<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
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<PAGE> 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).
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------------
1999 1998 1997 1996
------------------ ------------------ ------------------ ------------------
Amount % Amount % Amount % Amount %
-------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30,
------------------
1995
------------------
Amount %
-------- -------
(Dollars in thousands)
<S> <C> <C>
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
========
</TABLE>
- -----------------------------
(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.
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<PAGE> 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.
<TABLE>
<CAPTION>
Real Estate Loans
------------------------------------------------------
Multi-family Consumer and
and Construction Commercial
Single-family Commercial and Land Total Business Loans Total
------------- ---------- -------- ----- -------------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
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
======== ======= ========
</TABLE>
- -----------------------------
(1) Does not include adjustments relating to loans in process, allowances for
loan losses and deferred fee income.
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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.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
- ------------------------------
(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.
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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
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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
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<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
September 30,
----------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
==== === ==== === ==== === ==== ===
</TABLE>
13
<PAGE> 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.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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%
====== ====== ====== ====== ======
</TABLE>
- -----------------------------
(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
<PAGE> 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
<PAGE> 17
The following table summarizes changes in the allowance for loan losses
and other selected statistics for the periods presented.
<TABLE>
<CAPTION>
Year Ending September 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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%
======= ======= ======= ======= =======
</TABLE>
- ----------
(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
<PAGE> 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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
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%
====== ====== ====== ======
</TABLE>
17
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
September 30,
--------------------------------------
1999 1998 1997
-------- -------- --------
Held to maturity:
(In thousands)
Mortgage-backed securities:
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
- --------
(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
<PAGE> 22
The following table sets forth the purchases, sales and principal
repayments of the Bank's mortgage-related securities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
- --------------------------
(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
<PAGE> 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.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- --------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
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
========== ========== ========== ========== ========== ==========
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
Amount Percent Amount Percent Amount Percent
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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%
========== ========== ========== ========== ========== ==========
</TABLE>
The following table sets forth the net savings flows of the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
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.
<TABLE>
<CAPTION>
Amounts in
Thousands
--------------------
<S> <C>
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
=======
</TABLE>
23
<PAGE> 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.
<TABLE>
<CAPTION>
Amounts at September 30, 1999
September 30, Maturing Within
------------------------ ---------------------------------------------------------------
Certificates of
Deposit 1999 1998 One Year Two Years Three Years Thereafter
------- ---- ---- -------- --------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
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
======== ======== ======== ======== ======== ========
</TABLE>
The following table presents the average balance of each deposit type and the
average rate paid on each deposit type for the periods indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------------ ----------------------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------------ -------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
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%
======== ==== ======== ==== ======== ====
</TABLE>
24
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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
<PAGE> 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
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<PAGE> 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
<PAGE> 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.
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<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
Net Book Value Amount of
Description/Address Leased/Owned of Property Deposits
- --------------------------------------- ------------- ------------------ ------------------------
(In thousands)
<S> <C> <C>
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
====== ========
</TABLE>
- ------------------
(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
<PAGE> 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
<PAGE> 41
<TABLE>
<CAPTION>
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)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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(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.
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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.
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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
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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.
<PAGE> 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
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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,
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<PAGE> 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
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<PAGE> 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
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(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;
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(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
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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:
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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
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contained in this Agreement shall affect the agreement of even date being
entered into between the Savings Bank and the Executive.
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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
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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.
<PAGE> 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
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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
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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.
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(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.
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<PAGE> 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.
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<PAGE> 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
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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
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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.
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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.
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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
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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
<PAGE> 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;
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(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
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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
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<PAGE> 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
<PAGE> 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
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<PAGE> 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.
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<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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;
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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
<PAGE> 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
<PAGE> 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.
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<PAGE> 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
<PAGE> 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
<PAGE> 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
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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
<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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.
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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
<PAGE> 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
<PAGE> 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
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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
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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
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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
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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
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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:
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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
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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,
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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.
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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
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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
<PAGE> 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
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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
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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.
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(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.
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<PAGE> 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.
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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.
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<PAGE> 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.
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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.
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(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.
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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
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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.
<PAGE> 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
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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
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 1
EXHIBIT 13
FIRST
KEYSTONE
FINANCIAL, INC.
[COIN]
"NOTHING HAPPENS UNLESS FIRST A DREAM"
-CARL SANDBURG
ANNUAL REPORT
1999
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= =========== =========
</TABLE>
(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
<PAGE> 8
First Keystone Financial, Inc. and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
====== ====== ====== ======= ======
</TABLE>
(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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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%
========= ========= ========= ========= =========
</TABLE>
(1) Balances have been reduced for non-accruing loans, which amounted $3.2
million at September 30, 1999.
8
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C>
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%
====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997
-------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C>
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%
======
</TABLE>
(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
<PAGE> 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.
<TABLE>
<CAPTION>
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)
---- ------ ---------- ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
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
======= ====== ======= ====== ====== ======
</TABLE>
(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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 20
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30
1999 1998
---- ----
<S> <C> <C>
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
========= =========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 21
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 22
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
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
----- ------- ----- ----- ------------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
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
====== ======== ======= ======= ======== ======== ========
</TABLE>
<TABLE>
<S> <C> <C> <C>
(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
======= ====== =====
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 23
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Year Ended September 30
------------------------------------------
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
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
--------- --------- ---------
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
------------------------------------------------------
Available for Sale:
<S> <C> <C> <C> <C>
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
======= ==== ====== ========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
------------------------------------------------------
Available for Sale:
<S> <C> <C> <C> <C>
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
======= ===== ===== =======
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------------------------------------------------------
Available for Sale:
<S> <C> <C> <C> <C>
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
======== ======== ======= =========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
-------------------------------------------------------
Available for Sale:
<S> <C> <C> <C> <C>
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
======== ======== ==== =========
</TABLE>
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
<PAGE> 28
NOTES TO CONSOLIDATED STATEMENTS (continued)
5. ACCRUED INTEREST RECEIVABLE
The following is a summary of accrued interest receivable by category:
<TABLE>
<CAPTION>
September 30
------------------------
1999 1998
------ ------
<S> <C> <C>
Loans $1,602 $1,542
Mortgage-related securities 755 823
Investment securities 739 752
------ ------
Total $3,096 $3,117
====== ======
</TABLE>
6. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
September 30
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
FIXED-RATE
- ------------------------------------------------------
TERM TO MATURITY BOOK VALUE
- ------------------------------------------------------
<S> <C>
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
=========
</TABLE>
<TABLE>
<CAPTION>
ADJUSTABLE-RATE
- ------------------------------------------------------
TERM TO RATE ADJUSTMENT BOOK VALUE
- ------------------------------------------------------
<S> <C>
1 month to 1 year $ 73,723
1 year to 3 years 12,329
3 years to 5 years 3,127
---------
Total $ 89,179
=========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
-----------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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
<PAGE> 29
NOTES TO CONSOLIDATED STATEMENTS (continued)
7. REAL ESTATE OWNED
Real estate owned is comprised of:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------
1999 1998
------ ------
<S> <C> <C>
Real estate acquired
in settlement of loans $ 297 $ 196
Real estate acquired
and in development 1,467
------ ------
Total $ 297 $1,663
====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------
1999 1998
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
September 30:
<S> <C>
2000 $ 181
2001 125
2002 117
2003 116
2004 120
Thereafter 563
------
Total minimum future rental payments $1,222
======
</TABLE>
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:
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------------------------------------------
1999 1998
------------------------ -------------------------
AMOUNT PERCENT Amount Percent
------- ----- -------- -----
<S> <C> <C> <C> <C>
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%
======= ===== ======== =====
</TABLE>
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:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999
--------
<S> <C>
Within one year $122,597
One to two years 23,036
Two to three years 4,332
Thereafter 9,796
--------
Total $159,761
========
</TABLE>
A summary of interest expense on deposits is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
---------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
27
<PAGE> 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:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------------------------------------------
1999 1998
------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
-------- --- -------- ---
<S> <C> <C> <C> <C>
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%
======== === ======== ===
</TABLE>
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:
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------
1999 1998
------- -------
<S> <C> <C>
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
</TABLE>
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
<PAGE> 31
NOTES TO CONSOLIDATED STATEMENTS (continued)
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax accounts, calculated at 34%, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------
1999 1998
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
The Company's effective tax rate is less than the statutory federal income
tax rate for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
------------------------------------------------------------------------------
1999 1998 1997
PERCENTAGE PERCENTAGE PERCENTAGE
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
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%
======= ======= ======= ======= ======= =======
</TABLE>
29
<PAGE> 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.
<TABLE>
<CAPTION>
REQUIRED FOR WELL CAPITALIZED
CAPITAL ADEQUACY UNDER PROMPT
ACTUAL PURPOSES CORRECTIVE ACTION
------------------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
NUMBER OF PRICE PRICE
OPTION SHARES RANGE PER SHARE
------- ------------- -------------
<S> <C> <C> <C>
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
======= ============= =============
</TABLE>
A summary of the exercise price range at September 30, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
EXERCISE AVERAGE AVERAGE
NUMBER OF PRICE REMAINING EXERCISE PRICE
OPTION SHARES RANGE CONTRACTUAL LIFE PER SHARE
- ------------- ----- ---------------- ---------
<S> <C> <C> <C>
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
======= ============== ==== ======
</TABLE>
31
<PAGE> 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:
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
September 30
------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
September 30
------------
1999 1998
---- ----
<S> <C> <C>
Fixed-rate (ranging
from 5.875% to 13.50%) $ 6,122 $ 6,859
Adjustable-rate 2,706 4,900
------- -------
Total $ 8,828 $11,759
======= =======
</TABLE>
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
<PAGE> 35
NOTES TO CONSOLIDATED STATEMENTS(continued)
<TABLE>
<CAPTION>
September 30
1999 1998
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
September 30
------------
1999 1998
---- ----
<S> <C> <C>
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
======= =======
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
Year Ended
September 30
------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
34
<PAGE> 37
NOTES TO CONSOLIDATED STATEMENTS (continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
35
<PAGE> 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:
<TABLE>
<CAPTION>
1999 1998
1st 2nd 3rd 4th 1st 2nd 3rd 4th
QTR QTR QTR QTR QTR QTR QTR QTR
--- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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]
<PAGE> 40
[FIRST KEYSTONE FINANCIAL, Inc. LOGO]
FIRST KEYSTONE FINANCIAL, INC.
22 West State Street - Media, Pennsylvania 19063 - 610.565.6210
http://www.firstkeystone.com
<PAGE> 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
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