loans held for sale of $325, $526 and $281 for fiscal years ended September 30, 1999, 1998 and 1997, respectively. The Company offers loans to its directors and senior officers on terms permitted by OTS regulations. There were approximately $575 and $388 of loans outstanding to senior officers and directors as of September 30, 1999 and 1998, respectively. The amount of repayments during the years ended September 30, 1999 and 1998 totalled $28 and $102, respectively. There were $215 and $50 of new loans granted during fiscal year 1999 and 1998, respectively. The Company has undisbursed portions under consumer and commercial lines of credit as of September 30, 1999 of $4,323 and $8,891, respectively. The Company originates both adjustable and fixed interest rate loans and purchases mortgage-backed securities and collateralized mortgage obligations in the secondary market. The originated adjustable-rate loans have interest rate adjustment limitations and are generally indexed to U.S. Treasury securities plus a fixed margin. Future market factors may affect the correlation of the interest rate adjustment with rates the Company pays on the short-term deposits that have been the primary source funds for these loans. The adjustable-rate mortgage-related securities adjust to various national indices plus a fixed margin. At September 30, 1999, the composition of these loans and mortgage-related securities follows:
FIXED-RATE - ------------------------------------------------------ TERM TO MATURITY BOOK VALUE - ------------------------------------------------------ 1 month to 1 year $ 3,317 1 year to 3 years 5,290 3 years to 5 years 8,712 5 years to 10 years 23,204 Over 10 years 227,754 --------- Total $ 268,277 =========
ADJUSTABLE-RATE - ------------------------------------------------------ TERM TO RATE ADJUSTMENT BOOK VALUE - ------------------------------------------------------ 1 month to 1 year $ 73,723 1 year to 3 years 12,329 3 years to 5 years 3,127 --------- Total $ 89,179 =========
The following is an analysis of the allowance for loan losses:
YEAR ENDED SEPTEMBER 30 ----------------------------------------------- 1999 1998 1997 ------- ------- ------- Beginning balance $ 1,738 $ 1,628 $ 2,624 Provisions charged to income 259 186 239 Charge-offs (72) (114) (1,252) Recoveries 3 38 17 ------- ------- ------- Total $ 1,928 $ 1,738 $ 1,628 ======= ======= =======
At September 30, 1999 and 1998, non-performing loans (which include loans in excess of 90 days delinquent) amounted to approximately $3,180 and $3,704, respectively. All non-performing loans are collectively evaluated for impairment. 26 29 NOTES TO CONSOLIDATED STATEMENTS (continued) 7. REAL ESTATE OWNED Real estate owned is comprised of:
SEPTEMBER 30 ------------------------ 1999 1998 ------ ------ Real estate acquired in settlement of loans $ 297 $ 196 Real estate acquired and in development 1,467 ------ ------ Total $ 297 $1,663 ====== ======
In fiscal year 1996, First Pointe, Inc., a subsidiary of the Company, accepted a deed in lieu of foreclosure on a construction loan for the acquisition and improvement of a 106-lot real estate development project located in Pennsylvania. As of September 30, 1999, all townhomes have been completed and sold. Remaining items to be completed consist of township improvements under a tri-party agreement. 8. OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment are summarized by major classification as follows:
SEPTEMBER 30 --------------------------- 1999 1998 ------- ------- Land and buildings $ 4,990 $ 4,220 Furniture, fixtures and equipment 3,860 3,753 ------- ------- Total 8,850 7,973 Accumulated depreciation and amortization (5,774) (5,361) ------- ------- Net $ 3,076 $ 2,612 ======= =======
The future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of September 30, 1999 are as follows:
September 30: 2000 $ 181 2001 125 2002 117 2003 116 2004 120 Thereafter 563 ------ Total minimum future rental payments $1,222 ======
Lease hold expense was approximately $182, $197 and $148 for the years ended September 30, 1999, 1998 and 1997, respectively. 9. DEPOSITS Deposits consist of the following major classifications:
SEPTEMBER 30 -------------------------------------------------------------- 1999 1998 ------------------------ ------------------------- AMOUNT PERCENT Amount Percent ------- ----- -------- ----- Non-interest bearing $ 7,912 3.0% $ 8,254 3.3% NOW 33,412 12.8 28,181 11.4 Passbook 40,324 15.5 37,988 15.4 Money market demand 19,417 7.4 16,087 6.5 Certificates of deposit 159,761 61.3 156,801 63.4 ------- ----- -------- ----- Total 260,826 100.0% $247,311 100.0% ======= ===== ======== =====
The weighted average interest rates on deposits were 3.96% and 4.21% at September 30, 1999 and 1998, respectively. Included in deposits as of September 30, 1999 are deposits greater than $100,000 totalling approximately $41,740. At September 30, 1999 and 1998, the Company had pledged certain mortgage-related securities aggregating approximately $5,849 and $1,633, respectively, as collateral for municipal deposits. A summary of scheduled maturities of certificates is as follows:
SEPTEMBER 30 1999 -------- Within one year $122,597 One to two years 23,036 Two to three years 4,332 Thereafter 9,796 -------- Total $159,761 ========
A summary of interest expense on deposits is as follows:
YEAR ENDED SEPTEMBER 30 --------------------------------------------- 1999 1998 1997 ------- ------- ------- NOW $ 440 $ 376 $ 360 Passbook 955 923 949 Money market demand 502 452 450 Certificates of deposit 8,368 8,186 7,423 ------- ------- ------- Total $10,265 $ 9,937 $ 9,182 ======= ======= =======
27 30 NOTES TO CONSOLIDATED STATEMENTS (continued) 10. ADVANCES FROM FEDERAL HOME LOAN BANK A summary of advances from the Federal Home Loan Bank ("FHLB") of Pittsburgh follows:
SEPTEMBER 30 ------------------------------------------------------------ 1999 1998 ------------------------------------------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE INTEREST INTEREST AMOUNT RATE AMOUNT RATE -------- --- -------- --- Advances from FHLB due by September 30, 1999 $ 30,325 5.8% 2000 $ 47,055 5.4% 5,159 5.4 2001 Thereafter 76,082 5.4 66,094 5.5 -------- --- -------- --- Total $123,137 5.4 $101,578 5.6% ======== === ======== ===
The advances are collateralized by FHLB stock and substantially all first mortgage loans held by the company. Included in the table above at September 30, 1999 and 1998 are convertible advances whereby the FHLB has the option at a predetermined time to convert the fixed interest rate to an adjustable rate tied to LIBOR. The Company then has the option to prepay these advances if the FHLB converts the interest rate. These advances are included in the year in which they mature. The Company has available various lines of credit with the FHLB up to the Company's maximum borrowing capacity which was $220.6 million, of which $123.1 million was outstanding, at September 30, 1999. 11. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE The Company sold, under agreements to repurchase, mortgage-related securities to broker-dealers. Securities underlying the agreements with broker-dealers were delivered to the dealer who arranged the transaction. Securities delivered to broker-dealers may have been sold, loaned, or otherwise disposed of, to other parties in the normal course of their operations. Information concerning securities sold under agreements to repurchase is summarized as follows:
SEPTEMBER 30 --------------------------- 1999 1998 ------- ------- Average balance for months outstanding $19,300 $24,411 Average interest rate for months outstanding 6.11% 6.07% Maximum month-end balance during the year $19,300 $24,600 Mortgage-related securities underlying the agreements at year-end: Carrying value $20,972 $23,055 Estimated fair value $20,681 $23,385
12. INCOME TAXES As of October 1, 1996, the Company changed its method of computing reserves for bad debts to the experience method. The bad debt deduction allowable under this method is available to small banks with assets less than $500 million. Generally, this method allowed the Company to deduct an annual addition to the reserve for bad debts equal to the increase in the balance of the Company's reserve for bad debts at the end of the year to an amount equal to the percentage of total loans at the end of the year, computed using the ratio of the previous six years net chargeoffs divided by the sum of the previous six years total outstanding loans at year end. The Company treated such change as a change in a method of accounting determined solely with respect to the "applicable excess reserves" of the institution. The amount of the applicable excess reserves will be taken into account ratably over a six-taxable year period, beginning with the first taxable year beginning after December 31, 1995. For financial reporting purposes, the Company will not incur any additional tax expense. At September 30, 1997, under SFAS No. 109, deferred taxes were provided on the difference between the book reserve at September 30, 1997 and the applicable excess reserve in the amount equal to the Bank's increase in the tax reserve from December 31, 1987 to September 30, 1996. Retained earnings at September 30, 1999 and 1998 included approximately $2.5 million representing bad debt deductions for which no deferred income taxes have been provided. 28 31 NOTES TO CONSOLIDATED STATEMENTS (continued) Income tax expense (benefit) is comprised of the following:
YEAR ENDED SEPTEMBER 30 1999 1998 1997 ------- ------- ------- Current Federal $ 1,057 $ 1,362 $ 489 State 313 ------- ------- ------- Subtotal 1,057 1,362 802 Deferred (140) (112) 862 ------- ------- ------- Total $ 917 $ 1,250 $ 1,664 ======= ======= =======
The tax effect of temporary differences that give rise to significant portions of the deferred tax accounts, calculated at 34%, are as follows:
SEPTEMBER 30 --------------------------- 1999 1998 ------- ------- Accelerated depreciation $ 326 $ 249 Allowance for loan losses 824 634 Deferred loan fees (135) (61) Accrued expenses 111 161 Unrealized (gain) loss on available for sale securities 1,559 (767) Other 64 67 ------- ------- Total deferred tax asset $ 2,749 $ 283 ======= =======
The Company's effective tax rate is less than the statutory federal income tax rate for the following reasons:
YEAR ENDED SEPTEMBER 30 ------------------------------------------------------------------------------ 1999 1998 1997 PERCENTAGE PERCENTAGE PERCENTAGE OF PRETAX OF PRETAX OF PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME ------- ------- ------- ------- ------- ------- Tax at statutory rate $ 1,280 34.0% $ 1,370 34.0% $ 1,462 34.0% Increase (decrease) in taxes resulting from: Tax exempt interest, net (284) (7.5) (149) (3.7) (24) (.6) State tax -- net of federal tax effect 207 4.8 Other (79) (2.1) 29 .7 19 .5 ------- ------- ------- ------- ------- ------- Total $ 917 24.4% $ 1,250 31.0% $ 1,664 38.7% ======= ======= ======= ======= ======= =======
29 32 NOTES TO CONSOLIDATED STATEMENTS (continued) 13. REGULATORY CAPITAL REQUIREMENTS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to adjusted assets (as defined), and of Tier I and total capital (as defined) to average assets (as defined). Management believes, as of September 30, 1999, that the Bank meets all capital adequacy requirements to which it is subject. As of September 30, 1999, the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier-1 risk-based, and Tier-1 leveraged-ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios are also presented in the table. At September 30, 1999 and 1998, risk-based capital, for regulatory requirements, is increased by $1,813 and $1,688, respectively, of general loan loss reserves for a total of $38,280 and $35,389, respectively.
REQUIRED FOR WELL CAPITALIZED CAPITAL ADEQUACY UNDER PROMPT ACTUAL PURPOSES CORRECTIVE ACTION ------------------------------------------------------------------------ AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE ------ ------ ------ ------ ------ ------ At September 30, 1999: Core Capital (to Adjusted Tangible Assets) 36,467 8.2% 17,586 4.0% 22,320 5.0% Tier I Capital (to Risk Weighted Assets) 36,467 17.9 N/A N/A 26,784 6.0 Total Capital (to Risk Weighted Assets) 38,280 18.8 16,294 8.0 20,367 10.0 Tangible Capital (to Tangible Assets) 36,467 8.2 6,696 1.5 N/A N/A At September 30, 1998: Core Capital (to Adjusted Tangible Assets) 33,701 8.3% 16,301 4.0% 20,376 5.0% Tier I Capital (to Risk Weighted Assets) 33,701 20.1 N/A N/A 24,451 6.0 Total Capital (to Risk Weighted Assets) 35,389 21.1 13,424 8.0 16,780 10.0 Tangible Capital (to Tangible Assets) 33,701 8.3 6,113 1.5 N/A N/A
At the date of the Conversion, the Bank established a liquidation account in an amount equal to its retained income as of August 31, 1995. The liquidation account is maintained for the benefit of eligible account holders and supplemental eligible account holders who continue to maintain their accounts at the Bank after the Conversion. The liquidation account is reduced annually to the extent that eligible account holders and supplemental eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases in such balances will not restore an eligible account holder's or supplemental eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Bank, each eligible account holder and supplemental eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The Bank may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements. 30 33 NOTES TO CONSOLIDATED STATEMENTS (continued) 14. EMPLOYEE BENEFITS 401(k) PROFIT SHARING PLAN The Bank's 401(k) profit sharing plan covers substantially all full-time employees of the Company and provides for pre-tax contributions by the employees with matching contributions at the discretion of the Board of Directors determined at the beginning of the calendar year. All amounts are fully vested. For calendar years 1999 and 1998, there were no contributions to the 401(k) profit sharing plan. For calendar year 1997, the Board approved a 1% of salary profit sharing contribution of all contributing participants. EMPLOYEE STOCK OWNERSHIP PLAN In connection with the Conversion, the Company established an ESOP for the benefit of eligible employees. The ESOP purchased 217,600 shares of common stock in the Conversion. During November 1996, the ESOP purchased an additional 77,550 shares of common stock. At September 30, 1999, 114,022 shares of the total number of shares held by the ESOP were committed to be released. The Company accounts for its ESOP in accordance with AICPA Statement of Position 93-6, "Employers Accounting for Employee Stock Ownership Plans," which requires the Company to recognize compensation expense equal to the fair value of the ESOP shares during the periods in which they become committed to be released. To the extent that the fair value of the ESOP shares released differs from the cost of such shares, this difference is charged or credited to equity as additional paid-in capital. Management expects the recorded amount of expense to fluctuate as continuing adjustments are made to reflect changes in the fair value of the ESOP shares. The Company's ESOP, which is internally leveraged, does not report the loan receivable from the ESOP as an asset and does not report the ESOP debt from the employer as a liability. The Company recorded compensation and employee benefit expense related to the ESOP of $348, $450 and $275 for the years ended September 30, 1999, 1998 and 1997, respectively. RECOGNITION AND RETENTION PLAN Under the 1995 Recognition and Retention Plan and Trust (the "RRP"), the Company had outstanding awards aggregating 21,216 shares as of September 30, 1999 to the Company's Board of Directors and executive officers subject to vesting and other provisions of the RRP. At September 30, 1999 and 1998, the deferred cost of unearned RRP shares totaled $117 and $258, respectively, and is recorded as a charge against stockholders' equity. Compensation expense will be recognized ratably over the five year vesting period for shares awarded. For the fiscal years ended September 30, 1999, 1998 and 1997, the Company recorded compensation and employee benefit expense of $141 for each fiscal year relating to the RRP. STOCK OPTION PLAN Under the 1995 Stock Option Plan (the "Plan"), Common Stock totaling 272,000 shares has been reserved for issuance for the Plan. During fiscal year 1999, shareholders approved the adoption of the 1998 Stock Option Plan ("1998 Option Plan")(collectively the "Plans") which reserves an additional 111,200 shares of common stock for issuance. An aggregate of 351,050 stock options have been granted to the Company's executive officers, nonemployee directors and other key employees, subject to vesting and other provisions of the Plans. During the year ended September 30, 1998 and 1997, 578 and 1,088 shares were exercised at a weighted average exercise price of $7.56 and $7.50, respectively. The following table summarizes transactions regarding stock option plans:
WEIGHTED AVERAGE EXERCISE EXERCISE NUMBER OF PRICE PRICE OPTION SHARES RANGE PER SHARE ------- ------------- ------------- Outstanding at October 1, 1996 236,368 $7.50 - 8.50 $ 7.53 Granted 15,720 12.38 - 14.25 13.52 Canceled (5,032) 7.50 - 8.50 7.64 Exercised (1,088) 7.50 - 7.50 7.50 ------- ------------- ------------- Outstanding at September 30, 1997 245,968 $7.50 - 14.25 $ 7.91 Granted 5,700 12.88 - 12.88 12.88 Exercised (578) 7.50 - 8.50 7.56 ------- ------------- ------------- Outstanding at September 30, 1998 251,090 $7.50 - 14.25 $ 8.02 Granted 99,960 12.13 - 12.13 12.13 ------- ------------- ------------- Outstanding at September 30, 1999 351,050 $7.50 - 14.25 $ 9.19 ======= ============= =============
A summary of the exercise price range at September 30, 1999 is as follows:
WEIGHTED WEIGHTED EXERCISE AVERAGE AVERAGE NUMBER OF PRICE REMAINING EXERCISE PRICE OPTION SHARES RANGE CONTRACTUAL LIFE PER SHARE - ------------- ----- ---------------- --------- 229,670 $ 7.50 - 8.50 7.03 $ 7.53 121,380 12.38 - 14.25 9.69 12.34 ------- -------------- ---- ------ 351,050 $ 7.50 - 14.25 7.29 $ 9.19 ======= ============== ==== ======
31 34 NOTES TO CONSOLIDATED STATEMENTS(continued) The Company applies APB Opinion No. 25 in accounting for stock options and, accordingly, no compensation expense has been recognized in the financial statements. Had the Company determined compensation expense based on the fair value at the grant date for its stock options under SFAS 123, the Company's net income and income per share would have been reduced to the pro forma amounts indicated below:
Year Ended September 30 ----------------------- 1999 1998 1997 ---- ---- ---- Net income: As reported $ 2,848 $ 2,781 $ 2,637 Pro forma 2,770 2,771 $ 2,598 Net income per common and common equivalent share: Earnings per common share -As report $ 1.32 $ 1.23 $ 1.13 -Pro forma 1.31 1.22 1.12 Weighted average fair value of options granted during the period $ 4.43 $ 5.15 $ 10.55
The binomial option-pricing model was used to determine the grant date fair value of options. Significant assumptions used to calculate the above fair value of the awards are as follows:
September 30 ------------ 1999 1998 1997 ---- ---- ---- Risk free interest rate of return 5.83% 4.69% 6.12% Expected option life (months) 60 60 60 Expected volatility 41% 45% 37% Expected Dividends 2.6% 1.9% 1.0%
OTHER The Company established an expense accrual in connection with the anticipated funding of a trust to be created to formalize the Company's deferred compensation arrangements with four former officers of the Company. A total of $308 and $377 was included in the Company's liabilities at September 30, 1999 and 1998, respectively. 15. COMMITMENTS AND CONTINGENCIES The Company has outstanding loan commitments, excluding undisbursed portion of loans in process and equity lines of credit, of approximately $6,405 and $11,759 as of September 30, 1999 and 1998, respectively, which are all expected to be funded within four months. Of these commitments outstanding, the breakdown between fixed and adjustable rate loans is as follows:
September 30 ------------ 1999 1998 ---- ---- Fixed-rate (ranging from 5.875% to 13.50%) $ 6,122 $ 6,859 Adjustable-rate 2,706 4,900 ------- ------- Total $ 8,828 $11,759 ======= =======
Generally, non-conforming loans are sold in the secondary market, depending on cash flow, interest rate, risk management and other considerations. There were approximately $2,733 and $6,029 in outstanding commitments to sell loans at September 30, 1999 and 1998, respectively. 16. RELATED PARTY TRANSACTIONS The Company retains the services of a law firm in which one of the Company's Directors is a member. In addition to providing general legal counsel to the Company, the firm also prepares mortgage documents and attends loan closings for which it is paid directly by the borrower. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures about the Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. 32 35 NOTES TO CONSOLIDATED STATEMENTS(continued)
September 30 1999 1998 ---- ---- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Assets: Cash and interest-earning deposits $ 20,015 $ 20,015 $ 24,126 $ 24,126 Investment securities 44,315 44,315 40,621 40,621 Loans 226,375 222,007 198,343 214,020 Loans held for sale 1,792 1,792 2,799 2,799 Mortgage-related securities 127,543 127,146 134,255 134,146 FHLB stock 6,157 6,157 5,079 5,079 Liabilities: Passbook deposits 40,324 40,324 37,988 37,988 NOW and MMDA deposits 60,741 60,741 52,522 52,522 Certificates of deposit 159,761 158,165 156,801 158,526 Advances from Federal Home Loan Bank 123,137 121,800 101,578 120,235 Securities sold under agreements to repurchase 19,300 19,226 19,300 19,884 Off balance sheet commitments 31,047 31.047 26,365 26,365
The fair value of cash and interest-earning deposits is their carrying value due to their short-term nature. The fair value of investments and mortgage-related securities is based on quoted market prices, dealer quotes, and prices obtained from independent pricing services. The fair value of loans is estimated, based on present values using approximate current entry-value interest rates, applicable to each category of such financial instruments. The fair value of FHLB stock approximates its carrying amount. The fair value of NOW deposits, MMDA deposits, and passbook deposits is the amount reported in the financial statements. The fair value of certificates of deposit and FHLB advances is based on a present value estimate, using rates currently offered for deposits of similar remaining maturity. No adjustment was made to the entry-value interest rates for changes in credit performing commercial loans, construction loans, and land loans for which there are no known credit concerns. Management believes that the risk factor embedded in the entry-value interest rates, along with the general reserves applicable to the performing commercial, construction, and land loan portfolios for which there are no known credit concerns, result in a fair valuation of such loans on an entry-value basis. The fair value of non-performing loans, with a recorded book value of approximately $3,180 and $3,704 (which are collateralized by real estate properties with property values in excess of carrying amounts) as of September 30, 1999 and 1998, respectively, was not estimated because it is not practicable to reasonably assess the credit adjustment that would be applied in the marketplace for such loans. The fair value estimates presented herein are based on pertinent information available to management as of September 30, 1999 and 1998. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. 18. CAPITAL SECURITIES On August 21, 1997, First Keystone Capital Trust I ("the Trust"), a trust formed under Delaware law, that is a subsidiary of the Company, issued $16.2 million of preferred securities at an interest rate of 9.7%, with a scheduled maturity of August 15, 2027. The Company owns all the common stock of the Trust. The proceeds from the issue were invested in Junior Subordinated Debentures (the "Debentures") issued by the Company. The Debentures are unsecured and rank subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. The Debentures represent the sole assets of the Trust. Interest on the Preferred Securities is cumulative and payable semi-annually in arrears. The Company has the option, subject to required regulatory approval, to prepay the securities beginning August 15, 2007. The securities are shown on the liability side of the balance sheet as "Company-obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debentures of the Company." The Company has, under the terms of the Debentures and the related Indenture as well as the other operative corporate documents, agreed to irrevocably and unconditionally guarantee the Trust's obligations under the Debentures. The Company contributed approximately $6.0 million of the net proceeds to the Bank to support the Bank's lending activities. The interest cost associated with this issue is treated as a non-interest expense on the consolidated statement of operations rather than interest expense. 33 36 NOTES TO CONSOLIDATED STATEMENTS (continued) 19. PARENT COMPANY ONLY FINANCIAL INFORMATION Condensed financial statements of First Keystone Financial, Inc. are as follows: CONDENSED STATEMENTS OF FINANCIAL CONDITION
September 30 ------------ 1999 1998 ---- ---- ASSETS Interest-bearing deposits $ 606 $ 222 Investment securities available for sale 7,400 7,043 Investment in subsidiaries 34,403 35,622 Other assets 793 884 ------- ------- Total assets $43,202 $43,771 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Junior subordinated debt $16,702 $16,702 Other borrowed money 2,232 100 Other liabilities 364 305 ------- ------- Total liabilities 19,298 17,107 Stockholders' equity 23,904 26,664 Total liabilities and stockholders' equity ------- ------- $43,202 $43,771 ======= =======
Condensed Statements of Income
Year Ended September 30 ------------ 1999 1998 1997 ---- ---- ---- Interest and dividend Income: Dividends from subsidiary $ 750 $ 1,000 Loan to Employee Stock Ownership Plan 127 $ 136 129 Interest and dividends on investments 549 502 Interest on deposits 9 43 48 ------ ------ ------ Total interest and dividend income 1,435 681 1,177 Interest on debt and other borrowed money 1,788 1,620 153 Other Income 130 5 Operating expenses 129 107 26 ------ ------ ------ Income (loss) before income taxes and equity in undistributed income of subsidiaries (352) (1,041) 998 Income tax expense (benefit) (374) (343) 10 ------ ------ ------ Income (loss) before equity in undistributed income of subsidiaries 22 (698) 988 Equity in undistributed income of subsidiaries 2,826 3,479 1,649 ----- ----- ----- Net income $ 2,848 $ 2,781 $ 2,637 ======= ======= =======
34 37 NOTES TO CONSOLIDATED STATEMENTS (continued) CONDENSED STATEMENTS OF CASH FLOWS
Year Ended September 30 ----------------------- 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income $ 2,848 $ 2,781 $ 2,637 Adjustments to reconcile net income to cash provided by operations: (Equity in) return of undistributed earnings of subsidiaries (2,826) (3,479) (1,649) Increase in investment of subsidiaries (48) Amortization of common stock acquired by stock benefit plans 462 563 411 Gain on sale of investment available for sale (130) (5) Amortization of premium 1 Decrease (increase) in other assets 91 (172) (677) Increase in other liabilities 302 47 184 --- ---- --- Net cash provided by (used in) operating activities 748 (313) 906 --- ---- --- Cash flows from investing activities: Purchases of investments available for sale (3,535) (8,891) Proceeds from sale of investments available for sale 2,630 2,005 ----- ----- Net cash used in investing activities (905) (6,886) --- ---- Cash flows from financing activities: Proceeds from issuance of debentures 16,200 Increase in other borrowed money 2,132 100 Capital contribution to subsidiary (6,000) Common stock acquired by stock benefit plans (775) Purchase of treasury stock (1,047) (2,036) (1,257) Dividends paid (544) (475) (250) -------- -------- ------- Net cash provided by (used in) financing activities 541 (2,411) 7,918 -------- -------- ------- Increase (decrease) in cash 384 (9,610) 8,824 Cash at beginning of period 222 9,832 1,008 -------- -------- -------- Cash at end of period $ 606 $ 222 $ 9,832 ======== ======== ========
35 38 NOTES TO CONSOLIDATED STATEMENTS(continued) 20. QUARTERLY FINANCIAL DATA (UNAUDITED) Unaudited quarterly financial data for the years ended September 30, 1999 and 1998 is as follows:
1999 1998 1st 2nd 3rd 4th 1st 2nd 3rd 4th QTR QTR QTR QTR QTR QTR QTR QTR --- --- --- --- --- --- --- --- Interest Income $7,165 $7,083 $7,050 $7,396 $6,762 $6,836 $6,776 $7,019 Interest Expense 4,270 4,162 4,146 4,378 3,827 3,834 3,852 4,112 ------ ------ ------ ------ ------ ------ ------ ------ Net Interest Income 2,895 2,921 2,904 3,018 2,935 3,002 2,924 2,907 Provision for Loan Losses 25 75 84 75 75 76 20 15 ------ ------ ------ ------ ------ ------ ------ ------ Net Interest Income after Provision for Loan Losses 2,870 2,846 2,820 2,943 2,860 2,926 2,904 2,892 Non-Interest Income 322 687 372 406 385 408 320 407 Non-Interest Expense 2,336 2,594 2,223 2,348 2,155 2,256 2,363 2,298 ------ ------ ------ ------ ------ ------ ------ ------ Income Before Income Taxes 856 939 969 1,001 1,090 1,078 861 1,001 Provision for Income Taxes 196 228 244 249 418 394 160 278 ------ ------ ------ ------ ------ ------ ------ ------ Net Income $ 660 $ 711 $ 725 $ 752 $ 672 $ 684 $ 701 $ 723 ====== ====== ====== ====== ====== ====== ====== ====== Per Share: Earnings Per Share - Basic $ .32 $ .35 $ .35 $ .37 $ .31 $ .32 $ .33 $ .35 Earnings Per Share - Diluted $ .31 $ .33 $ .34 $ .35 $ .29 $ .30 $ .31 $ .33 Common Stock Price Range of the Company High $16.00 $14.63 $14.25 $14.00 $18.75 $19.00 $22.25 $17.75 Low $12.25 $12.00 $12.00 $12.13 $14.63 $16.38 $17.25 $11.63
Earnings per share is computed independently for each period presented Consequently, the sum of the quarters may not equal the total earnings per share for the year. 36 39 First Keystone Financial, Inc. is a unitary savings and loan holding company conducting business through its wholly-owned subsidiary, First Keystone Federal Savings Bank. The savings bank is a federally chartered SAIF-insured savings institution operating through six full-service offices located in Delaware and Chester Counties, Pennsylvania. The Company's headquarters is located at 22 West State Street, Media, PA 19063. DIRECTORS Donald A. Purdy, Esquire Chairman of the Board William K. Betts; retired Former Senior Vice President of Human Resources First Keystone Federal Savings Bank Edward Calderoni President of Century-21 Alliance Silvio F. D'Ignazio Owner of the Towne House Restaurant Olive J. Faulkner; retired Former Vice President and Corporate Secretary First Keystone Federal Savings Bank Donald S. Guthrie, Esquire President and Chief Executive Officer Edmund Jones, Esquire Chairman Emeritus Member Jones, Strohm, Crain & Guthrie, P.C. Thomas M. Kelly Executive Vice President and Chief Financial Officer Willard F. Letts President and Principal Stockholder Eastern Flame Hardening Company Walter J. Lewicki; retired Former associate of Looker, Lees and Melcher, Inc. Joan G. Taylor; retired Former Executive Director of the Young Women's Christian Association (YWCA) SENIOR OFFICERS Donald S. Guthrie President and Chief Executive Officer Thomas M. Kelly Executive Vice President and Chief Financial Officer Stephen J. Henderson Senior Vice President/Lending Elizabeth M. Mulcahy Senior Vice President/Human Resources Carol Walsh Corporate Secretary EXECUTIVE OFFICES 22 West State Street Media, PA 19063 (610) 565-6210 TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 COUNSEL Lawrence G. Strohm, Jr., Esquire Jones, Strohm, Crain & Guthrie, P.C 10 Beatty Road Media, PA 19063 SPECIAL COUNSEL Elias, Matz, Tiernan and Herrick L.L.P. Suite 1200 734 15th Street, N.W. Washington, DC 20005 INDEPENDENT AUDITORS Deloitte & Touche LLP Twenty-Fourth Floor 1700 Market Street Philadelphia, PA 19103-3984 INVESTOR INFORMATION Thomas M. Kelly Executive Vice President and Chief Financial Officer (610) 565-6210 SHAREHOLDER INFORMATION Carol Walsh Corporate Secretary (610) 565-6210 STOCK INFORMATION First Keystone Financial, Inc. is traded on the Nasdaq National Market under the symbol of "FKFS." There were approximately 435 shareholders of record as of October 1, 1999, not including the number of persons or entities whose stock is held in nominee or street name through various brokerage firms or banks. The Annual Meeting of Shareholders is scheduled for Wednesday, January 26, 2000, at 2:00 p.m. to be held at the Towne House Restaurant, 117 Veterans Square, Media, Pennsylvania. [FIRST KEYSTONE FINANCIAL, Inc. LOGO] 40 [FIRST KEYSTONE FINANCIAL, Inc. LOGO] FIRST KEYSTONE FINANCIAL, INC. 22 West State Street - Media, Pennsylvania 19063 - 610.565.6210 http://www.firstkeystone.com EX-23 13 CONSENT OF DELOITTE & TOUCHE LLP. 1 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements of First Keystone Financial, Inc. on Form S-8 (Registration Nos. 333-09565 and 33-97562) of our report dated November 5, 1999, appearing in this Annual Report on Form 10-K of First Keystone Financial, Inc. for the year ended September 30, 1999. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania December 28, 1999 EX-27 14 FINANCIAL DATA SCHEDULE
9 1,000 YEAR SEP-30-1999 OCT-01-1998 SEP-30-1999 3,010 17,005 0 0 157,361 14,497 14,100 228,167 1,928 450,126 260,826 47,350 23,409 95,087 0 0 6,269 17,635 450,126 17,366 10,914 414 28,694 10,265 16,956 11,738 259 291 9,501 3,765 2,848 0 0 2,848 1.40 1.32 7.15 3,179 1 24 0 1,738 72 3 1,928 1,114 0 814
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