<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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission File Number: 0-25328
FIRST KEYSTONE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0469351
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
22 West State Street
Media, Pennsylvania 19063
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (610) 565-6210
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Number of shares of Common Stock outstanding as of May 10, 1999: 2,269,216
Transitional Small Business Disclosure Format Yes No X
--- ---
<PAGE> 2
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
<S> <C> <C>
Consolidated Statements of Financial Condition as of
March 31, 1999 (Unaudited) and September 30, 1998 ............................... 1
Consolidated Statements of Income for the Three and Six
Months Ended March 31, 1999 and 1998 (Unaudited)................................. 2
Consolidated Statement of Changes in Stockholders' Equity for the Six
Months Ended March 31, 1998 (Unaudited).......................................... 3
Consolidated Statements of Cash Flows for the Three and Six
Months Ended March 31, 1999 and 1998 (Unaudited)................................. 4
Notes to Consolidated Financial Statements (Unaudited)........................... 5
Item 2. Managements' Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 16
Item 2. Changes in Securities and Use of Proceeds....................................... 16
Item 3. Defaults Upon Senior Securities................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............................ 16
Item 5. Other Information............................................................... 16
Item 6. Exhibits and Reports on Form 8-K................................................ 16
SIGNATURES...................................................................................... 17
</TABLE>
i
<PAGE> 3
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
<TABLE>
<CAPTION>
March 31 September 30
ASSETS 1999 1998
- ------ ---- ----
(Unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 2,525 $ 2,457
Interest-bearing deposits with depository institutions 24,385 21,669
--------- ---------
Total cash and cash equivalents 26,910 24,126
Investment securities available for sale 46,119 40,621
Mortgage-related securities available for sale 102,728 115,486
Loans held for sale 4,325 2,799
Mortgage-related securities held to maturity - at amortized cost (approximate
fair value of $16,290 at March 31, 1999
and $18,700 at September 30, 1998) 16,509 18,769
Loans receivable - net 218,305 198,343
Accrued interest receivable 3,004 3,117
Real estate owned 602 1,663
Federal Home Loan Bank stock - at cost 6,066 5,079
Office properties and equipment - net 2,674 2,612
Deferred income taxes 859 283
Prepaid expenses and other assets 10,641 2,965
--------- ---------
TOTAL ASSETS $ 438,742 $ 415,863
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 260,238 $ 247,311
Advances from Federal Home Loan Bank 110,321 101,578
Securities sold under agreements to repurchase 19,300 19,300
Accrued interest payable 1,817 1,683
Advances from borrowers for taxes and insurance 2,052 1,036
Accounts payable and accrued expenses 2,849 2,091
--------- ---------
Total liabilities 396,577 372,999
--------- ---------
Company-obligated mandatorily redeemable preferred securities of a subsidiary
trust holding solely junior subordinated debentures of the Company 16,200 16,200
Stockholders' Equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized;
none issued
Common stock, $.01 par value, 20,000,000 shares authorized; issued
and outstanding: 2,269,216 shares at March 31, 1999
and 2,329,216 shares at September 30, 1998 14 14
Additional paid-in capital 13,306 13,204
Common stock acquired by stock benefit plans (1,662) (1,789)
Treasury stock at cost; 450,784 shares at March 31, 1999 (5,406) (4,575)
and 390,784 shares at September 30, 1998
Unrealized gain on available for sale securities - net of tax 291 1,487
Retained earnings - partially restricted 19,422 18,323
--------- ---------
Total stockholders' equity 25,965 26,664
--------- ---------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY $ 438,742 $ 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 Six months ended
March 31 March 31
-------- --------
1999 1998 1998 1998
-------- -------- -------- --------
INTEREST INCOME:
Interest on:
<S> <C> <C> <C> <C>
Loans $ 4,394 $ 4,109 $ 8,619 $ 8,195
Mortgage-related securities 1,849 2,057 3,961 4,123
Investments 732 563 1,465 1,009
Interest-bearing deposits 108 107 204 271
-------- -------- -------- --------
Total interest income 7,083 6,836 14,249 13,598
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on:
Deposits 2,551 2,421 5,165 4,854
Federal Home Loan Bank advances 1,320 1,045 2 679 2,063
Other borrowings 291 368 589 744
-------- -------- -------- --------
Total interest expense 4,162 3,834 8,433 7,661
-------- -------- -------- --------
NET INTEREST INCOME 2,921 3,002 5,816 5,937
PROVISION FOR LOAN LOSSES 75 76 100 151
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,846 2,926 5,716 5,786
-------- -------- -------- --------
OTHER INCOME (LOSS):
Service charges and other fees 248 226 475 468
Net gain on sale of:
Loans 99 130 200 258
Investment and mortgage-related securities 249 47 249 47
Real estate owned 1 1
Real estate operations (12) (9) (24) (19)
Other income 103 13 109 27
-------- -------- -------- --------
Total other income 687 408 1,009 782
-------- -------- -------- --------
OPERATING EXPENSES:
Salaries and employee benefits 920 955 1,786 1,819
Occupancy and equipment expenses 259 261 514 497
Professional fees 140 137 293 289
Federal deposit insurance premium 37 37 73 73
Bank service charges 100 100 203 201
Data processing 96 87 192 168
Advertising 80 64 157 146
Provision for real estate owned losses 300 350
Minority interest in expense of subsidiary 393 393 786 786
Other 269 222 576 421
-------- -------- -------- --------
Total operating expenses 2,594 2,256 4,930 4,400
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 939 1,078 1,795 2,168
INCOME TAX EXPENSE 228 394 424 812
-------- -------- -------- --------
NET INCOME $ 711 $ 684 $ 1,371 $ 1,356
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE $ 0.35 $ 0.32 $ 0.67 $ 0.63
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE $ 0.33 $ 0.30 $ 0.64 $ 0.59
======== ======== ======== ========
</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 Total
Common paid-in stock benefit Treasury available for sale Retained stockholders
stock capital plans stock (net of tax) earnings equity
----- ------- ----- ----- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1998 $ 14 $ 13,204 $ (1,789) $ (4,575) $ 1,487 $ 18,323 $ 26,664
ESOP stock committed
to be released 57 57
Excess of fair value
above cost of ESOP
stock committed
to be released 102 102
RRP amortization 70 70
Dividends - $.12 per share (272) (272)
Net unrealized loss on
securities available for
sale, net of tax (1,196) (1,196)
Purchase of treasury stock (831) (831)
Net income 1,371 1,371
-------- -------- -------- -------- -------- -------- --------
BALANCE AT MARCH 31, 1999 $ 14 $ 13,306 $ (1,662) $ (5,406) $ 291 $ 19,422 $ 25,965
======== ======== ======== ======== ======== ======== ========
</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>
Six months ended
March 31
--------
1999 1998
---- ----
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,371 $ 1,356
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization 220 225
Amortization of premiums and discounts 110 (89)
Gain on sales of:
Loans (200) (258)
Mortgage-related securities available for sale (47)
Investment securities available for sale (249)
Real estate owned (1)
Provision for loan losses 100 151
Provision for real estate owned losses 350
Amortization of stock benefit plans 229 317
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (33,996) (30,688)
Loans sold in the secondary market 32,470 31,939
Deferred income taxes 1 28
Accrued interest receivable 113 (12)
Prepaid expenses and other assets (7,676) (125)
Accrued interest payable 134 165
Accrued expenses 758 (259)
-------- --------
Net cash (used in) provided by operating activities (6,265) 2,702
-------- --------
INVESTING ACTIVITIES:
Loans originated (50,586) (27,488)
Purchases of:
Investment securities available for sale (13,750) (18,157)
Mortgage-related securities available for sale (19,135) (21,100)
Investment securities held to maturity (2,000)
Mortgage-related securities held to maturity (2,687)
Purchase of FHLB stock (987) (438)
Proceeds from sales of real estate owned 2,044 818
Proceeds from sales of mortgage-related securities 14,295
Proceeds from sales of investment securities 7,749 2,000
Principal collected on loans 29,623 22,850
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 75 1,070
Mortgage-related securities available for sale 30,531 13,201
Investment securities held to maturity 7,000
Mortgage-related securities held to maturity 2,228 2,667
Purchase of property and equipment (282) (397)
Net expenditures on real estate acquired through foreclosure and in development (44) (1,056)
-------- --------
Net cash used in investing activities (12,534) (9,422)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 12,927 9,616
Net proceeds from FHLB advances 8,743 246
Net increase in advances from borrowers for taxes and insurance 1,016 1,020
Purchase of treasury stock (831) (715)
Cash dividend (272) (241)
-------- --------
Net cash provided by financing activities 21,583 9,926
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 2,784 3,206
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,126 21,561
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,910 $ 24,767
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest on deposits and borrowings $ 8,299 $ 7,496
Transfers of loans receivable into real estate owned 1,297 193
Cash payments of income taxes 465 550
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999 (UNAUDITED) AND SEPTEMBER 30, 1998 AND
(UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1999 AND 1998 (dollars
in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
However, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the unaudited
interim periods.
The results of operations of the three and six month periods ended
March 31, 1999 are not necessarily indicative of the results to be
expected for the fiscal year ending September 30, 1999. The
consolidated financial statements presented herein should be read in
conjunction with the audited consolidated financial statements and
related notes thereto included in the Company's Annual Report to
Stockholders for the year ended September 30, 1998.
Certain information in this quarterly statement may constitute
forward-looking information 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>
March 31, 1999
--------------
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:
1 to 5 years $ 5,744 $ 5,744
5 to 10 years 10,000 $ 15 10,015
Municipal obligations 18,920 286 $ 2 19,204
Corporate bonds 2,010 79 1,931
Mutual funds 2,000 13 1,987
Preferred stocks 5,000 44 5,044
Other equity investments 2,390 196 2,194
------- ------ ---- -------
Total $46,064 $345 $290 $46,119
======= ==== ==== =======
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
September 30, 1998
------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
Available for Sale:
U.S. Treasury securities and securities
of U.S. Government agencies:
<S> <C> <C> <C> <C>
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>
March 31, 1999
--------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
Available for Sale:
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $ 13,566 $ 214 $ 25 $ 13,755
FNMA pass-through certificates 27,051 153 147 27,057
GNMA pass-through certificates 35,584 182 124 35,642
Collateralized mortgage obligations 26,100 303 129 26,274
-------- -------- -------- --------
Total $102,301 $ 852 $ 425 $102,728
======== ======== ======== ========
Held to Maturity:
FHLMC pass-through certificates $ 3,911 $ 48 $ 19 $ 3,940
FNMA pass-through certificates 7,811 12 143 7,680
Collateralized mortgage obligations 4,787 1 118 4,670
-------- -------- -------- --------
Total $ 16,509 $ 61 $ 280 $ 16,290
======== ======== ======== ========
</TABLE>
6
<PAGE> 9
<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 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, could be sold in response to changes in interest rates and
cash flows or for restructuring purposes.
7
<PAGE> 10
5. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
March 31 September 30
1999 1998
---- ----
Real estate loans:
<S> <C> <C>
Single-family $ 164,753 $ 148,088
Construction and land 17,960 15,858
Multi-family and commercial 24,715 20,563
Consumer loans:
Home equity and lines of credit 18,554 19,609
Deposit 155 181
Education 354 449
Other 1,739 1,429
Commercial loans 1,572 1,390
--------- ---------
Total loans 229,802 207,567
Loans in process (7,984) (5,781)
Allowance for loan losses (1,782) (1,738)
Deferred loan fees (1,731) (1,705)
--------- ---------
Loans receivable - net $ 218,305 $ 198,343
========= =========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Six Months Ended
March 31
--------
1999 1998
---- ----
<S> <C> <C>
Balance beginning of period $ 1,738 $ 1,628
Provisions charged to income 100 151
Charge-offs (56) (28)
Recoveries 15
------- -------
Total $ 1,782 $ 1,766
======= =======
</TABLE>
At March 31, 1999 and September 30, 1998, non-performing loans (which
include loans in excess of 90 days delinquent) amounted to
approximately $2,868 and $2,077, respectively.
6. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
March 31 September 30
1999 1998
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 7,545 2.9% $ 8,254 3.3%
NOW accounts 37,630 14.5 28,181 11.4
Passbook accounts 40,243 15.5 37,988 15.4
Money market demand accounts 18,066 6.9 16,087 6.5
Certificate accounts 156,754 60.2 156,801 63.4
-------- ----- -------- -----
Total $260,238 100.0% $247,311 100.0%
======== ===== ======== =====
</TABLE>
8
<PAGE> 11
7. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, effective October 1, 1998. The
statement requires disclosure of amounts from transactions and other
events which are currently excluded from the statement of operations
and are recorded directly to stockholders' equity. These transactions
and other events represent foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. Only the last of these
items, however, is currently applicable to the Company.
For the three and six months ended March 31, 1999 and 1998, the
Company's comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
---------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 711 $ 684 $ 1,371 $ 1,356
Net SFAS 115 Adjustment (557) (108) (1,196) 217
------- ------- ------- -------
Total comprehensive income $ 154 $ 576 $ 175 $ 1,573
======= ======= ======= =======
</TABLE>
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 For the Six Months Ended
March 31, March 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator $ 711 $ 684 $ 1,371 $ 1,356
Denominators:
Basic shares outstanding 2,040,333 2,141,979 2,037,551 2,153,837
Effect of dilutive securities 100,673 135,405 106,611 133,484
---------- ---------- ---------- ----------
Dilutive shares outstanding 2,141,006 2,277,384 2,144,162 2,287,321
========== ========== ========== ==========
EPS:
Basic $ 0.35 $ 0.32 $ 0.67 $ 0.63
Diluted $ 0.33 $ 0.30 $ 0.64 $ 0.59
</TABLE>
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT MARCH 1999 (UNAUDITED) AND SEPTEMBER 30,
1998
Total assets of the Company increased $22.9 million or 5.5% from $415.9 million
at September 30, 1998 to $438.7 million at March 31, 1999 primarily due to a
$20.0 million increase in loans receivable - net, and $5.5 million increase in
investment securities available for sale and a $7.7 million increase in prepaid
expenses and other assets partially offset by a $12.8 million decrease in
mortgage-related securities available for sale. The increases in investment
securities and loans were funded primarily through deposits and cash flows and,
to a lesser extent, advances from the Federal Home Loan Bank of Pittsburgh. The
loan growth was concentrated primarily in single-family and commercial real
estate loans. The increase in prepaid expenses and other assets was due to the
purchase of $7.0 million of bank owned life insurance policies in order to fund
ongoing costs of employee benefit and retirement plans.
Deposits increased $12.9 million or 5.2% from $247.3 million at September 30,
1998 to $260.2 million at March 31, 1999. The increase resulted primarily from
the growth in core deposits which are passbook accounts, NOW accounts, money
market accounts and commercial checking.
Stockholders' equity decreased $699,000 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 six months ended March 31, 1999.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 1999 AND 1998
Net Income.
Net income was $711,000 for the three months ended March 31, 1999 as compared to
$684,000 for the same period in 1998. Net income for the six month periods ended
March 31, 1999 and 1998 was $1.4 million. The $27,000 or 3.9% increase in net
income for the three months ended March 31, 1999 was primarily due to a $279,000
increase in other income combined with a $166,000 decrease in income tax expense
partially offset by a $81,000 decrease in net interest income together with a
$338,000 increase in operating expenses. The $15,000 or 1.1% increase in net
income for the six months ended March 31, 1999 compared to the same period in
1998 was primarily due to a $388,000 decrease in income tax expense as well as a
$227,000 increase in other income partially offset by a $530,000 increase in
operating expenses and a $121,000 decrease in net interest income.
10
<PAGE> 13
Net Interest Income.
Net interest income decreased $81,000 or 2.7% to $2.9 million and $121,000 or
2.0% to $5.8 million for the three and six months ended March 31, 1999,
respectively. Such decreases were primarily due to a $328,000 or 8.6% and a
$772,000 or 10.1% increase in interest expense for the three and six months
ended March 31, 1999, respectively, which were partially offset by a $247,000 or
3.6% and a $651,000 or 4.8% increase in interest income during such periods. The
average balance of interest-earning assets increased $35.8 million and $45.2
million for the three and six months ended March 31, 1999, respectively, as
compared to the same period in 1998. Calculated on a fully taxable equivalent
basis, the weighted average yield earned thereon for the three and six months
ended March 31, 1999 decreased 32 basis points to 7.13% and 43 basis points to
7.15%, respectively, compared to the 1998 periods. In addition, net interest
income was affected by an increase in the average balance of interest-bearing
liabilities of $44.3 million and $45.4 million for the three and six months
ended March 31, 1999, respectively, as compared to the same period in 1998.
However, the weighted average rate paid thereon decreased 20 basis points to
4.45 % and 16 basis points to 4.53% during the three and six months ended March
31, 1999, respectively, as compared to 4.65% and to 4.69%, during the three and
six months ended March 31, 1998. The interest rate spread and net interest
margin amounted to 2.69% and 3.00% for the three months ended March 31, 1999 as
compared to 2.80% and 3.27% for the same period in 1998. The interest rate
spread and net interest margin were 2.62% and 2.98% for the six months ended
March 31, 1999 as compared to 2.89% and 3.31% for the same periods in 1998. The
decline in the net interest rate spread and net interest margin is primarily due
to the compression of the yield curve, reflecting the movement of market rates
of interest. The Bank's yield on interest-earning assets, primarily tied to
longer term interest rates, has declined at a more rapid pace than the Bank's
funding liabilities, which are primarily tied to shorter term rates.
Provision for Loan Losses.
The Company's provision for loan losses remained unchanged for the three months
ended March 31, 1999 as compared to the same period in 1998. For the six months
ended March 31, 1999 and 1998, the provision for loan losses was $100,000 and
$151,000, respectively.
Other Income.
Other income increased $279,000 or 68.4% to $687,000 and $227,000 or 29.0% to
$1.0 million for the three and six months ended March 31, 1999, respectively, as
compared to the same periods in 1998. The increase was primarily a result of
increases in the net gain on sales of mortgage-related securities and increases
in fee and other income offset by a decrease in gain on sale of loans. Gain on
sales of investment and mortgage-related securities are highly dependent on
market conditions and consequently the amount of gains may differ materially in
subsequent quarters.
11
<PAGE> 14
Operating Expenses.
Operating expenses increased $338,000 or 15.0% during the three months ended
March 31, 1999 as compared to the same period in 1998. The increase was
primarily due to an increase in the provision for losses on real estate owned of
$300,000 related to the Company's only real estate under development project
which is expected to be completed by the third fiscal quarter. See Note 7 of the
Notes to Consolidated Financial Statements in the Annual Report. Small increases
in professional fees, advertising, data processing and other expenses were
partially offset by reductions in salaries and employee benefits and occupancy
and equipment expenses. For the six months ended, March 31, 1999, operating
expenses increased $530,000 or 12.0% primarily due to a $350,000 provision
relating to the Company's real estate owned. In addition, increases of $17,000,
$24,000 and $155,000 were incurred in occupancy and equipment expenses, data
processing and other expenses, respectively.
Income Tax Expense.
Income tax expense decreased $166,000 to $228,000 and $388,000 to $424,000
during the three and six months ended March 31, 1999, respectively, as compared
to the same period in 1998. The decreases were primarily a result of decreases
in income before income taxes combined with 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 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
12
<PAGE> 15
their products and services Year 2000 compliant. Such modifications and
conversions and related testing of such systems was 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 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 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 the majority of 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 remaining borrowers have
completed their Y2K projects or are in the process of completing their projects.
The Year 2000 Committee is continually working with its commercial customers to
assess their Year 2000 readiness. The Company has completed its own company-wide
Year 2000 contingency plan. Individual contingency plans concerning specific
software and hardware issues and operational plans for continuing operations
were completed by December 1998. The Year 2000 Committee has reviewed
substantially all mission critical test plans and contingency plans to ensure
the reasonableness of the plans. Testing began on mission critical systems in
August 1998 with a majority of such systems completed by March 31, 1999. The
Company has developed contingency plans for substantially all priority 1 and
priority 2 applications which address operational policies and procedures in the
event of data processing, electric power supply and/or telephone service
failures associated with the Year 2000. Such contingency plans provide
documented actions to allow the Company to maintain and/or resume normal
operations in the event of the failure of priority 1 and priority 2
applications. Such plans identify participants, processes and equipment that
will be necessary to permit the Company to continue operations. The plans
include providing off-line system processing, back-up electrical and telephone
systems and other methods to ensure the Company's ability to continue to
operate. The costs of modifications to the existing software is being primarily
absorbed by the third party vendors. The Company recognizes that the need exists
to purchase new hardware and software regardless of year 2000 implications.
Based upon current estimates, 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 is being charged $25,000 to participate in the data
service processor Year 2000 testing. As of March 31, 1999, the Company has
incurred approximately $23,600 of that cost.
13
<PAGE> 16
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 March 31, 1999, the Company had short-term
borrowings outstanding of $19.2 million, all of which were advances from the
Federal Home Loan Bank of Pittsburgh.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer term basis, the Company maintains a
strategy of investing in various lending products, mortgage-related securities
and investment securities. The Company uses its sources of funds primarily to
meet its ongoing commitments, to pay maturing certificates of deposit and
savings withdrawals, fund loan commitments and maintain a portfolio of
mortgage-related and investment securities. At March 31, 1999, the total
approved loan commitments outstanding amounted to $45.1 million, not including
loans in process. At the same date, commitments under unused lines of credit
amounted to $12.8 million. Certificates of deposit scheduled to mature in one
year or less at March 31, 1999 totaled $119.5 million. Based upon its historical
experience, management believes that a significant portion of maturing deposits
will remain with the Company.
First Keystone Federal Savings Bank (the "Bank"), the Company's wholly owned
subsidiary, is required by the Office of Thrift Supervision ("OTS") to maintain
average daily balances of liquid assets and short-term liquid assets (as
defined) in amounts equal to 4% of net withdrawable deposits and borrowings
payable in one year or less to assure its ability to meet demand from
withdrawals and repayments of short-term borrowings. The liquidity requirements
may vary from time to time at the direction of the OTS depending upon economic
conditions and deposit flows. The Bank's average monthly liquidity ratio for
March 1999 was 6.47%.
As of March 31, 1999, the Bank had regulatory capital in excess of applicable
limits. The Bank is required under certain federal regulations to maintain
tangible capital equal to at least 1.5% of its adjusted total assets, core
capital equal to at least 4.0% of its adjusted total assets and total capital to
at least 8.0% of its total risk-weighted assets. At March 31, 1999, the Bank had
tangible and core capital equal to 8.2% of adjusted total assets and total
capital equal to 19.8% of risk-weighted assets.
14
<PAGE> 17
QUANTITATIVE AND QUALITATIVE DISCLOSURES
DISCLOSURES ABOUT MARKET RISK
The Company's balance sheet consists of interest-earning assets and
interest-bearing liabilities, and is therefore exposed to interest rate risk.
The following additional information is being provided regarding the exposure to
this interest rate risk.
The Company utilizes reports prepared by the OTS to measure interest rate risk.
Using data from the Bank's quarterly thrift financial reports, the OTS models
the net portfolio value ("NPV") of the Bank over a variety of interest rate
scenarios. The NAV 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 400 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 December 31, 1998.
Net Portfolio Value
<TABLE>
<CAPTION>
Changes in
Rates in Dollar Percentage Net Portfolio Value Change in
Basis Points Amount Change Change As a % of Assets Percentage (1)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
200 $24,394 $(17,196) (41.35)% 6.02% (38.07)%
100 33,590 (8,000) (19.24) 8.05 (17.18)
0 41,590 9.72
(100) 46,598 5,008 12.04 10.68 9.88
(200) 50,692 9,102 21.89 11.43 17.59
</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.
Based upon the Company's knowledge as of the date hereof, the Company does not
believe that there has been any material change in the Company's asset and
liability position or the market value of the Company's portfolio equity since
December 31, 1998.
15
<PAGE> 18
PART II
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
16
<PAGE> 19
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: May 14, 1999 By: /s/ Donald S. Guthrie
--------------------------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: May 14, 1999 By: /s/ Thomas M. Kelly
--------------------------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
17
<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> MAR-31-1999
<CASH> 2,525
<INT-BEARING-DEPOSITS> 24,385
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,509
<INVESTMENTS-CARRYING> 16,290
<INVESTMENTS-MARKET> 148,847
<LOANS> 222,630
<ALLOWANCE> 0
<TOTAL-ASSETS> 438,742
<DEPOSITS> 260,238
<SHORT-TERM> 19,200
<LIABILITIES-OTHER> 22,918
<LONG-TERM> 110,421
0
0
<COMMON> 6,252
<OTHER-SE> 19,713
<TOTAL-LIABILITIES-AND-EQUITY> 25,965
<INTEREST-LOAN> 4,394
<INTEREST-INVEST> 2,581
<INTEREST-OTHER> 108
<INTEREST-TOTAL> 7,083
<INTEREST-DEPOSIT> 2,551
<INTEREST-EXPENSE> 4,162
<INTEREST-INCOME-NET> 2,921
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 249
<EXPENSE-OTHER> 2,594
<INCOME-PRETAX> 939
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 711
<EPS-PRIMARY> .35
<EPS-DILUTED> .33
<YIELD-ACTUAL> 7.13
<LOANS-NON> 2,859
<LOANS-PAST> 9
<LOANS-TROUBLED> 67
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,755
<CHARGE-OFFS> 48
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,782
<ALLOWANCE-DOMESTIC> 1,070
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 712
</TABLE>
