<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 June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from .......... to ..........
Commission File Number: 0-25328
FIRST KEYSTONE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
<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 August 4, 1999: 2,251,716
Transitional Small Business Disclosure Format Yes No X
<PAGE> 2
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I FINANCIAL INFORMATION:
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1999 (Unaudited) and September 30, 1998 ..................... 1
Consolidated Statements of Income for the Three and Nine
Months Ended June 30, 1999 and 1998 (Unaudited) ...................... 2
Consolidated Statement of Changes in Stockholders' Equity for the Nine
Months Ended June 30, 1998 (Unaudited) ............................... 3
Consolidated Statements of Cash Flows for the Three and Nine
Months Ended June 30, 1999 and 1998 (Unaudited) ...................... 4
Notes to Consolidated Financial Statements (Unaudited) ............... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........... 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings .................................................... 16
Item 2. Changes in Securities and Use of Proceeds ............................ 16
Item 3. Defaults Upon Senior Securities ...................................... 16
Item 4. Submission of Matters to a Vote of Security Holders .................. 16
Item 5. Other Information .................................................... 16
Item 6. Exhibits and Reports on Form 8-K ..................................... 16
SIGNATURES .......................................................................... 18
</TABLE>
i
<PAGE> 3
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
<TABLE>
<CAPTION>
June 30 September 30
ASSETS 1999 1998
- ------ --------- ---------
(Unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions ........................................ $ 2,733 $ 2,457
Interest-bearing deposits with depository institutions ................................... 22,000 21,669
--------- ---------
Total cash and cash equivalents ................................................ 24,733 24,126
Investment securities available for sale ................................................. 40,418 40,621
Mortgage-related securities available for sale ........................................... 111,329 115,486
Loans held for sale ...................................................................... 3,295 2,799
Mortgage-related securities held to maturity - at amortized cost (approximate
fair value of $15,060 at June 30, 1999
and $18,700 at September 30, 1998) ........................................... 15,538 18,769
Loans receivable - net ................................................................... 222,526 198,343
Accrued interest receivable .............................................................. 2,832 3,117
Real estate owned ........................................................................ 534 1,663
Federal Home Loan Bank stock - at cost ................................................... 6,066 5,079
Office properties and equipment - net .................................................... 2,868 2,612
Deferred income taxes .................................................................... 2,011 283
Prepaid expenses and other assets ........................................................ 9,930 2,965
--------- ---------
TOTAL ASSETS ............................................................................. $ 442,080 $ 415,863
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ....................................................................... $ 258,618 $ 247,311
Advances from Federal Home Loan Bank ........................................... 116,291 101,578
Securities sold under agreements to repurchase ................................. 19,496 19,300
Accrued interest payable ....................................................... 2,035 1,683
Advances from borrowers for taxes and insurance ................................ 3,138 1,036
Accounts payable and accrued expenses .......................................... 2,423 2,091
--------- ---------
Total liabilities ............................................. 402,001 372,999
--------- ---------
Company-obligated mandatorily redeemable preferred securities of a subsidiary
trust holding solely junior subordinated debentures of the Company ............. 16,200 16,200
Stockholders' Equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized;
none issued
Common stock, $.01 par value, 20,000,000 shares authorized; issued
and outstanding: 2,251,716 shares at June 30, 1999
and 2,329,216 shares at September 30, 1998 ............................... 14 14
Additional paid-in capital ..................................................... 13,361 13,204
Common stock acquired by stock benefit plans ................................... (1,597) (1,789)
Treasury stock at cost; 468,284 shares at June 30, 1999 ........................ (5,622) (4,575)
and 390,784 shares at September 30, 1998
Unrealized (loss) gain on available for sale securities - net of tax ........... (2,288) 1,487
Retained earnings - partially restricted ....................................... 20,011 18,323
--------- ---------
Total stockholders' equity .................................... 23,879 26,664
--------- ---------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY .............. $ 442,080 $ 415,863
========= =========
</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 Nine months ended
June 30 June 30
-------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on:
Loans ............................................ $ 4,329 $ 4,102 $ 12,948 $ 12,297
Mortgage-related securities ...................... 1,896 1,880 5,857 6,003
Investments ...................................... 708 697 2,173 1,706
Interest-bearing deposits ........................ 117 97 321 368
-------- -------- -------- --------
Total interest income ........... 7,050 6,776 21,299 20,374
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on:
Deposits ......................................... 2,542 2,497 7,707 7,351
Federal Home Loan Bank advances .................. 1,304 982 3 983 3,045
Other borrowings ................................. 300 373 888 1,116
-------- -------- -------- --------
Total interest expense .......... 4,146 3,852 12,578 11,512
-------- -------- -------- --------
NET INTEREST INCOME ........................................ 2,904 2,924 8,721 8,862
PROVISION FOR LOAN LOSSES .................................. 84 20 184 172
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ....................................... 2,820 2,904 8,537 8,690
-------- -------- -------- --------
OTHER INCOME (LOSS):
Service charges and other fees ........................ 222 219 697 687
Net gain on sale of:
Loans ............................................ 70 76 270 334
Investment and mortgage-related securities ....... 42 9 291 56
Real estate owned ................................ 8 6 8 7
Other assets ..................................... 1 1
Real estate operations ................................ (68) (11) (92) (29)
Other income .......................................... 98 20 207 47
-------- -------- -------- --------
Total other income .............. 372 320 1,381 1,103
-------- -------- -------- --------
OPERATING EXPENSES:
Salaries and employee benefits ........................ 876 916 2,662 2,735
Occupancy and equipment expenses ...................... 258 264 771 761
Professional fees ..................................... 142 136 435 425
Federal deposit insurance premium ..................... 37 36 110 109
Bank service charges .................................. 123 104 326 305
Data processing ....................................... 98 94 290 262
Advertising ........................................... 90 69 247 216
Provision for real estate owned losses ................ 140 350 140
Minority interest in expense of subsidiary ............ 393 393 1,179 1,179
Other ................................................. 206 211 783 632
-------- -------- -------- --------
Total operating expenses ........ 2,223 2,363 7,153 6,764
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE ........................... 969 861 2,765 3,029
INCOME TAX EXPENSE ......................................... 244 160 668 972
-------- -------- -------- --------
NET INCOME ................................................. $ 725 $ 701 $ 2,097 $ 2,057
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE ............................ $ 0.35 $ 0.33 $ 1.03 $ 0.96
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE .......................... $ 0.34 $ 0.31 $ 0.98 $ 0.90
======== ======== ======== ========
</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
stock
Additional acquired by
Common paid-in stock benefit Treasury
stock capital plans stock
----- ------- ----- -----
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1998 $ 14 $ 13,204 $ (1,789) $ (4,575)
ESOP stock committed
to be released 87
Excess of fair value
above cost of ESOP
stock committed
to be released 157
RRP amortization 105
Dividends - $.18 per share
Net unrealized loss on
securities available for
sale, net of tax
Purchase of treasury stock (1,047)
Net income -------- -------- -------- --------
BALANCE AT JUNE 30, 1999 $ 14 $ 13,361 $ (1,597) $ (5,622)
======== ======== ======== ========
Unrealized
gain (loss)
on securities Total
available for sale Retained stockholders'
(net of tax) earnings equity
------------ -------- ------
<S> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1998 $ 1,487 $ 18,323 $ 26,664
ESOP stock committed
to be released 87
Excess of fair value
above cost of ESOP
stock committed
to be released 157
RRP amortization 105
Dividends - $.18 per share (409) (409)
Net unrealized loss on
securities available for
sale, net of tax (3,775) (3,775)
Purchase of treasury stock (1,047)
Net income 2,097 2,097
-------- -------- --------
BALANCE AT JUNE 30, 1999 $ (2,288) $ 20,011 $ 23,879
======== ======== ========
</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>
Nine months ended
June 30
------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,097 $ 2,057
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization 335 341
Amortization of premiums and discounts (221) 85
Gain on sales of:
Loans (270) (334)
Mortgage-related securities available for sale (47)
Investment securities available for sale (291) (9)
Real estate owned (8) (7)
Provision for loan losses 184 171
Provision for real estate owned losses 350 140
Amortization of stock benefit plans 349 441
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (40,113) (47,813)
Loans sold in the secondary market 39,617 45,996
Deferred income taxes 4 28
Accrued interest receivable 285 (252)
Prepaid expenses and other assets (6,965) (16)
Accrued interest payable 352 (52)
Accrued expenses 332 745
-------- --------
Net cash (used in) provided by operating activities (3,963) 1,474
-------- --------
INVESTING ACTIVITIES:
Loans originated (75,626) (39,125)
Purchases of:
Investment securities available for sale (20,051) (36,714)
Mortgage-related securities available for sale (38,217) (26,422)
Investment securities held to maturity (2,000)
Mortgage-related securities held to maturity (2,687)
Purchase of FHLB stock (987) (438)
Proceeds from sales of real estate owned 2,120 1,051
Proceeds from sales of mortgage-related securities 14,295
Proceeds from sales of investment securities 6,791 7,009
Principal collected on loans 50,616 33,036
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 12,075 4,070
Mortgage-related securities available for sale 38,414 21,316
Investment securities held to maturity 7,000
Mortgage-related securities held to maturity 3,188 3,468
Purchase of property and equipment (591) (429)
Net expenditures on real estate acquired through foreclosure and in development (24) (1,248)
-------- --------
Net cash used in investing activities (22,292) (17,818)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 11,307 13,855
Net proceeds from FHLB advances and other borrowings 14,909 219
Net increase in advances from borrowers for taxes and insurance 2,102 2,106
Purchase of treasury stock (1,047) (1,840)
Cash dividend (409) (358)
-------- --------
Net cash provided by financing activities 26,862 13,982
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 607 (2,362)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,126 21,561
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,733 $ 19,199
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest on deposits and borrowings $ 12,226 $ 11,564
Transfers of loans receivable into real estate owned 1,317 193
Cash payments of income taxes 715 850
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 (UNAUDITED) AND SEPTEMBER 30, 1998 AND
(UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(dollars in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared in accordance with instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. However, such information reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair statement of results
for the unaudited interim periods.
The results of operations of the three and nine month periods ended
June 30, 1999 are not necessarily indicative of the results to be
expected for the fiscal year ending September 30, 1999. The
consolidated financial statements presented herein should be read in
conjunction with the audited consolidated financial statements and
related notes thereto included in the Company's Annual Report to
Stockholders for the year ended September 30, 1998.
Certain information in this quarterly statement may constitute
forward-looking information (within the meaning of the Private
Securities Litigation Reform Act of 1998) that involves risks and
uncertainties that could cause actual results to differ materially
from those estimated. Persons are cautioned that such
forward-looking statements are not guarantees of future performance
and are subject to various factors which could cause actual results
to differ materially from those estimated. These factors include
changes in general economic and market conditions; changes in
interest rates, deposit flows, loan demand, real estate values and
competition; changes in accounting principles, policies or
guidelines; and the development of an interest rate environment that
adversely affects the interest rate spread or other income from the
Company's investments and operations.
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment
securities are as follows:
<TABLE>
<CAPTION>
June 30, 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 $ 50 $ 5,694
5 to 10 years 4,994 163 4,831
Municipal obligations 18,922 $ 31 598 18,355
Corporate bonds 2,010 135 1,875
Mutual funds 2,000 20 1,980
Preferred stocks 5,500 42 97 5,445
Other equity investments 2,390 10 162 2,238
------- ------- ------- -------
Total $41,560 $ 83 $ 1,225 $40,418
======= ======= ======= =======
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
September 30, 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 $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>
June 30, 1999
-------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Available for Sale:
FHLMC pass-through certificates $ 12,694 $103 $ 155 $ 12,642
FNMA pass-through certificates 33,987 47 805 33,229
GNMA pass-through certificates 33,180 49 676 32,553
Collateralized mortgage obligations 33,571 135 801 32,905
------- ---- ---- -------
Total $113,432 $334 $2,437 $111,329
======== ==== ====== ========
Held to Maturity:
FHLMC pass-through certificates $ 3,594 $15 $ 49 $ 3,560
FNMA pass-through certificates 7,366 246 7,120
Collateralized mortgage obligations 4,578 198 4,380
------ ----- ---- ------
Total $15,538 $15 $493 $15,060
======= === ==== =======
</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 or guaranteed by FHLMC,
FNMA, or the GNMA.
The mortgage-related securities designated as available for sale, by
definition, could be sold in response to changes in interest rates
and cash flows or for restructuring purposes.
7
<PAGE> 10
5. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
June 30 September 30
1999 1998
---- ----
<S> <C> <C>
Real estate loans:
Single-family $ 162,774 $ 148,088
Construction and land 20,937 15,858
Multi-family and commercial 29,623 20,563
Consumer loans:
Home equity and lines of credit 18,190 19,609
Deposit 213 181
Education 360 449
Other 1,144 1,429
Commercial loans 1,476 1,390
--------- ---------
Total loans 234,717 207,567
Loans in process (8,653) (5,781)
Allowance for loan losses (1,857) (1,738)
Deferred loan fees (1,681) (1,705)
--------- ---------
Loans receivable - net $ 222,526 $ 198,343
========= =========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Nine Months Ended
June 30
---------------------
1999 1998
------- -------
<S> <C> <C>
Balance beginning of period $ 1,738 $ 1,628
Provisions charged to income 184 172
Charge-offs (67) (54)
Recoveries 2 15
------- -------
Total $ 1,857 $ 1,761
======= =======
</TABLE>
At June 30, 1999 and September 30, 1998, non-performing loans (which
consists of loans in excess of 90 days delinquent) amounted to
approximately $3,761 and $3,704, respectively.
6. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
June 30 September 30
1999 1998
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Non-interest bearing accounts $ 7,214 2.8% $ 8,254 3.3%
NOW accounts 35,762 13.8 28,181 11.4
Passbook accounts 41,243 15.9 37,988 15.4
Money market demand accounts 17,720 6.9 16,087 6.5
Certificate accounts 156,679 60.6 156,801 63.4
-------- -------- -------- --------
Total $258,618 100.0% $247,311 100.0%
======== ======== ======== ========
</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 nine months ended June 30, 1999 and 1998,
the Company's comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
--------- --------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 725 $ 701 $ 2,097 $ 2,057
Net SFAS 115 adjustment (2,579) (150) (3,775) 367
------- ------- ------- -------
Total comprehensive income (loss) $(1,854) $ 551 $(1,678) $ 2,424
======= ======= ======= =======
</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 ("EPS") is as
follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator $ 725 $ 701 $ 2,097 $ 2,057
Denominators:
Basic shares outstanding 2,044,095 2,122,631 2,039,771 2,143,440
Effect of dilutive securities 98,729 135,095 104,032 138,620
---------- ---------- ---------- ----------
Dilutive shares outstanding 2,142,824 2,257,726 2,143,803 2,282,060
========== ========== ========== ==========
EPS:
Basic $ 0.35 $ 0.33 $ 1.03 $ 0.96
Diluted $ 0.34 $ 0.31 $ 0.98 $ 0.90
</TABLE>
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 (UNAUDITED) AND SEPTEMBER 30,
1998
Total assets of the Company increased $26.2 million or 6.3% from $415.9 million
at September 30, 1998 to $442.1 million at June 30, 1999 primarily due to a
$24.2 million increase in loans receivable - net and a $7.0 million increase in
prepaid expenses and other assets partially offset by a $4.2 million decrease in
mortgage-related securities available for sale. The increased loan growth was
concentrated primarily in single-family, construction and commercial real estate
loans and funded through deposits and cash flows as well as advances from the
Federal Home Loan Bank of Pittsburgh. The decrease in the mortgage-related
securities available for sale was primarily due to decreases in the market value
of the securities combined with cash prepayments. The increase in prepaid
expenses and other assets was due to the purchase of $7.0 million of bank owned
life insurance policies in order to fund ongoing costs of employee benefit and
retirement plans.
Deposits increased $11.3 million or 4.6% from $247.3 million at September 30,
1998 to $258.6 million at June 30, 1999. The increase resulted primarily from
the growth in core deposits which are passbook accounts, NOW accounts, money
market accounts and commercial checking.
Stockholders' equity decreased $2.8 million due to the combined effects of the
repurchase of shares of common stock pursuant to the Company's publicly
announced repurchase program, dividends paid and a decrease in the market
valuation, net of taxes, of securities available for sale partially offset by
the Company's net income for the nine months ended June 30, 1999.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 1999 AND 1998
Net Income.
Net income was $725,000 for the three months ended June 30, 1999 as compared to
$701,000 for the same period in 1998. Net income for the nine month periods
ended June 30, 1999 and 1998 was $2.1 million and $2.06 million, respectively.
The $24,000 or 3.4% increase in net income for the three months ended June 30,
1999 was primarily due to a $52,000 increase in other income combined with a
$140,000 decrease in operating expenses partially offset by a $64,000 increase
in the provision for loan losses together with a $84,000 increase in income tax
expense. The $40,000 increase in net income for the nine months ended June 30,
1999 compared to the same period in 1998 was primarily due to a $304,000
decrease in income tax expense as well as a $278,000 increase in other income
offset in part by a $389,000 increase in operating expenses and a $141,000
decrease in net interest income.
10
<PAGE> 13
Net Interest Income.
Net interest income decreased $20,000 to $2.9 million and $141,000 to $8.7
million for the three and nine months ended June 30, 1999, respectively. Such
decreases were primarily due to a $294,000 or 7.6% and a $1.1 million or 9.3%
increase in interest expense for the three and nine months ended June 30, 1999,
respectively, which were partially offset by a $274,000 or 4.0% and a $925,000
or 4.5% increase in interest income during such periods. The average balance of
interest-earning assets increased $36.1 million and $38.8 million for the three
and nine months ended June 30, 1999, respectively, as compared to the same
period in 1998. Calculated on a fully taxable equivalent basis, the weighted
average yield earned on such amount for the three and nine months ended June 30,
1999 decreased 34 basis points to 7.05% and 35 basis points to 7.14%,
respectively, compared to the 1998 periods. In addition, net interest income was
affected by an increase in the average balance of interest-bearing liabilities
of $43.0 million and $44.7 million for the three and nine months ended June 30,
1999, respectively, as compared to the same period in 1998. However, the
weighted average rate paid of such liabilities decreased 21 basis points to 4.42
% and 18 basis points to 4.49% during the three and nine months ended June 30,
1999, respectively, as compared to 4.63% and to 4.67%, respectively, during the
three and nine months ended June 30, 1998. The interest rate spread and net
interest margin amounted to 2.63% and 2.96% for the three months ended June 30,
1999 as compared to 2.76% and 3.23% for the same period in 1998. The interest
rate spread and net interest margin were 2.65% and 2.98%, respectively, for the
nine months ended June 30, 1999 as compared to 2.82% and 3.28% for the same
periods in 1998. The decline in the net interest rate spread and net interest
margin is primarily due to the compression of the yield curve, reflecting the
movement of market rates of interest. The Bank's yield on interest-earning
assets, primarily tied to longer term interest rates, has declined at a more
rapid pace than the Bank's funding liabilities, which are primarily tied to
shorter term rates.
Provision for Loan Losses.
The Company's provision for loan losses increased to $84,000 for the three
months ended June 30, 1999 as compared to $20,000 for the same period in 1998.
For the nine months ended June 30, 1999 and 1998, the provision for loan losses
was $184,000 and $172,000, respectively.
Other Income.
Other income increased $52,000 or 16.3% to $372,000 and $278,000 or 25.2% to
$1.4 million for the three and nine months ended June 30, 1999, respectively, as
compared to the same periods in 1998. The increase was primarily a result of
increases in the net gain on sales of mortgage-related securities and
investments along with an increase in other income due to the purchase of bank
owned life insurance policies offset by a decrease in real estate operations.
Gain on sales of investment and mortgage-related securities are highly dependent
on market conditions and consequently the amount of gains may differ materially
in subsequent quarters.
11
<PAGE> 14
Operating Expenses.
Operating expenses decreased $140,000 or 5.9% during the three months ended June
30, 1999 as compared to the same period in 1998. The decrease was primarily due
to decreases of $40,000 and $140,000 in salaries and employee benefits and
provisions for real estate owned, respectively, partially offset by increases in
bank service charges and advertising expenses. For the nine months ended, June
30, 1999, operating expenses increased $389,000 or 5.8% due to an increase of
$210,000 in the provision relating to a real estate owned property consisting of
a 106-lot residential townhouse project located in Pennsylvania. The project was
completed in March 1999. In addition, increases of $21,000, $31,000, $28,000 and
$151,000 were incurred in bank service changes, advertising, data processing and
other expenses, respectively, offset by a reduction of $73,000 in salaries and
employee benefits.
Income Tax Expense.
Income tax expense increased $84,000 to $244,000 for the three months ended June
30, 1999 compared to June 30, 1998, while decreasing $304,000 to $668,000 for
the nine months ended June 30, 1999. The increase during the three months ended
June 30, 1999 is a result of an increase in income before income taxes and
recognition in the third quarter of fiscal 1998 of a reversal of 127,000 in
state income taxes which was accrued in a prior quarter. For the nine months
ended June 30, 1999, the decreases were primarily a result of decreases in
income before income taxes combined with the implementation of various tax
planning strategies including investments in tax-exempt securities.
Year 2000 Compliance
The Year 2000 Issue is the result of computer programs which were written using
two digits rather than four to define the applicable year. As a result, such
programs may recognize a date using "00" as the year 1900 instead of the year
2000 which could result in system failures or miscalculations.
In order to be ready for the year 2000, the Company has developed a Year 2000
Policy (the "Policy") which was presented to the Board of Directors during June
1997. The Policy was developed using the guidelines outlined in the Federal
Financial Institutions Examination's Council's "The Effect of Year 2000 on
Computer Systems". The Board of Directors and its Executive Committee assigned
responsibility for the Policy to the Year 2000 Committee, which reports to the
Board of Directors on a monthly basis. The Policy recognizes that the Company's
operating, processing and accounting operations are computer reliant and could
be affected by the Year 2000 Issue. The Company is primarily reliant on third
party vendors for its computer output and processing, as well as other
significant functions and services (i.e., securities safekeeping services,
securities pricing information, etc.). The Year 2000 Committee is continually
working with these third party vendors to assess their year 2000 readiness.
Based upon the initial assessment, management presently believes that with
planned modifications to existing software and hardware and planned conversions
to new software and hardware, the Company's third party vendors are taking the
appropriate steps to ensure critical systems will function properly. The Company
has identified 74 priority 1 (directly effects customers) and 61 priority 2
(effects employee's ability to service customers) third party vendors. Of such
priority 1 and priority 2 vendors, as of June 30, 1999, the Company has been
informed thereby that 80% are Year 2000 compliant. The Company's data service
processing vendor, which is its major software provider, has informed the
Company that it has completed testing and updating systems. The initial phase of
testing of the data service processor's updated system was successfully
completed in January 1999, and the subsequent phase of modifications and
conversions
12
<PAGE> 15
and related testing of the system was completed by March 31, 1999. Substantially
all of the Company's vendors of its priority 1 and priority 2 applications
(discussed below) have provided assurances, written or oral, that they are
working to make their products and services Year 2000 compliant. While the
Company has received assurances from such vendors as to compliance, such
assurances are not guarantees and may not be enforceable. The Company's existing
older contracts with such vendors do not include Year 2000 certifications or
warranties. Thus, in the event such vendor's products and/or services are not
Year 2000 compliant, the Company's recourse in the event of such failure may be
limited. If the required modifications and conversions are not made, or are not
completed on a timely basis, the Year 2000 Issue could have a material impact on
the operations of the Company. There can be no assurance that potential system
interruptions or unanticipated additional expense incurred to obtain Year 2000
compliance will not have a material adverse effect on the Company's business,
financial condition, results of operations and business prospects. Nevertheless,
the Company does not believe that the cost of addressing the Year 2000 issues
will be a material event or uncertainty that would cause reported financial
information not to be necessarily indicative of future operating results or
financial conditions, nor does it believe that the costs or the consequences of
incomplete or untimely resolution of its Year 2000 issues represents a known
material event or uncertainty that is reasonably likely to affect its future
financial results, or cause its reported financial information not to be
necessarily indicative of future operating results or future financial
condition.
The Year 2000 issues also affect certain of the Company's customers,
particularly in the areas of access to funds and additional expenditures to
achieve compliance. As of June 30, 1999, the Company had contacted all of its
commercial credit customers (86 borrowers with loans outstanding aggregating
$21.8 million) regarding the customers' awareness of the Year 2000 Issue. While
no assurance can be given that the customers will be Year 2000 compliant,
management believes, based on representations of such customers and reviews of
their operations (including assessments of the borrowers' level of
sophistication and data and record keeping requirements), that the customers are
either addressing the appropriate issues to insure compliance or that they are
not faced with material Year 2000 issues. In the majority of cases the credit
extended to such borrowers is collateralized by real estate which inherently
minimizes the Company's exposure to loss in the event that such borrowers do
experience problems becoming Year 2000 compliant. The remaining borrowers have
completed their Year 2000 projects or are in the process of completing their
projects. The Year 2000 Committee is continually working with its commercial
customers to assess their Year 2000 readiness.
The Company has completed its own company-wide Year 2000 contingency plan.
Individual contingency plans concerning specific software and hardware issues
and operational plans for continuing operations were completed by December 1998.
The Year 2000 Committee has reviewed substantially all mission critical test
plans and contingency plans to ensure the reasonableness of the plans. Testing
began on mission critical systems in August 1998 with a majority of such systems
completed by March 31, 1999. The Company has developed contingency plans for
substantially all priority 1 and priority 2 applications which address
operational policies and procedures in the event of data processing, electric
power supply and/or telephone service failures associated with the Year 2000.
Such contingency plans provide documented actions to allow the Company to
maintain and/or resume normal operations in the event of the failure of priority
1 and priority 2 applications. Such plans identify participants, processes and
equipment that will be necessary to permit the Company to continue operations.
The plans include providing off-line system processing, back-up electrical and
telephone systems and other methods to ensure the Company's ability to continue
to operate. The costs of modifications to the existing software is being
primarily absorbed by the third party vendors. The Company recognizes that the
need exists to purchase new hardware and software regardless of year 2000
implications. Based upon current estimates,
13
<PAGE> 16
the Company has identified the hardware and software that would have to be
replaced, and have found the amounts to not be material and consistent with the
Company's normal expenditures for technology upgrades. The Company has been
charged $25,000 to participate in the data service processor's Year 2000 testing
which the amount has been incurred by the Company as of June 30, 1999.
Liquidity and Capital Resources.
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing and financing activities. The Company's primary
sources of funds are deposits, amortization, prepayment and maturities of
outstanding loans and mortgage-related securities, sales of loans, maturities of
investment securities and other short-term investments, borrowing and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-related securities and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, the Company invests excess
funds in overnight deposits and other short-term interest-earning assets which
provide liquidity to meet lending requirements. The Company has been able to
generate sufficient cash through its deposits as well as borrowings to satisfy
its funding commitments. At June 30, 1999, the Company had short-term borrowings
outstanding of $35.1 million, all of which were advances from the Federal Home
Loan Bank of Pittsburgh.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer term basis, the Company maintains a
strategy of investing in various lending products, mortgage-related securities
and investment securities. The Company uses its sources of funds primarily to
meet its ongoing commitments, to pay maturing certificates of deposit and
savings withdrawals, fund loan commitments and maintain a portfolio of
mortgage-related and investment securities. At June 30, 1999, the total approved
loan commitments outstanding amounted to $12.9 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$24.4 million. Certificates of deposit scheduled to mature in one year or less
at June 30, 1999 totaled $123.2 million. Based upon its historical experience,
management believes that a significant portion of maturing deposits will remain
with the Company.
First Keystone Federal Savings Bank (the "Bank"), the Company's wholly owned
subsidiary, is required by the Office of Thrift Supervision ("OTS") to maintain
average daily balances of liquid assets and short-term liquid assets (as
defined) in amounts equal to 4% of net withdrawable deposits and borrowings
payable in one year or less to assure its ability to meet demand from
withdrawals and repayments of short-term borrowings. The liquidity requirements
may vary from time to time at the direction of the OTS depending upon economic
conditions and deposit flows. The Bank's average monthly liquidity ratio for
June 1999 was 6.91%.
As of June 30, 1999, the Bank had regulatory capital in excess of applicable
limits. The Bank is required under certain federal regulations to maintain
tangible capital equal to at least 1.5% of its adjusted total assets, core
capital equal to at least 4.0% of its adjusted total assets and total capital to
at least 8.0% of its total risk-weighted assets. At June 30, 1999, the Bank had
tangible and core capital equal to 8.3% of adjusted total assets and total
capital equal to 19.6% of risk-weighted assets.
14
<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 NPV is defined as the present value of expected cash flows from
existing assets less the present value of expected cash flows from existing
liabilities plus the present value of net expected cash inflows from existing
off-balance sheet contracts. The model assumes instantaneous, parallel shifts in
the U.S. Treasury Securities yield curve of 100 to 300 basis points, either up
or down, and in 100 basis point increments.
The interest rate risk analysis used by the OTS includes an "Exposure Measure"
or "Post-Shock" NPV ratio and a "Sensitivity Measure". The "Post-Shock" NPV
ratio is the net present value as a percentage of assets over the various yield
curve shifts. A low "Post-Shock" NPV ratio indicates greater exposure to
interest rate risk and can result from a low initial NPV ratio or high
sensitivity to changes in interest rates. The "Sensitivity Measure" is the
decline in the NPV ratio, in basis points, caused by a 2% increase or decrease
in rates, whichever produces a larger decline. The following table sets forth
the Bank's NPV as of March 31, 1999, the most recent data for which data is
available.
Net Portfolio Value
<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 $24,881 (17,165) (40.82)% 5.97% (37.68)%
100 34,033 (8,013) (19.06) 7.94 (17.12)
0 42,046 9.58
(100) 47,640 5,594 13.30 10.65 11.17
(200) 51,968 9,922 23.60 11.44 19.42
</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
March 31, 1999.
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
(a) Documents filed as part of this Report.
(1) The following documents are filed as part of
this report and are incorporated herein by
reference from the Registrant's Annual Report.
Report of Independent Auditors.
Consolidated Statements of Financial Condition at
September 30, 1998 and 1997.
Consolidated Statements of Income for the Years
Ended September 30, 1998, 1997 and 1996.
Consolidated Statements of Changes in
Stockholders' Equity for the Years Ended
September 30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the
Years Ended September 30, 1998, 1997 and 1996.
Notes to the Consolidated Financial Statements.
(2) All schedules for which provision is made in
the applicable accounting regulation of the SEC
are omitted because they are not applicable or
the required information is included in the
Consolidated Financial Statements or notes
thereto.
(3) The following exhibits are filed as part of
this Form 10-K, and this list includes the
Exhibit Index.
16
<PAGE> 19
<TABLE>
<CAPTION>
No Description
- -- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of First Keystone Financial, Inc. *
3.2 Amended and Restated Bylaws of First Keystone Financial, Inc. *
4 Specimen Stock Certificate of First Keystone Financial, Inc. *
10.1 Employee Stock Ownership Plan and Trust of First Keystone Financial, Inc. *
10.2 401(K)/ Profit Sharing Plan of First Keystone Federal Savings Bank *
10.3 Employment Agreement between First Keystone Financial, Inc. and
Donald S. Guthrie (incorporated by reference from Exhibit 10.3 to
Registrant's Form 10-KSB for the year ended September 30, 1995).
10.4 Employment Agreement between First Keystone Financial, Inc. and
Stephen J. Henderson (incorporated by reference from Exhibit 10.4 to
Registrant's Form 10-KSB for the year ended September 30, 1995).
10.5 Employment Agreement between First Keystone Financial, Inc. and
Thomas M. Kelly (incorporated by reference from Exhibit 10.5 to
Registrant's Form 10-KSB for the year ended September 30, 1995).
10.6 Form of Severance Agreement between First Keystone Financial, Inc. and
Elizabeth M. Mulcahy (incorporated by reference from Exhibit 10.6 to
Registrant's Form 10-KSB for the year ended September 30, 1995).
10.8 Form of Severance Agreement between First Keystone Financial, Inc. and
Carol Walsh (incorporated by reference from Exhibit 10.8 to
Registrant's Form 10-KSB for the year ended September 30, 1995).
10.9 1995 Stock Option Plan (incorporated by reference from Exhibit
10.9 to Registrant's Form 10-KSB for the year ended September
30, 1995).
10.10 1995 Recognition and Retention Plan and Trust Agreement,
(incorporated by reference from Exhibit 10.10 to Registrant's
Form 10-KSB for the year ended September 30, 1995).
13 Annual Report to Stockholders.
21 Subsidiaries of the Registrant - Reference is made to Item 1
"Business," for the required information.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule
</TABLE>
- -----------------------
(*) Incorporated by reference from the Registration Statement Form S-1
(Registration No. 33-84824) filed by the Registrant with the SEC on
October 6, 1994, as amended.
(b) Reports filed on Form 8-K. None.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST KEYSTONE FINANCIAL, INC.
Date: August 12, 1999 By: /s/ Donald S. Guthrie
-------------------------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: August 12, 1999 By: /s/ Thomas M. Kelly
-------------------------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,733
<INT-BEARING-DEPOSITS> 22,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 151,747
<INVESTMENTS-CARRYING> 15,538
<INVESTMENTS-MARKET> 15,060
<LOANS> 222,526
<ALLOWANCE> 1,857
<TOTAL-ASSETS> 442,080
<DEPOSITS> 258,618
<SHORT-TERM> 40,206
<LIABILITIES-OTHER> 23,992
<LONG-TERM> 95,385
0
0
<COMMON> 6,156
<OTHER-SE> 17,723
<TOTAL-LIABILITIES-AND-EQUITY> 442,080
<INTEREST-LOAN> 4,329
<INTEREST-INVEST> 2,604
<INTEREST-OTHER> 117
<INTEREST-TOTAL> 7,050
<INTEREST-DEPOSIT> 2,542
<INTEREST-EXPENSE> 4,146
<INTEREST-INCOME-NET> 2,904
<LOAN-LOSSES> 84
<SECURITIES-GAINS> 42
<EXPENSE-OTHER> 2,223
<INCOME-PRETAX> 969
<INCOME-PRE-EXTRAORDINARY> 969
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 969
<EPS-BASIC> .35
<EPS-DILUTED> .34
<YIELD-ACTUAL> 7.05
<LOANS-NON> 3,759
<LOANS-PAST> 2
<LOANS-TROUBLED> 42
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,782
<CHARGE-OFFS> 11
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1,857
<ALLOWANCE-DOMESTIC> 1,207
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 650
</TABLE>
