<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-25328
FIRST KEYSTONE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code: (610) 565-6210
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
Number of shares of Common Stock outstanding as of February 3, 1999: 2,269,216
Transitional Small Business Disclosure Format Yes / / No /X/
<PAGE> 2
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1998 (Unaudited) and September 30, 1998 .......... 1
Consolidated Statements of Income for the Three
Months Ended December 31, 1998 and 1997 (Unaudited)............ 2
Consolidated Statement of Changes in Stockholders' Equity for the Three
Months Ended December 31, 1998 (Unaudited)..................... 3
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1998 and 1997 (Unaudited)................... 4
Notes to Consolidated Financial Statements (Unaudited)......... 5
Item 2. Managements's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................. 15
Item 2. Changes in Securities and Use of Proceeds..................... 15
Item 3. Defaults Upon Senior Securities............................... 15
Item 4. Submission of Matters to a Vote of Security Holders.......... 15
Item 5. Other Information............................................. 15
Item 6. Exhibits and Reports on Form 8-K.............................. 15
SIGNATURES.................................................................. 16
</TABLE>
i
<PAGE> 3
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
<TABLE>
<CAPTION>
December 31 September 30
ASSETS 1998 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 2,102 $ 2,457
Interest-bearing deposits with depository institutions 14,586 21,669
--------- ---------
Total cash and cash equivalents 16,688 24,126
Investment securities available for sale 45,071 40,621
Mortgage-related securities available for sale 110,820 115,486
Loans held for sale 4,437 2,799
Mortgage-related securities held to maturity - at amortized cost (approximate
fair value of $17,140 at December 31, 1998
and $18,700 at September 30, 1998) 17,364 18,769
Loans receivable - net 208,916 198,343
Accrued interest receivable 2,951 3,117
Real estate owned 2,433 1,663
Federal Home Loan Bank stock - at cost 5,294 5,079
Office properties and equipment - net 2,623 2,612
Deferred income taxes 613 283
Prepaid expenses and other assets 9,865 2,965
--------- ---------
TOTAL ASSETS $ 427,075 $ 415,863
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 254,495 $ 247,311
Advances from Federal Home Loan Bank 104,350 101,578
Securities sold under agreements to repurchase 19,300 19,300
Accrued interest payable 1,648 1,683
Advances from borrowers for taxes and insurance 2,158 1,036
Accounts payable and accrued expenses 3,088 2,091
--------- ---------
Total liabilities 385,039 372,999
--------- ---------
Guaranteed preferred beneficial interest in subordinated debt 16,200 16,200
Stockholders' Equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized;
none issued
Common stock, $.01 par value, 20,000,000 shares authorized; issued
and outstanding: 2,269,216 shares at December 31, 1998
and 2,329,216 shares at September 30, 1998 14 14
Additional paid-in capital 13,259 13,204
Common stock acquired by stock benefit plans (1,726) (1,789)
Treasury stock at cost; 450,784 shares (5,406) (4,575)
Unrealized gain on available for sale securities - net of tax 848 1,487
Retained earnings - partially restricted 18,847 18,323
--------- ---------
Total stockholders' equity 25,836 26,664
--------- ---------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY $427,075 $ 415,863
========= =========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
December 31
-------------------
1998 1997
------ ------
<S> <C> <C>
INTEREST INCOME:
Interest on:
Loans $4,224 $4,086
Mortgage-related securities 2,112 2,066
Investments 733 446
Interest-bearing deposits 96 164
------ ------
Total interest income 7,165 6,762
------ ------
INTEREST EXPENSE:
Interest on:
Deposits 2,614 2,433
Federal Home Loan Bank advances 1,359 1,019
Other borrowings 297 375
------ ------
Total interest expense 4,270 3,827
------ ------
NET INTEREST INCOME 2,895 2,935
PROVISION FOR LOAN LOSSES 25 75
------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,870 2,860
------ ------
OTHER INCOME (LOSS):
Service charges and other fees 227 242
Net gain on sale of loans 101 128
Real estate operations (12) (3)
Other income 6 18
------ ------
Total other income 322 385
------ ------
OPERATING EXPENSES:
Salaries and employee benefits 866 864
Occupancy and equipment expenses 255 236
Professional fees 153 152
Federal deposit insurance premium 35 36
Bank service charges 103 102
Data processing 97 81
Advertising 77 82
Minority interest in expense of subsidiaries 393 393
Other 357 209
------ ------
Total operating expenses 2,336 2,155
------ ------
INCOME BEFORE INCOME TAX EXPENSE 856 1,090
INCOME TAX EXPENSE 196 418
------ ------
NET INCOME $ 660 $ 672
====== ======
BASIC EARNINGS PER COMMON SHARE $ 0.32 $ 0.31
====== ======
DILUTED EARNINGS PER COMMON SHARE $ 0.31 $ 0.29
====== ======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Common Unrealized
stock gain (loss)
Additional acquired by on securities
Common paid-in stock benefit Treasury available for sale
stock capital plans stock (net of tax)
-------- ---------- ------------- -------- ------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1998 $ 14 $ 13,204 $(1,789) $(4,575) $1,487
ESOP stock committed
to be released 28
Excess of fair value
above cost of ESOP
stock committed
to be released 55
RRP amortization 35
Dividends - $.06 per share
Net unrealized loss on
securities available for
sale, net of tax (639)
Purchase of treasury stock (831)
Net income
----- -------- ------- ------- ------
BALANCE AT DECEMBER 31, 1998 $ 14 $ 13,259 $(1,726) $(5,406) $ 848
===== ======== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
Total
Retained stockholders'
earnings equity
--------- -------------
<S> <C> <C>
BALANCE AT SEPTEMBER 30, 1998 $18,323 $26,664
ESOP stock committed
to be released 28
Excess of fair value
above cost of ESOP
stock committed
to be released 55
RRP amortization 35
Dividends - $.06 per share (136) (136)
Net unrealized loss on
securities available for
sale, net of tax (639)
Purchase of treasury stock (831)
Net income 660 660
------- -------
BALANCE AT DECEMBER 31, 1998 $18,847 $25,836
======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
December 31
1998 1997
-------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 660 $ 672
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization 109 108
Amortization of premiums and discounts 82 (91)
Gain on sales of loans (101) (128)
Provision for loan losses 25 75
Provision for real estate owned losses 50
Amortization of stock benefit plans 118 137
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (15,725) (19,470)
Loans sold in the secondary market 14,087 17,882
Deferred income taxes 1 (17)
Accrued interest receivable 166 (191)
Prepaid expenses and other assets (6,900) (74)
Accrued interest payable (35) (263)
Accounts payable and accrued expenses 997 792
-------- --------
Net cash used in operating activities (6,466) (568)
-------- --------
INVESTING ACTIVITIES:
Loans originated (30,883) (12,263)
Purchases of:
Mortgage-related securities available for sale (10,016)
Investment securities available for sale (5,000) (10,352)
Mortgage-related securities held to maturity (2,687)
Investment securities held to maturity (2,000)
Purchase of FHLB stock (215) (39)
Proceeds from sales of real estate owned 624 611
Principal collected on loans 19,370 10,725
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 75 1,070
Mortgage-related securities available for sale 13,935 4,278
Investment securities held to maturity 3,000
Mortgage-related securities held to maturity 1,387 474
Purchase of property and equipment (120) (201)
Net expenditures on real estate acquired through foreclosure and in development (240) (610)
-------- --------
Net cash used in investing activities (11,083) (7,994)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 7,184 2,437
Net proceeds from FHLB advances 2,772 773
Net increase in advances from borrowers for taxes and insurance 1,122 1,060
Purchase of treasury stock (831) (715)
Cash dividend (136) (121)
-------- --------
Net cash provided by financing activities 10,111 3,434
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (7,438) (5,128)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,126 21,561
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,688 $ 16,433
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 4,305 $ 4,090
Transfers of loans receivable into real estate owned 1,212 143
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 (UNAUDITED) AND SEPTEMBER 30, 1998 AND
(UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(dollars in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
However, such information reflects all adjustments (consisting solely of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the unaudited interim
periods.
The results of operations of the three month period ended December 31,
1998 are not necessarily indicative of the results to be expected for
the fiscal year ending September 30, 1999. The consolidated financial
statements presented herein should be read in conjunction with the
audited consolidated financial statements and related notes thereto
included in the Company's Annual Report to Stockholders for the year
ended September 30, 1998.
Certain information in this quarterly statement may constitute
forward-looking information that involves risks and uncertainties that
could cause actual results to differ materially from those estimated.
Persons are cautioned that such forward-looking statements are not
guarantees of future performance and are subject to various factors
which could cause actual results to differ materially from those
estimated. These factors include changes in general economic and market
conditions and the development of an interest rate environment that
adversely affects the interest rate spread or other income from the
Company's investments and operations.
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities,
by contractual maturities, are as follows:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury securities and securities
of U.S. Government agencies:
5 to 10 years $12,000 $ 52 $12,052
Over 10 years 3,769 61 3,830
Municipal obligations 18,919 302 $ 2 19,219
Mutual funds 2,000 14 1,986
Preferred stocks 5,500 227 5,727
Other equity investments 2,390 133 2,257
------- ---- ------- -------
Total $44,578 $642 $ 149 $45,071
======= ==== ======= =======
</TABLE>
5
<PAGE> 8
<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>
3. MORTGAGE-RELATED SECURITIES
Mortgage-related securities available for sale and
mortgage-related securities held to maturity are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale:
FHLMC pass-through certificates $ 14,673 $ 204 $ 14,877
FNMA pass-through certificates 28,629 280 $ 63 28,846
GNMA pass-through certificates 38,589 259 14 38,834
Collateralized mortgage obligations 28,137 276 150 28,263
-------- ----- ---- --------
Total $110,028 $1,019 $227 $110,820
======== ====== ==== ========
Held to Maturity:
FHLMC pass-through certificates $ 4,188 $20 $ 8 $ 4,200
FNMA pass-through certificates 8,207 13 110 8,110
Collateralized mortgage obligations 4,969 139 4,830
------- ---- ---- -------
Total $17,364 $33 $257 $17,140
======= === ==== =======
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale:
FHLMC pass-through certificates $ 10,968 $ 197 $ 11,165
FNMA pass-through certificates 25,600 503 26,103
GNMA pass-through certificates 41,379 562 41,941
Collateralized mortgage obligations 36,022 327 $72 36,277
-------- ------ --- --------
Total $113,969 $1,589 $72 $115,486
======== ====== === ========
Held to Maturity:
FHLMC pass-through certificates $ 4,698 $33 $ 1 $ 4,730
FNMA pass-through certificates 8,747 46 103 8,690
Collateralized mortgage obligations 5,324 1 45 5,280
------ --- ---- ------
Total $18,769 $80 $149 $18,700
======= === ==== =======
</TABLE>
The collateralized mortgage obligations contain both fixed and
adjustable classes of bonds which are repaid in accordance with a
predetermined priority. The underlying collateral of the bonds primarily
consist of loans which are insured by FHLMC, FNMA, or the GNMA.
The mortgage-related securities designated as available for sale, by
definition, may be sold in response to changes in interest rates and
cash flows or for restructuring purposes.
5. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
December 31 September 30
1998 1998
----------- ------------
<S> <C> <C>
Real estate loans:
Single-family $157,052 $148,088
Construction and land 16,018 15,858
Multi-family and commercial 23,866 20,563
Consumer loans:
Home equity and lines of credit 19,287 19,609
Deposit 159 181
Education 489 449
Other 1,383 1,429
Commercial loans 1,370 1,390
--------- ---------
Total loans 219,624 207,567
Loans in process (7,205) (5,781)
Allowance for loan losses (1,755) (1,738)
Deferred loan fees (1,748) (1,705)
--------- ---------
Loans receivable - net $208,916 $198,343
======== ========
</TABLE>
7
<PAGE> 10
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Ended
----------------------
December 31
1998 1997
------- -------
<S> <C> <C>
Balance beginning of period $ 1,738 $ 1,628
Provisions charged to income 25 75
Charge-offs (8) (10)
------- -------
Total $ 1,755 $ 1,693
======= =======
</TABLE>
At December 31, 1998 and September 30, 1998, non-performing loans
(which include loans in excess of 90 days delinquent) amounted to
approximately $2,554 and $3,704, respectively.
6. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
December 31 September 30
1998 1998
----------------------- -----------------------
Amount Percent Amount Percent
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 7,745 3.0% $ 8,254 3.3%
NOW accounts 35,073 13.8 28,181 11.4
Passbook accounts 38,404 15.1 37,988 15.4
Money market demand accounts 17,281 6.8 16,087 6.5
Certificate accounts 155,992 61.3 156,801 63.4
-------- -------- -------- --------
Total $254,495 100.0% $247,311 100.0%
======== ======== ======== ========
</TABLE>
7. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", effective October 1, 1998. The
statement requires disclosure of amounts from transactions and other
events which are currently excluded from the statement of operations and
are recorded directly to stockholders' equity. These transactions and
other events represent foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in
debt and equity securities. Only the last of these items, however, is
currently applicable to the Company. Total comprehensive income for the
three month periods ended December 31, 1998 and 1997 amounted to $21,000
and $1.7 million, respectively.
8
<PAGE> 11
8. EARNINGS PER SHARE
Basic net income per share is based upon the weighted average number of
common shares outstanding, while diluted net income per share is based
upon the weighted average number of common share outstanding and common
share equivalents that would arise from the exercise of dilutive
securities.
The calculated basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Numerator $ 660 $ 672
Denominators:
Basic shares outstanding 2,034,945 2,165,439
Effect of dilutive securities 113,294 130,437
---------- ----------
Dilutive shares outstanding 2,148,239 2,295,876
---------- ----------
EPS:
Basic $ 0.32 $ 0.31
Diluted $ 0.31 $ 0.29
</TABLE>
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 (UNAUDITED) AND SEPTEMBER
30, 1998
Total assets of the Company increased $11.2 million or 2.7% from $415.9 million
at September 30, 1998 to $427.1 million at December 31, 1998 primarily due to a
$10.6 million increase in loans receivable - net, and $4.5 million increase in
investment securities available for sale and a $6.9 million increase in prepaid
expenses and other assets partially offset by a $7.4 million decrease in cash
and cash equivalents. The increases in investment securities and loans were
funded primarily through interest-bearing deposits and, to a lesser extent,
deposits. The loan growth was concentrated primarily in single-family and
commercial real estate loans. Increase in prepaid expenses and other assets was
due to the purchase of $7.0 million of bank owned life insurance policies in
order to fund ongoing costs of employee benefit and retirement plans.
Deposits increased $7.2 million or 2.9% from $247.3 million at September 30,
1998 to $254.5 million at December 31, 1998. The increase resulted primarily
from the growth in core deposits.
Stockholders' equity decreased $828,000 due to the combined effects of the
repurchase of shares of common stock, dividends paid and a decrease in the
market valuation, net of taxes, of securities available for sale partially
offset by the Company's net income for the quarter.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
AND 1997
Net Income.
Net income was $660,000 for the three months ended December 31, 1998 as compared
to $672,000 for the same period in 1997. The $12,000 or 1.8% decrease in net
income for the three months ended December 31, 1998 was due to a $63,000 or
16.4% decrease in other income and a $181,000 or 8.4% increase in operating
expenses partially offset by a $222,000 or 53.1% decrease in income taxes.
Net Interest Income.
Net interest income decreased $40,000 or 1.4% to $2.9 million for the three
months ended December 31, 1998 as compared to the same period in 1997. The
decrease was due to a $443,000 or 11.6% increase in interest expense which was
offset, in part, by a $403,000 or 6.0% increase in interest income for the 1998
period. The interest rate spread and net interest margin, on a fully tax
equivalent basis, were 2.56% and 2.96%, respectively, for the three months ended
December 31, 1998 as compared to 2.82% and 3.29%, respectively, for the same
period in 1997. The $403,000 increase in interest income was primarily due to a
$46.7 million or 13.0% increase in average interest-earning assets offset by a
38 basis point decrease in the yield on such assets. The $443,000 increase in
interest expense was primarily due to an increase of $46.9 million or 14.5% in
the average balance of interest-bearing liabilities combined with a 12 basis
point decrease in the weighted average rate paid thereon for the three months
ended December 31, 1998, as compared to the same period in 1997. The decrease in
the net interest rate spread was due to the general decline in market rates of
interest reducing the yields on interest-earning assets at a more rapid pace
than the reduction of rates paid on interest-bearing liabilities.
10
<PAGE> 13
Provision for Loan Losses.
For the three months ended December 31, 1998, the provision for loan losses
amounted to $25,000 as compared to $75,000 for the same period in 1997. At
December 31, 1998, non-performing assets totalled $5.3 million or 1.2% of total
assets, a decrease of $190,000 from September 30, 1998. The Company's coverage
ratio, which is the loan loss reserve to non-performing assets, was 33.9% and
32.4% at December 31, 1998 and September 30, 1998, respectively.
Other Income.
Other income decreased $63,000 or 16.4% to $322,000 for the three months ended
December 31, 1998 as compared to the same period in 1997. The decrease was
primarily a result of a $27,000 decrease in the net gain on sales of loans
partially offset by a small decrease in service charges and other fees of
$12,000. The decrease in gain on sales of loans was due to decreased
originations and sales of loans with servicing released to credit impaired
borrowers.
Operating Expenses.
Operating expenses increased $181,000 or 8.4% during the three months ended
December 31, 1998 as compared to the same period in 1997. Increases of $19,000,
$16,000, and $148,000 were incurred in the occupancy and equipment, data
processing and other expenses, respectively.
Income Tax Expense.
Income tax expense decreased $222,000 to $196,000 during the three months ended
December 31, 1998 as compared to the same period in 1997. The decrease was
primarily a result of an decrease in income before income taxes and the
implementation of various tax planning strategies including investment in
tax-exempt securities.
Year 2000 Compliance
The Year 2000 Issue is the result of computer programs which were written using
two digits rather than four to define the applicable year. As a result, such
programs may recognize a date using "00" as the year 1900 instead of the year
2000 which could result in system failures or miscalculations.
In order to be ready for the year 2000, the Company has developed a Year 2000
Policy (the "Policy") which was presented to the Board of Directors during June
1997. The Policy was developed using the guidelines outlined in the Federal
Financial Institutions Examination's Council's "The Effect of Year 2000 on
Computer Systems". The Board of Directors and its Executive Committee assigned
responsibility for the Policy to the Year 2000 Committee, which reports to the
Board of Directors on a monthly basis. The Policy recognizes that the Company's
operating, processing and accounting operations are computer reliant and could
be affected by the Year 2000 Issue. The Company is primarily reliant on third
party vendors for its computer output and processing, as well as other
significant functions and services (i.e., securities safekeeping services,
securities pricing information, etc.). The Year 2000 Committee is continually
working with these third party vendors to assess their year 2000 readiness.
Based upon the initial assessment, management presently believes that with
planned modifications to existing software and hardware and planned conversions
to new software and hardware, the Company's third party vendors are taking the
appropriate steps to ensure critical systems will
11
<PAGE> 14
function properly. The Company has identified 73 priority 1 (directly effects
customers) and 66 priority 2 (effects employee's ability to service customers)
third party vendors. Of such priority 1 and priority 2 vendors, as of December
31, 1998, the Company has been informed that 59% are already Year 2000
compliant. The Company's data service processing vendor, which is its major
software provider, has informed the Company that it expects to complete testing
of its updated systems (in which testing the Company has been involved) by the
end of April 1999. The initial phase of testing of the data service processor's
updated system was successfully completed in January 1999. Substantially all of
the Company's vendors of its priority 1 and priority 2 applications (discussed
below) have provided assurances, written or oral, that they are working to make
their products and services Year 2000 compliant. The majority of such
modifications and conversions and related testing of such systems was completed
by December 31, 1998 and the Company expects any remaining ones to be completed
by March 31, 1999. While the Company has received assurances from such vendors
as to compliance, such assurances are not guarantees and may not be enforceable.
The Company's existing older contracts with such vendors do not include Year
2000 certifications or warranties. Thus, in the event such vendor's products
and/or services are not Year 2000 compliant, the Company's recourse in the event
of such failure may be limited. If the required modifications and conversions
are not made, or are not completed on a timely basis, the Year 2000 Issue could
have a material impact on the operations of the Company. There can be no
assurance that potential system interruptions or unanticipated additional
expense incurred to obtain Year 2000 compliance would 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
February 28, 1998, the Company had contacted all of its commercial credit
customers (19 borrowers with loans outstanding aggregating $10.0 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 substantially all cases the credit extended to such
borrowers is collateralized by real estate which inherently minimizes the
Company's exposure in the event that such borrowers do experience problems
becoming Year 2000 compliant. The Company has completed its own company-wide
Year 2000 contingency plan. Individual contingency plans concerning specific
software and hardware issues and operational plans for continuing operations
were completed by December 1998. The Year 2000 Committee has reviewed
substantially all mission critical test plans and contingency plans to ensure
the reasonableness of the plans. Testing began on mission critical systems in
August 1998 with a majority of such systems completed by December 1998 with the
remainder by March 31, 1999. The Company has developed contingency plans for
substantially all priority 1 and priority 2 applications which address
operational policies and procedures in the event of data processing, electric
power supply and/or telephone service failures associated with the Year 2000.
Such contingency plans provide documented actions to allow the Company to
maintain and/or resume normal operations in the event of the failure of priority
1 and priority 2 applications. Such plans identify participants, processes and
equipment that will be necessary to permit the Company to continue operations.
The plans include providing off-line system processing, back-up electrical and
telephone
12
<PAGE> 15
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 in line with normal expenditures for technology upgrades. The
Company is being charged $25,000 to participate in the data service processor
Year 2000 testing. As of December 31, 1998, the Company has incurred
approximately $18,000 of that cost.
Liquidity and Capital Resources.
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing and financing activities. The Company's primary
sources of funds are deposits, amortization, prepayment and maturities of
outstanding loans and mortgage-related securities, sales of loans, maturities of
investment securities and other short-term investments, borrowing and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-related securities and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, the Company invests excess
funds in overnight deposits and other short-term interest-earning assets which
provide liquidity to meet lending requirements. The Company has been able to
generate sufficient cash through its deposits as well as borrowings to satisfy
its funding commitments. At December 31, 1998, the Company had short-term
borrowings outstanding of $23.1 million, all of which were advances from the
FHLB of Pittsburgh.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer term basis, the Company maintains a
strategy of investing in various lending products, mortgage-related securities
and investment securities. The Company uses its sources of funds primarily to
meet its ongoing commitments, to pay maturing certificates of deposit and
savings withdrawals, fund loan commitments and maintain a portfolio of
mortgage-related and investment securities. At December 31, 1998, the total
approved loan commitments outstanding amounted to $11.5 million, not including
loans in process. At the same date, commitments under unused lines of credit
amounted to $9.1 million. Certificates of deposit scheduled to mature in one
year or less at December 31, 1998 totalled $118.7 million. Based upon its
historical experience, management believes that a significant portion of
maturing deposits will remain with the Company.
The Bank is required by the Office of Thrift Supervision ("OTS") to maintain
average daily balances of liquid assets and short-term liquid assets (as
defined) in amounts equal to 4% of net withdrawable deposits and borrowings
payable in one year or less to assure its ability to meet demand from
withdrawals and repayments of short-term borrowings. The liquidity requirements
may vary from time to time at the direction of the OTS depending upon economic
conditions and deposit flows. The Bank's average liquidity ratio was 6.33% for
the quarter ended December 31, 1998.
13
<PAGE> 16
As of December 31, 1998, the Bank had regulatory capital which was in excess of
applicable limits. The Bank is required under certain federal regulations to
maintain tangible capital equal to at least 1.5% of its adjusted total assets,
core capital equal to at least 4.0% of its adjusted total assets and total
capital to at least 8.0% of its risk-weighted assets. At December 31, 1998, the
Bank had tangible capital equal to 8.2% of adjusted total assets, core capital
equal to 8.2% of adjusted total assets and total capital equal to 20.0% of
risk-weighted assets.
Impact of Inflation and Changing Prices.
The Consolidated Financial Statements of the Company and related notes presented
herein have been prepared in accordance with generally accepted accounting
principles which requires the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation to a larger
extent than interest rates. In the current interest rate environment, liquidity
and the maturity structure of the Company's assets and liabilities are critical
to the maintenance of acceptable performance levels.
14
<PAGE> 17
PART II
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On January 27, 1999, the Annual Meeting of stockholders of the Company
was held to elect management's nominees for director and to ratify the
appointment of the Company's independent auditors. With respect to the
election of directors, the results were as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C> <C>
Donald S. Guthrie 2,063,606 11,678
Edmund Jones 2,060,697 14,587
Willard F. Letts 2,060,597 14,687
</TABLE>
With respect to the proposal to adopt the 1998 Stock Option Plan, the
results were as follows: 1,971,906 Votes For, 76,422 Votes Against,
23,466 Votes Abstaining, and 3,489 Votes Non-voting.
With respect to the ratification of Deloitte & Touche LLP as the
Company's independent certified accountants, the results were as
follows: 1,939,652 Votes For, 128,753 Votes Against, and 6,878 Votes
Abstaining.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST KEYSTONE FINANCIAL, INC.
Date: February 12, 1999 By: /s/ Donald S. Guthrie
-------------------------------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: February 12, 1999 By: /s/ Thomas M. Kelly
-----------------------------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,102
<INT-BEARING-DEPOSITS> 14,586
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 155,981
<INVESTMENTS-CARRYING> 17,364
<INVESTMENTS-MARKET> 17,140
<LOANS> 208,916
<ALLOWANCE> 1,755
<TOTAL-ASSETS> 427,075
<DEPOSITS> 254,495
<SHORT-TERM> 23,125
<LIABILITIES-OTHER> 23,094
<LONG-TERM> 100,525
0
0
<COMMON> 6,141
<OTHER-SE> 19,695
<TOTAL-LIABILITIES-AND-EQUITY> 427,075
<INTEREST-LOAN> 4,224
<INTEREST-INVEST> 2,845
<INTEREST-OTHER> 96
<INTEREST-TOTAL> 7,165
<INTEREST-DEPOSIT> 2,614
<INTEREST-EXPENSE> 4,270
<INTEREST-INCOME-NET> 2,895
<LOAN-LOSSES> 25
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<EXPENSE-OTHER> 2,336
<INCOME-PRETAX> 856
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 660
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
<YIELD-ACTUAL> 7.17
<LOANS-NON> 2,554
<LOANS-PAST> 0
<LOANS-TROUBLED> 83
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,738
<CHARGE-OFFS> 8
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</TABLE>
