<PAGE> 1
FIRST
KEYSTONE
FINANCIAL, INC.
[COIN]
"NOTHING HAPPENS UNLESS FIRST A DREAM"
-CARL SANDBURG
ANNUAL REPORT
1999
<PAGE> 2
As we approach the millennium, we look to the challenges that lie ahead as
opportunities to improve our services, expand our line of products, develop the
potential of our employees, and explore the yet unknown expanses of the
financial world.
Donald S. Guthrie
President
<PAGE> 3
a Message
to Our Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
More than 100 years ago, the founders of First Keystone Financial envisioned
a community bank that would serve the needs of the working man by helping him
purchase a home, build a business, and save for his family and his own
retirement. Today, as we approach the dawn of a new era, we salute our
predecessors who had the forethought to develop the building and loan
association concept, and all the visionaries who have marked this century with
achievements such as television, computers and space exploration.
As we stand at the starting line of a new millennium, it is now clearer
than ever that mankind is only limited by its imagination and its ability to
learn from the lessons of its past. At First Keystone, we have prepared
ourselves for the journey into the future by taking on the challenges brought
with the rapidly changing times. We began preparations for the Year 2000 upgrade
of the Company's computer hardware and software system early in 1998, formed
strategic alliances in 1999 to offer our customers more services including a
complete line of insurance products, and we plan to introduce Internet Banking
in the Year 2000. We challenge our employees to continue to provide the Bank's
customers with the products and services needed to make banking more convenient
and efficient while providing the Company's shareholders with increased value.
[PHOTO]
Donald S. Guthrie
President and Chief Executive Officer
It is with respect for all that has been accomplished in this past
century, and with wonder at the possibilities ahead, that I report on the
Company's performance for fiscal 1999.
[PHOTO]
Thomas M. Kelly, Executive Vice President and Chief Financial Officer, reviews a
design for the new home page for the Bank's website which will introduce
internet banking during the Year 2000.
I am pleased to report that for the year ended September 30, 1999,
First Keystone continued to achieve record earnings. Net income increased to
$2.8 million and diluted earnings per share increased to $1.32 per share as
compared to $1.23 per share for the prior fiscal year.
Total assets grew to $450 million at year-end compared to $416 million
at the previous year-end. Asset growth was attributed primarily to growth of the
Company's loan portfolio. The Company's net loan portfolio increased by $28
million to $226 million at
<PAGE> 4
September 30, 1999. As we continue to implement our strategic business plan, we
are particularly pleased with the impressive growth in the origination of
commercial real estate and construction loans.
Asset growth was partially funded by an increase in the Bank's core
deposits. The increase of 11.7%, or $11 million, in core deposits can be
attributed to the Bank's successful efforts to cross-sell existing customers,
acquire new households through targeted direct mail campaigns, and open new
ancillary deposit accounts by further developing the Bank's commercial business
lending relationships.
During the first quarter of fiscal year 1999, the Board of Directors
unanimously approved to increase the quarterly dividends paid to the Company's
shareholders by 20% reflecting First Keystone's commitment to enhancing
shareholder value.
[PHOTO]
Robert Hosier, Vice President of Management Information Services, spearheaded
the Bank's Y2K compliance program and alleviated customers' fears of the Big
Bad Wolf.
I encourage you to read the Company's complete financial review
presented in this annual report. One of the highlights includes a 35% reduction
in the Company's ratio of non-performing assets and troubled debt restructurings
to total assets as a result of the completion of a real estate development
project. In addition, I am pleased to report that the Company's financial
performance remains strong as evidenced through earnings improvement and the
continued repurchase of its stock in the open market. These factors contributed
to the Company's slight increase in return on equity at year-end despite a
sluggish market in the financial services sector.
During the next fiscal year, we plan to introduce internet banking,
open the Bank's seventh full service office in Chester Heights, Pennsylvania,
and further develop the strategic alliances formed through the Company's
subsidiaries to provide insurance services and title insurance. These
subsidiaries will provide additional financial services to both bank and
non-bank customers and will directly impact the bottom line by contributing to
non-interest income.
Thank you for the trust and confidence that you have placed in our
management team. We will continue to work hard to increase the value of your
investment.
[PHOTO]
With the bank well prepared for the millennium,"Who's afraid of Y2K?" was an
appropriate and fun theme for this year's Delaware County Halloween Parade in
Media. The parade was sponsored by First Keystone Federal.
Sincerely,
/s/Donald S. Guthrie
Donald S. Guthrie
President and Chief Executive Officer
<PAGE> 5
YEAR IN REVIEW
We're More than Y2K OK
Recognizing the importance of upgrading the Bank's computer system to properly
read dates in a four-digit system, management began dedicating significant
resources to this potential problem in early 1998. In accordance with the Bank's
Y2K Compliance Plan, the Bank has run complete diagnostic tests on its computer
system, all necessary hardware and software has been updated, and testing with
the Bank's primary service provider has produced excellent results. In addition,
the Bank has hosted numerous customer informational seminars on the topic, and
we are confident that these efforts will result in a seamless transition into
the new millennium for its customers.
FORMING STRATEGIC ALLIANCES TO MAKE FINANCIAL MATTERS EASIER
Understanding that, for many of us, time has become one of our most valuable
assets, the Bank has added to the convenience of one-stop shopping for
residential and commercial loans by also offering title insurance services
through its investment in a title insurance agency. Now, with just one quick
telephone call, our customers can feel confident that their title insurance will
be completed efficiently and professionally. Another natural extension of
services is the ability to offer a full array of insurance products. Through
First Keystone Insurance Services, LLC, a subsidiary of the Bank, Bank customers
can receive valuable discounts on the purchase of long-term health care, life,
automobile, home and commercial insurance products. These strategic alliances
enable the Bank to provide its customers with excellent service, competitive
prices and time saving convenience on many financial products while providing
the Company with a more diversified income stream that is less dependent on
interest income.
CONCENTRATING ON COMMERCIAL, CONSTRUCTION AND CONSUMER LENDING
With a strong economy helping to pave the way, commercial real estate lending
and commercial business loans enjoyed a robust year with outstanding balances
increasing from $22 million at September 30, 1998 to $33 million at September
30, 1999. This 50% increase in the portfolio helped to provide many small
businesses with the financing they needed to
[PHOTO]
A group of Russian delegates, brought to the United States by Congressman Curt
Weldon, attended a meeting with First Keystone Federal Vice President of Lending
Elizabeth Gibson to learn mortgage processing and underwriting skills. With the
information gathered from this and other meetings with bank officials and
business leaders throughout Delaware County, they will use their knowledge to
help institute business and economic changes in their country.
<PAGE> 6
[PHOTO]
Mary Wentz, Vice President of Construction Loans and Bud Amentt, Vice President
of Commercial Lending work together to provide commercial real estate lending
and commercial business loans throughout Chester and Delaware Counties. Shown
above, they are on the construction site of the new Fox Roach Realtor office in
Media.
expand, while providing the Company with solid returns on its investments. The
tremendous growth in this department is a result of increased market
penetration, and greater customer awareness that First Keystone is a source for
commercial financing.
Continued strong activity in new residential construction was spurred by
both record low interest rates and the expansion of public sewer and water in
many of the markets the Bank serves. In addition, the ability to offer permanent
commercial loan financing has also enhanced the construction lending portfolio.
First Keystone continues to maintain its market share in this extremely
competitive arena because of its proven expertise, active presence in the trade
associations and solid reputation with area builders.
First mortgage lending remains an important aspect of the Bank's
portfolio mix, and management recognizes that traditional residential lending
will always be a staple among its lending products. However, increased emphasis
is being placed on originating consumer loans, as well as first and second
mortgages to subprime borrowers. The origination of consumer loans provides
greater interest rate spreads than single-family residential loans while the
origination of subprime loans generates increased fee income as they are sold
into the capital markets for a premium.
BANKING SERVICES DELIVERED IN A MULTITUDE OF MEDIUMS
First Keystone is meeting the needs of our customers by providing access to bank
products through a multitude of mediums. These include the expansion of branch
offices, increased options and services through its telephone banking system,
and Internet banking which will be introduced in fiscal year 2000.
The Company's goal remains to provide its banking customers with a
multitude of financial services while striving to enhance shareholder value.
First Keystone continues to face these challenges with foresight and strong
leadership. The latest branch office that opened in December 1999 in Chester
Heights, Pennsylvania is located in the most explosive growth area in Delaware
County. The Bank's 24/7 banking telephone system, Keystone Direct, continues to
expand its services and the number of transactions increases monthly. Internet
banking will be launched during the new fiscal year, and management recognizes
that this new service will not only assist the Bank in remaining competitive in
the financial industry, but will serve as an aggressive tool to attract a
younger demographic group than its current client base.
[PHOTO]
The newest branch of First Keystone Federal opened in December 1999 in Chester
Heights, PA.
<PAGE> 7
First Keystone Financial, Inc. and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of First Keystone Financial,
Inc. set forth below does not purport to be complete and should be read in
conjunction with, and is qualified in its entirety by, the more detailed
information, including the Consolidated Financial Statements and related Notes,
appearing elsewhere herein.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets $ 450,126 $ 415,863 $ 373,430 $ 294,241 $ 280,979
Loans receivable, net 226,375 198,343 188,289 167,530 158,002
Mortgage-related securities held to maturity 14,497 18,769 20,707 23,221 60,294
Investment securities held to maturity 10,000 16,532 10,710
Assets held for sale:
Mortgage-related securities 113,046 115,486 104,472 60,211 19,538
Investment securities 44,315 40,621 10,211
Loans 1,792 2,799 4,577 2,447 57
Real estate owned 297 1,663 1,672 1,557 465
Deposits 260,826 247,311 227,918 219,205 223,753
Borrowings 142,437 120,878 99,987 46,740 28,411
Stockholders' equity 23,904 26,664 24,752 23,084 24,463
Non-performing assets 3,477 5,367 3,749 6,909 3,621
========= ========= ========= =========== =========
SELECTED OPERATIONS DATA:
Interest income $ 28,694 $ 27,393 $ 22,750 $ 19,837 $ 18,295
Interest expense 16,956 15,625 12,639 10,932 10,767
--------- --------- --------- --------- ---------
Net interest income 11,738 11,768 10,111 8,905 7,528
Provision for loan losses 259 186 239 1,250 52
--------- --------- --------- --------- ---------
Net interest income
after provision for loan losses 11,479 11,582 9,872 7,655 7,476
Other income (expense):
Service charges and other fees 934 898 972 1,047 1,029
Net gain on sales of interest-earning assets 616 577 285 203 113
Net gain on sale of other assets 1 46
Net gain (loss) on real estate activities (113) (25) 7 2 (44)
Other 350 57 40 56 89
Operating expenses 9,501 9,059 6,921 8,645 7,036
-------- --------- -------- --------- ---------
Income (loss) before income taxes, extraordinary
item and cumulative effect of change in
accounting principle 3,765 4,031 4,301 318 1,627
Income tax expense (benefit) 917 1,250 1,664 (567) 504
--------- --------- --------- ---------- ---------
Net income $ 2,848 $ 2,781 $ 2,637 $ 885(2) $ 1,123
========= ========= ========= =========== =========
Diluted earnings per common share(1) $ 1.32 $ 1.23 $ 1.13 $ .37(2) $ .37
========= ========= ========= =========== =========
</TABLE>
(1) Adjusted for the effect of a 2 for 1 stock split declared December 4,
1997.
(2) Includes the effects of the one-time SAIF special assessment. The
effects of the assessment increased operating expenses and decreased
income before income taxes by $1.4 million. The effects of the
assessment also decreased net income and earnings per share by
$876,000 and $.74, respectively.
5
<PAGE> 8
First Keystone Financial, Inc. and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS: (3)
Average yield earned on interest-earning assets 7.15% 7.40% 7.54% 7.45% 7.37%
Average rate paid on interest-bearing liabilities 4.49% 4.68 4.48 4.42 4.62
Average interest rate spread 2.65% 2.72 3.07 3.03 2.75
Net interest margin 2.98% 3.18 3.35 3.34 3.03
Ratio of interest-earning assets to
interest-bearing liabilities 107.91 110.80 106.82 107.65 106.55
Net interest income after provision for loan
losses to operating expenses 120.82 127.84 142.64 88.55(4) 106.25
Operating expenses as a percent of average assets 2.23 2.37 2.21 3.14(4) 2.73
Return on average assets 0.67 0.73 0.84 0.32(4) 0.44
Return on average equity 11.18 11.13 11.46 3.92(4) 5.59
Ratio of average equity to average assets 5.99 6.54 7.36 8.20 7.80
Full-service offices at end of period 6 6 5 5 5
====== ====== ====== ======= ======
ASSET QUALITY RATIOS: (5)
Non-performing loans as a
percent of gross loans receivable 1.39% 1.85% 1.09% 3.15% 1.98%
Non-performing assets as a
percent of total assets 0.77 1.29 1.00 2.35 1.29
Allowance for loan losses as a
percent of gross loans receivable 0.84 0.87 0.86 1.54 0.93
Allowance for loan losses as a
percent of non-performing loans 60.63 46.92 78.38 49.03 47.12
Net loans charged-off to average
interest-earning loans receivable 0.03 0.04 0.68 0.07 0.07
====== ====== ====== ======= ======
CAPITAL RATIOS: (5) (6)
Tangible capital ratio 8.17% 8.27% 8.12% 7.67% 8.23%
Core capital ratio 8.17 8.27 8.12 7.67 8.23
Risk-based capital ratio 18.80 21.09 19.91 17.24 17.82
====== ====== ====== ======= ======
</TABLE>
(3) Adjusted for the effects of tax-free investments
(4) Includes the effects of the one-time SAIF special assessment of $1.4
million. Excluding the one-time effects, the ratio of net interest
income after provision for loan losses to operating expenses and
operating expenses as a percent of average assets ratios were 106.04%
and 2.62%, respectively. In addition, return of average assets and
return on average equity were .64% and 7.79%, respectively, excluding
the special assessment.
(5) Asset Quality Ratios and Capital Ratios are end of period ratios, except
for charge-offs to average loans. With the exception of end of period
ratios, all ratios are based on average daily balances during the
indicated periods.
(6) Regulatory capital ratios of the Company's wholly-owned subsidiary, First
Keystone Federal Savings Bank.
LOANS RECEIVABLE
Commercial Business 1%
Single Family 69%
Construction 8%
Non-Residential 13%
Consumer Equity 8%
Other 1%
DEPOSIT ACCOUNTS
Non-Interest Bearing Accounts 3%
Money Market Demand Accounts 7%
Passbook Accounts 16%
New Accounts 13%
Certificates of Deposit 61%
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
First Keystone Financial, Inc. (the "Company") is the holding company for its
wholly owned subsidiary, First Keystone Federal Savings Bank (the "Bank"). For
purposes of this discussion, First Keystone Financial, Inc., including its
wholly owned subsidiaries, will be referred to as the "Company". The Company is
a community oriented banking organization that focuses on providing customer and
business services within its primary market area, consisting of Delaware and
Chester counties in the state of Pennsylvania.
The following discussion should be read in conjunction with the Company's
consolidated financial statements presented elsewhere herein. The primary asset
of the Company is its investment in the Bank and, accordingly, the discussion
below with respect to results of operations relates primarily to the Bank.
The Company's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, which principally consist of loans, mortgage-related securities and
investment securities, and interest expense on interest-bearing liabilities,
which principally consist of deposits and Federal Home Loan Bank ("FHLB")
advances. The Company's results of operations also are affected by the provision
for loan losses, resulting from management's assessment of the adequacy of the
allowance for loan losses, the level of its non-interest income, including
service charges and other fees as well as gains and losses from the sale of
certain assets, the level of its operating expenses, and income tax expense.
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Company's asset and liability management is to
evaluate the interest rate risk existing in certain assets and liabilities,
determine the level of risk appropriate given the Company's business focus,
operating environment, capital and liquidity requirements and performance
objectives, establish prudent asset concentration guidelines, and manage the
risk consistent with Board approved guidelines. Through asset and liability
management, the Company seeks to reduce both the vulnerability and volatility of
its operations to changes in interest rates and to manage the ratio of
interest-rate sensitive assets to interest-rate sensitive liabilities within
specified maturities or repricing periods. The Company's actions in this regard
are taken under the guidance of the Asset/Liability Committee ("ALCO"), which is
chaired by the Chief Financial Officer and comprised of members of the Company's
senior management. The ALCO meets on a monthly basis to review, among other
things, liquidity and cash flow needs, current market conditions and interest
rate environment, the sensitivity to changes in interest rates of the Company's
assets and liabilities, the book and market values of assets and liabilities,
unrealized gains and losses, and the purchase and sale activity and maturities
of investments, deposits and borrowings. In addition, the pricing of the
Company's residential loans and deposits is reviewed at least weekly while the
pricing of loans originated for sale in the secondary market is reviewed daily.
The ALCO reports to the Company's Board of Directors no less than once a
quarter.
The Company's primary asset/liability monitoring tool consists of various
asset/liability simulation models, which are prepared on a quarterly basis and
are designed to capture the dynamics of the balance sheet as well as rate and
spread movements and to quantify variations in net interest income under
different interest rate scenarios. A more conventional but limited
Asset/Liability monitoring tool involves an analysis of the extent to which
assets and liabilities are interest rate sensitive and measures an institution's
interest rate sensitivity gap.
An asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between interest-earning
assets and interest-bearing liabilities maturing or repricing within a given
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. Conversely, during a period
of rising interest rates, a negative gap would tend to adversely affect net
interest income, while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap would
tend to result in an increase in net interest income, while a positive gap would
tend to affect net interest income adversely. While a conventional gap measure
may be useful, it is limited in its ability to predict trends in future
earnings. It makes no presumptions about changes in prepayment tendencies,
deposit or loan maturity preferences or repricing time lags that may occur in
response to a change in the interest rate environment.
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For purposes of the table below, annual prepayment assumptions range from 9%
to 15% for fixed-rate mortgage loans and mortgage-related securities and 5% to
15% for adjustable-rate mortgage loans and mortgage-related securities. Passbook
and statement savings accounts are assumed to decay at a rate of 14.0% per year.
Money market ("MMDA") are assumed to decay at a rate of 30% per year. Negotiable
order of withdrawal ("NOW") accounts are assumed to decay at a rate of 20% per
year. First Keystone's passbook, statement savings, MMDA and NOW accounts are
generally subject to immediate withdrawal. However, management considers a
portion of these deposits to be core deposits having significantly longer
effective maturities based upon the Bank's experience in retaining such deposits
in changing interest rate environments.
Management believes that the assumptions used by it to evaluate the
vulnerability of the Bank's operations to changes in interest rates are
conservative and considers them reasonable. However, the interest rate
sensitivity of the Bank's assets and liabilities as portrayed in the table below
could vary substantially if different assumptions are used or actual experience
differs from the assumptions used in the table.
The Company also utilizes an analysis of the market value of portfolio
equity, which addresses the estimated change in the Company's equity value
arising from movements in interest rates. The market value of portfolio equity
is estimated by valuing the Company's assets and liabilities under different
interest rate scenarios. The extent to which assets gain or lose value in
relation to gains or losses of liabilities as interest rates increase or
decrease determines the appreciation or depreciation in equity on a market value
basis. Market value analysis is intended to evaluate the impact of immediate and
sustained shifts of the current yield curve upon the market value of the
Company's current balance sheet. See Item 7A in the Company's Annual Report on
Form 10-K.
The following table summarizes the anticipated maturities or repricing of the
Company's interest-earning assets and interest-bearing liabilities as of
September 30, 1999, based on the information and assumptions set forth above.
<TABLE>
<CAPTION>
MORE THAN MORE THAN
WITHIN SIX TO ONE YEAR THREE OVER
SIX TWELVE TO THREE YEARS TO FIVE
MONTHS MONTHS YEARS FIVE YEARS YEARS TOTAL
------ ------ ----- ---------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net(1) $ 61,292 $ 35,858 $ 44,010 $ 30,896 $ 51,140 $ 223,196
Mortgage-related securities 13,980 8,890 28,722 24,718 51,233 127,543
Loans held for sale 1,792 1,792
Investment securities 10,645 4,994 34,833 50,472
Interest-earning deposits 17,005 17,005
--------- --------- --------- --------- --------- ---------
Total interest-earning assets $ 104,714 $ 44,748 $ 77,726 $ 55,614 $ 137,206 $ 420,008
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Deposits $ 85,613 $ 57,271 $ 66,178 $ 36,250 $ 15,514 $ 260,826
Borrowed funds 72,180 34,300 20,500 10,000 5,457 142,437
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities $ 157,793 $ 91,571 $ 86,678 $ 46,250 $ 20,971 $ 403,263
--------- --------- --------- --------- --------- ---------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ (53,079) $ (46,823) $ (8,952) $ 9,364 $ 116,235 $ 16,745
========= ========= ========= ========= ========= =========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ (53,079) $ (99,902) $(108,854) $ (99,490) $ 16,745
========= ========= ========= ========= =========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percentage of total assets (11.79)% (22.19)% (24.18)% (22.10)% 3.72%
========= ========= ========= ========= =========
</TABLE>
(1) Balances have been reduced for non-accruing loans, which amounted $3.2
million at September 30, 1999.
8
<PAGE> 11
MD&A
management's discussion and analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
GENERAL. Total assets of the Company increased by $34.3 million, or 8.2%,
from $415.9 million at September 30, 1998 to $450.1 million at September 30,
1999. The increase reflected primarily growth in loans receivable and, to a
lessor extent, prepaid expenses and other assets, which consist primarily of the
Bank's purchase of Bank Owned Life Insurance ("BOLI") products. The asset growth
was funded by increases in customer deposits and advances from the FHLB of
Pittsburgh. Asset growth was also funded by a modest increase in retained
earnings.
CASH AND INVESTMENTS. Cash and investments (including investments available
for sale) decreased by $417,000, or .6%, to $64.3 million at September 30, 1999
compared to $64.7 million at September 30, 1998. The decrease was primarily due
to use of the Company's liquid assets and the proceeds from investments to fund
increases in the Company's loan portfolio.
LOANS HELD FOR SALE AND LOANS RECEIVABLE, NET. Aggregate loans receivable
(loans receivable, net, and loans held for sale) increased $27.0 million or
13.4% to $228.2 million at September 30, 1999 compared to $201.1 million at
September 30, 1998. Single-family mortgage loans increased $18.7 million, or
12.6%, while an increased focus on the origination of multi-family and
commercial real estate mortgages increased the balance of such loans to $11.4
million, or 52.0%, for the year ended September 30, 1999.
MORTGAGE-RELATED SECURITIES AND MORTGAGE-RELATED SECURITIES AVAILABLE FOR
SALE. Mortgage-related securities and mortgage-related securities available for
sale decreased in the aggregate by $6.8 million, or 5.0%, to $127.5 million at
September 30, 1999 compared to $134.3 million at September 30, 1998. The
decrease was the result of the Company's continued emphasis on loan
originations.
NON-PERFORMING ASSETS. The Company's total non-performing loans (including
troubled debt restructurings) and real estate owned decreased $1.9 million or
35.2% from $5.4 million, or 1.0%, of total assets at September 30, 1998 to $3.5
million, or .8%, of total assets at September 30, 1999. The decrease in the
non-performing assets was primarily due to the completion in fiscal 1999 of the
Company's only real estate development project. Real estate owned decreased by
$1.4 million to $297,000, or .07%, of total assets at September 30, 1999 as
compared to $1.7 million, or .40%, of total assets at September 30, 1998.
Non-performing assets consist primarily of single-family residential loans.
DEPOSITS. Deposits increased by $13.5 million, or 5.5%, from $247.3 million
at September 30, 1998 to $260.8 million at September 30, 1999. This increase was
primarily due to a $10.6 million, or 11.7%, increase in the Company's core
accounts, NOW, passbook, and MMDA accounts, as a result of the Company's
continued emphasis on these deposit accounts. Certificates of deposit also
increased by $3.0 million, or 1.9%, in the current fiscal year.
BORROWINGS. The Company's total borrowings increased $21.6 million to $142.4
million at September 30, 1999 from $120.9 million at September 30, 1998. The
FHLB advances were used to fund loan growth and had a weighted average interest
rate of 5.4% at September 30, 1999. See Note 10 to the Consolidated Financial
Statements for further information.
EQUITY. At September 30, 1999, total stockholders' equity was $23.9 million,
or 5.3% of total assets, compared to $26.7 million, or 6.4%, of total assets at
September 30, 1998. The $2.8 million decrease was due to the combination of a
decrease of $4.5 million in unrealized gains on available for sale securities as
well as the cost of the Company's stock repurchases and dividends paid
aggregating $1.6 million offset, in part, by the Company's net income of $2.8
million. The decrease in the unrealized gains on available for sale securities
was due to general increases in market interest rates.
9
<PAGE> 12
MD&A
management's discussion and analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Average Balances, Net Interest Income and Yields Earned and Rates Paid. The
following table sets forth, for the periods indicated, information regarding (i)
the total dollar amount of interest income of the Company from interest-earning
assets and the resultant average yields; (ii) the total dollar amount of
interest expense on interest-bearing liabilities and the resultant average rate;
(iii) net interest income; (iv) interest rate spread; and (v) net interest
margin. Information is based on average daily balances during the indicated
periods and yields were adjusted for the effects of tax-free investments.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
1999 1998
YIELD/COST -------------------------------------------------------------------
AT AVERAGE Average
SEPT. 30, AVERAGE YIELD/ Average Yield/
1999 BALANCE INTEREST COST Balance Interest Cost
--------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)(2) 7.69% $ 218,784 $ 17,366 7.94% $ 197,776 $ 16,447 8.32%
Mortgage-related securities(2) 6.66 127,572 7,965 6.24 123,283 8,029 6.51
Investment securities(2) 6.80 49,273 3,363 6.83 38,475 2,607 6.78
Other interest-earning assets 5.51 11,600 414 3.57 10,585 488 4.61
--------- -------- -------- --------
Total interest-earning assets 7.19 407,229 $ 29,108 7.15 370,119 $27,571 7.45
---- -------- ---- -------- ----
Noninterest-earning assets 18,261 11,608
--------- ---------
Total assets $ 425,490 $ 381,727
========= =========
Interest-bearing liabilities:
Deposits 3.96 $ 255,536 $ 10,265 4.02 $ 234,937 $ 9,937 4.23
FHLB advances and other borrowings 5.50 121,829 6,691 5.49 99,092 5,688 5.74
--------- -------- --------- --------
Total interest-bearing liabilities 4.50 377,365 16,956 4.49 334,029 15,625 4.68
---- -------- --------
Interest rate spread 2.68 2.65 2.77
---- ---- ----
Noninterest-bearing liabilities 22,643 22,730
--------- ---------
Total liabilities 400,008 356,759
Stockholders' equity 25,482 24,968
--------- ---------
Total liabilities and stockholders' equity $ 425,490 $ 381,727
========= =========
Net interest-earning assets $ 29,864 $ 36,090
========= =========
Net interest income/net interest margin(3) 12,152 2.98% 11,946 2.23%
==== ====
Less: tax equivalent adjustments (414) (178)
-------- --------
Net interest income $ 11,738 $ 11,768
======== ========
Ratio of average interest-earning assets to
average interest-bearing liabilities 107.91% 110.80%
====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1997
-------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) (2) $179,566 $ 14,737 8.21%
Mortgage-related securities(2) 92,393 6,197 6.71
Investment securities(2) 21,774 1,478 6.79
Other interest-earning assets 7,793 338 4.34
-------- --------
Total interest-earning assets 301,526 $ 22,750 7.54
-------- ----
Noninterest-earning assets 11,193
--------
Total assets $312,719
========
Interest-bearing liabilities:
Deposits $221,140 $ 9,182 4.15
FHLB advances and other borrowings 61,124 3,457 5.65
-------- --------
Total interest-bearing liabilities 282,264 12,639 4.47
--------
Interest rate spread 3.07
----
Noninterest-bearing liabilities 7,453
--------
Total liabilities 289,717
Stockholders' equity 23,002
--------
Total liabilities and stockholders' equity $312,719
========
Net interest-earning assets $ 19,262
========
Net interest income/net interest margin(3) $ 10,111 3.35%
====
Less: tax equivalent adjustments --------
Net interest income $ 10,111
========
Ratio of average interest-earning assets to
average interest-bearing liabilities 106.82%
======
</TABLE>
(1) Includes non-accrual loans.
(2) Includes assets classified as either available for sale or held for sale.
(3) Net interest income divided by interest-earning assets.
10
<PAGE> 13
management's discussion and analysis
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RATE/VOLUME ANALYSIS. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total change in rate and volume. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to rate and the
change due to volume.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
---------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due To Due To
---------------------------------------------------------------------------------
Total Increase Total Increase
Rate Volume (Decrease) Rate Volume (Decrease)
---- ------ ---------- ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable(1) $ (689) $1,608 $ 919 $ 198 $1,512 $1,710
Mortgage-related securities(1) (409) 345 (64) (174) 2,006 1,832
Investment securities (1) (2) 19 737 756 (3) 1,132 1,129
Other interest-earning assets (129) 55 (74) 22 128 150
------- ------ ------- ------ ------ ------
Total interest-earning assets (1,208) 2,745 1,537 43 4,778 4,821
------- ------ ------- ------ ------ ------
Interest-bearing liabilities:
Deposits (440) 768 328 174 581 755
FHLB advances and other borrowings (169) 1,172 1,003 (2) 2,233 2,231
------- ------ ------- ------ ------ ------
Total interest-bearing liabilities (609) 1,940 1,331 172 2,814 2,986
------- ------ ------- ------ ------ ------
Increase (decrease) in net interest income $ (599) $ 805 $ 206 $(129) $1,964 $1,835
======= ====== ======= ====== ====== ======
</TABLE>
(1) Includes assets classified as either available for sale or held for sale.
(2) The above table is presented on a taxable equivalent basis.
RESULTS OF OPERATIONS
GENERAL. The Company reported net income of $2.8 million, $2.8 million and
$2.6 million for the years ended September 30, 1999, 1998 and 1997,
respectively. The $67,000 increase in net income for the year ended September
30, 1999 compared to the year ended September 30, 1998 was primarily due to a
$279,000, or 18.5%, increase in other income, and a $333,000 decrease in income
tax expense offset, in part, by a $442,000, or 4.9%, increase in operating
expenses.
The $144,000 increase in net income for the year ended September 30, 1998
compared to the year ended September 30, 1997 was primarily due to a $1.7
million, or 16.4%, increase in net interest income, a $158,000, or 11.7%,
increase in other income and a $414,000 decrease in income tax expense partially
offset by a $2.1 million, or 30.9%, increase in operating expenses. The increase
in operating expenses for the year ended September 30, 1998 was primarily due to
the minority interest expense related to the issuance of trust preferred
securities.
NET INTEREST INCOME. Net interest income is determined by the interest rate
spread (the difference between the yields earned on interest-earning assets and
the rates paid on interest-bearing liabilities) and the relative amounts of
interest-earning assets and interest-bearing liabilities. All ratios are
reported on a fully tax equivalent basis. The Company's average interest-rate
spread was 2.65%, 2.72% and 3.07% during the years ended September 30, 1999,
1998 and 1997, respectively. The Company's interest-rate spread was 2.68% at
September 30, 1999. The Company's net interest margin (net interest income as a
percentage of average interest-earning assets) was 2.98%, 3.23% and 3.35% during
the years ended September 30, 1999, 1998 and 1997, respectively. In fiscal 1999
and 1998, the Company's net interest spread and net interest margin were
impacted by the relatively flat yield curve in which assets have repriced
downward to a greater degree than liabilities in the declining interest rate
environment that existed.
Net interest income declined slightly to $11.7 million in fiscal 1999 as
compared to $11.8 million in fiscal 1998. The reason for the decrease was a
greater increase in total interest expense than in total interest income. Net
interest income increased by $1.7 million, or 16.4%, in the year ended September
30, 1998 to $11.8 million compared to $10.1 million in fiscal 1997. The reason
for such increase was a $4.6 million, or 20.4%, increase in interest income
partially offset by a $3.0 million, or 23.6%, increase in interest expense.
11
<PAGE> 14
management's discussion and analysis
- --------------------------------------------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST INCOME. The $1.3 million, or 4.7%, increase in total interest
income during the year ended September 30, 1999 as compared to fiscal 1998 was
primarily due to a $919,000, or 5.6%, increase in interest income from loans as
a result of a $21.0 million, or 10.6%, increase in the average balance of the
loan portfolio offset, in part, by a 38 basis point (with 100 basis points being
equal to 1.0%) decrease in the yield earned thereon. The increase in the average
balance was due to increased loan originations in both single-family, commercial
business and commercial real estate loans as part of the Company's continued
emphasis on expanding its loan portfolio. The decline in yield was due to the
low rate environment in fiscal 1999 resulting in the refinancing of higher
yielding loans into lower yielding products. Additionally, interest income on
mortgage-related securities, investments and other interest-earning assets
increased $382,000, or 3.5%, due to a $16.1 million, or 9.3%, increase in the
aggregate average balance thereof offset by a 22 basis point decrease in the
average yield earned. The increase in the average balances of such assets was
due to the ongoing leveraging of the Company's capital base as part of the
implementation of its strategic plan and the decrease in the yield earned was
due to the declining interest rate environment experienced during fiscal 1999.
Total interest income amounted to $27.4 million for the year ended
September 30, 1998 compared to $22.8 million for the year ended September 30,
1997. The primary reason for the increase in the 1998 period was a $2.9 million,
or 36.6%, increase in interest income from mortgage-related securities,
investments and other interest-earning assets as a result of a $50.4 million, or
41.3%, increase in the aggregate average balance thereof. Such increase was
partially offset by a 22 basis point decrease in the yield earned thereon. The
increase in the average balances was due to increased leveraging of the
Company's capital base while the decrease in the yield reflected the declining
interest rate environment existing during fiscal 1998 compared to 1997. In
addition, interest income from loans increased $1.7 million, or 11.6%, due to a
$18.2 million, or 10.1%, increase in the average loan balance and a 11 basis
point increase in the yield earned thereon. The increase in the average balance
of the loan portfolio in fiscal 1998 reflected increased originations of
primarily fixed-rate single family loans held in portfolio.
INTEREST EXPENSE. Total interest expense amounted to $17.0 million for
the year ended September 30, 1999 as compared to $15.6 million for fiscal 1998.
The $1.4 million, or 8.5%, increase in interest expense in fiscal 1999 compared
to fiscal 1998 was due to a $1.0 million increase in interest expense on
borrowings and a $328,000 increase in interest expense on deposits. The increase
in interest expense on borrowings was due to a $22.7 million increase in the
average balance partially offset by a 25 basis point decline in the average rate
paid on borrowings. The increase in interest paid on deposits was due to a $20.6
million increase in the average balance of deposits offset by a 21 basis point
decline in the average rate paid on deposits. The increased level of borrowings
and deposits was used to fund loan originations and the purchase of
mortgage-related and investment securities. The decrease in the average rate
paid on deposits and borrowings was due to general market interest rate
fluctuations.
Total interest expense increased by $3.0 million, or 23.6%, in the year
ended September 30, 1998 compared to fiscal 1997. The reason for such increase
was a $2.2 million increase in interest expense on borrowings and $755,000
increase in interest expense on deposits. The increase in interest expense on
borrowings was due to a $38.0 million increase in the average balance of total
borrowings and a 9 basis point increase in the average rate paid thereon. The
increase in interest paid on deposits was due to a $13.8 million increase in the
average balance of deposits combined with an 8 basis point increase in the
average rate paid. The increased level of deposits and borrowings was used to
fund loan originations and purchases of investment securities. The modest
increase in the rates paid on deposits and borrowings was due to general market
interest rate fluctuations.
PROVISIONS FOR LOAN LOSSES. Provisions for loan losses are charged to
earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on historical experience, the volume and type of
lending conducted by the Company, the amount of the Company's classified assets,
the status of past due principal and interest payments, general economic
conditions, particularly as they relate to the Company's primary market area,
and other factors related to the collectibility of the Company's loan and loans
held for sale portfolios. Management of the Company assesses the allowance for
loan losses on a monthly basis and makes provisions for loan losses as deemed
appropriate in order to maintain the adequacy of the allowance for loan losses.
For the year ended September 30, 1999, the provision for loan losses amounted to
$259,000 as compared to $186,000 for fiscal 1998. For the year ended September
30, 1997, the provision for loan losses was $239,000. At September 30, 1999, the
Company's allowance for loan losses amounted to 60.6% of total non-performing
loans and .81% of gross loans receivable.
Although management of the Company believes that the Company's
allowance for loan losses was adequate
12
<PAGE> 15
management's discussion and analysis
- --------------------------------------------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
at September 30, 1999, based on facts and circumstances available to it, there
can be no assurances that additions to such allowance will not be necessary in
future periods, which would adversely affect the Company's results of operations
for such periods. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Company's provision for
loan losses and the carrying value of its other non-performing assets based on
their judgments about information available to them at the time of their
examination.
OTHER INCOME. For the year ended September 30, 1999, the Company
reported other income of $1.8 million compared to $1.5 million for the year
ended September 30, 1998. The primary reason for the $279,000, or 18.5%,
increase in other income in fiscal 1999 was a $274,000 increase in other income
and a $36,000 increase in service charges and other fees, partially offset by a
$106,000 increase in the cost of real estate operations. Also contributing to
the increase in other income was a $240,000 increase in the gain on sale of
investments and mortgage-related securities as the Company sought to take
advantage of certain market opportunities partially offset by a decrease in the
gain on sale of loans of $201,000 due to the record refinancings processed in
the prior fiscal year. The increase in other income is due to the Bank's
purchase of Bank Owned Life Insurance Policies which were purchased to offset
current employee benefit plan costs.
The $158,000, or 11.7%, increase in other income for the year ended
September 30, 1998 as compared to fiscal 1997 was due to a $241,000 increase in
net gain on sales of mortgage loans held for sale and a $51,000 gain on the sale
of investments and mortgage-related securities partially offset by a decrease of
$74,000 in service charges and other fees. The increase in gains on sales of
loans for fiscal 1998 reflected the Company's increased emphasis on the
origination and sale, servicing released, of non-conforming loans. See Note 6 to
the Consolidated Financial Statements.
OPERATING EXPENSES. Operating expenses include compensation and
employee benefits, occupancy and equipment expense, Federal Deposit Insurance
Corporation ("FDIC") deposit insurance premiums, data processing expense and
other items. Operating expenses increased $442,000, or 4.9%, to $9.5 million for
the year ended September 30, 1999 compared to the year ended September 30, 1998.
The primary reason for the increase in operating expenses in fiscal 1999 was a
$350,000 provision for real estate owned losses primarily related to the Bank
real estate development project. Also contributing to the increase in operating
expenses were modest increases in occupancy and equipment, professional fees,
bank service charges, data processing and advertising expenses offset in part by
a decrease in salaries and employee benefits.
Operating expenses increased $2.1 million, or 30.9%, for the year ended
September 30, 1998 compared to the year ended September 30, 1997 and amounted to
$9.1 million in fiscal 1998 compared to $6.9 million in fiscal 1997. The primary
reason for the substantially higher level of operating expenses for fiscal 1998
was the $1.6 million minority interest in expense of subsidiary relating to the
issuance of trust preferred securities by the Company. See Note 20 to the
Consolidated Financial Statements for further information regarding the trust
preferred securities. Also contributing to the increase was a $468,000, or 14.7%
increase in compensation expense, a $241,000, or 30.2% increase in other
expenses, and a $155,000, or 18.1%, increase in occupancy and equipment expense
partially offset by a $153,000, or 20.9%, decrease in professional fees and a
$62,000, or 30.0%, decrease in FDIC insurance premiums. Expansion of the branch
network, through the opening of a new branch office, contributed to both the
increased occupancy and equipment expense and compensation expense. Compensation
expense also increased due to general salary increases as well as increased
costs associated with the market value accounting for the employee stock
ownership plan in accordance with AICPA Statement of Position 93-6. The increase
in other expenses was due to a provision established for the Company's real
estate owned property.
INCOME TAXES. The Company recognized income tax expenses of $917,000,
or 24.4%, of pre-tax income, for the year ended September 30, 1999, compared to
$1.3 million, or 31.0%, of pre-tax income, for the year ended September 30,
1998. The Company recognized income tax expenses of $1.7 million, or 38.7% of
pre-tax income, for fiscal 1997. The primary reason for the decrease in the
percentage of tax expense in fiscal 1999 and 1998 was the reduction in state
income taxes combined with the increase in tax-free income resulting from
purchases of tax-exempt securities and insurance, as the Company employed
various strategies to reduce both federal and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Company's
primary sources of funds are deposits, amortization, prepayments and maturities
of outstanding loans and mortgage-related securities, sales of loans, maturities
of investment securities and other short-term investments, borrowings and funds
provided from operations.
13
<PAGE> 16
management's discussion and analysis
- --------------------------------------------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
While scheduled payments from the amortization of loans and mortgage-related
securities and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. In addition, the Company invests excess funds in overnight deposits
and other short-term interest-earning assets which provide liquidity to meet
lending requirements. The Company has the ability to obtain advances from the
FHLB of Pittsburgh through several credit programs with the FHLB in amounts not
to exceed the Bank's maximum borrowing capacity and subject to certain
conditions, including holding a predetermined amount of FHLB stock as
collateral. As an additional source of funds, the Company has access to the
Federal Reserve discount window, but only after it has exhausted its access to
the FHLB of Pittsburgh. At September 30, 1999, the Company had $123.1 million of
outstanding advances from the FHLB of Pittsburgh.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer term basis, the Company maintains a
strategy of investing in various lending products and mortgage-related
securities. The Company uses its sources of funds primarily to meet its ongoing
commitments, to pay maturing savings certificates and savings withdrawals, fund
loan commitments and maintain a portfolio of mortgage-related and investment
securities. At September 30, 1999, the total of approved loan commitments
outstanding amounted to $6.4 million. At the same date, commitments under unused
lines of credit and loans in process on construction loans amounted to $22.2
million. Certificates of deposit scheduled to mature in one year or less at
September 30, 1999 totalled $122.6 million. Based upon its historical
experience, management believes that a significant portion of maturing deposits
will remain with the Company.
The Company is required by the Office of Thrift Supervision ("OTS") to
maintain average daily balances of liquid assets, defined as a ratio of cash and
certain marketable securities that can be readily converted into cash to total
deposits and short-term borrowings, of 4% to assure its ability to meet demand
for withdrawals and repayment of short-term borrowings. The Company's liquidity
ratio under these guidelines was 6.32% at September 30, 1999.
The OTS requires that the Bank meet minimum regulatory tangible, core,
tier 1 risk-based and total risk-based capital requirements. At September 30,
1999, the Bank exceeded all regulatory capital requirements and was deemed a
well capitalized institution for regulatory purposes. See Note 13 to the
Consolidated Financial Statements.
The Company's assets consist primarily of its investment in the Bank
and investments in various corporate debt and equity instruments. Its only
material source of income consists of earnings from its investment in the Bank
and interest and dividends earned on other investments. The Company, as a
separately incorporated holding company, has no significant operations other
than serving as the sole stockholder of the Bank and paying interest to its
subsidiary, First Keystone Capital Trust I, for junior subordinated debt in
conjunction with the issuance of trust preferred securities. On an
unconsolidated basis, the Company has no paid employees. The expenses primarily
incurred by the Company relate to its reporting obligations under the Securities
Exchange Act of 1934, related expenses incurred as a publicly traded company,
and expenses relating to the issuance of the trust preferred securities and the
junior subordinated debentures issued in connection therewith. Management
believes that the Company has adequate liquidity available to respond to its
liquidity demands. Under applicable federal regulations, the Bank may pay
dividends within certain limits after providing written notice to the OTS. See
Note 21 to the Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," was issued.
This statement requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. This statement is effective for fiscal years beginning after June
15, 2000, and will not be applied retroactively to financial statements of prior
periods. Management of the Company does not believe this statement will have a
material impact on the Company's financial position or results of operations
when adopted.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
14
<PAGE> 17
management's discussion and analysis
- --------------------------------------------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.
YEAR 2000 ISSUES (YEAR 2000 READINESS DISCLOSURE STATEMENT)
The Year 2000 Issue is the result of computer programs which were
written using two digits rather than four to define the applicable year. As a
result, such programs may recognize a date using "00" as the year 1900 instead
of the year 2000 which could result in system failures or miscalculations.
In order to be ready for the year 2000, the Company has developed a
Year 2000 Policy (the "Policy") which was presented to the Board of Directors
during June 1997. The Policy was developed using the guidelines outlined in the
Federal Financial Institutions Examination's Council's "The Effect of Year 2000
on Computer Systems". The Board of Directors and its Executive Committee
assigned responsibility for the Policy to the Year 2000 Committee, which reports
to the Board of Directors on a monthly basis. The Policy recognizes that the
Company's operating, processing and accounting operations are computer reliant
and could be affected by the Year 2000 Issue. The Company is primarily reliant
on third party vendors for its computer output and processing, as well as other
significant functions and services (i.e., securities safekeeping services,
securities pricing information, etc.). The Year 2000 Committee is continually
working with these third party vendors to assess their year 2000 readiness.
Based upon this continual assessment, management presently believes that with
planned modifications to existing software and hardware and planned conversions
to new software and hardware, the Company's third party vendors are taking the
appropriate steps to ensure critical systems will function properly. The Company
has identified 74 priority 1 (directly effects customers) and 59 priority 2
(effects employee's ability to service customers) third party vendors. Of such
priority 1 and priority 2 vendors, the Company has been informed that 100% are
Year 2000 compliant. The Company's data service processing vendor, which is its
major software provider, has informed the Company that it has completed testing
and updating systems. The initial phase of testing of the data service
processor's updated system was successfully completed in January 1999, and the
subsequent phase of modifications and conversions and related testing of the
system was completed by March 31, 1999. All of the Company's vendors of its
priority 1 and priority 2 applications (discussed below) have provided
assurances, written or oral, that they are Year 2000 compliant. While the
Company has received assurances from such vendors as to compliance, such
assurances are not guarantees and may not be enforceable. The Company's existing
older contracts with such vendors do not include Year 2000 certifications or
warranties. Thus, in the event such vendor's products and/or services are not
Year 2000 compliant (notwithstanding their assurances to the contrary), the
Company's recourse in the event of such failure may be limited. If the required
modifications and conversions are not made, or are not completed on a timely
basis, the Year 2000 Issue could have a material impact on the operations of the
Company. There can be no assurance that potential system interruptions or
unanticipated additional expense incurred to obtain Year 2000 compliance will
not have a material adverse effect on the Company's business, financial
condition, results of operations and business prospects. Nevertheless, the
Company does not believe that the cost of addressing the Year 2000 issues will
be a material event or uncertainty that would cause reported financial
information not to be necessarily indicative of future operating results or
financial conditions, nor does it believe that the costs or the consequences of
incomplete or untimely resolution of its Year 2000 issues represents a known
material event or uncertainty that is reasonably likely to affect its future
financial results, or cause its reported financial information not to be
necessarily indicative of future operating results or future financial
condition.
The Year 2000 issues also affect certain of the Company's customers,
particularly in the areas of access to funds and additional expenditures to
achieve compliance. As of September 30, 1999, the Company had contacted all of
its commercial credit customers (85 borrowers with loans outstanding aggregating
$28.2 million) regarding the customers' awareness of the Year 2000 Issue. While
no assurance can be given that the customers will be Year 2000 compliant,
management believes, based on representations of such customers and reviews of
their operations (including assessments of the borrowers' level of
sophistication and data and record keeping requirements), that the customers are
either addressing the appropriate issues to insure compliance or that they are
not faced with material Year 2000 issues. In the majority of cases the credit
extended to such borrowers is collateralized by
15
<PAGE> 18
management's discussion and analysis
- --------------------------------------------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
real estate which inherently minimizes the Company's exposure to loss in the
event that such borrowers do experience problems becoming Year 2000 compliant.
The remaining borrowers have completed their Year 2000 projects or are in the
process of completing their projects. The Year 2000 Committee is continually
working with its commercial customers to assess their Year 2000 readiness.
The Company has completed its own company-wide Year 2000 contingency
plan. Individual contingency plans concerning specific software and hardware
issues and operational plans for continuing operations were completed by
December 1998. The Year 2000 Committee has reviewed all mission critical test
plans and contingency plans to ensure the reasonableness of the plans including
a Liquidity Contingency Plan to address the potential liquidity issues that
federal banking regulations have raised. These plans include ordering extra
currency, utilizing lines of credit, holding more liquid investments in order to
provide the Bank with the ability to maintain smooth operations in the event of
abnormally large withdrawals of funds by consumers concerned with the effect of
the advent of the Year 2000. Testing began on mission critical systems in August
1998 and was completed by September 30, 1999. The Company has developed
contingency plans for substantially all priority 1 and priority 2 applications
which address operational policies and procedures in the event of data
processing, electric power supply and/or telephone service failures associated
with the Year 2000. Such contingency plans provide documented actions to allow
the Company to maintain and/or resume normal operations in the event of the
failure of priority 1 and priority 2 applications. Such plans identify
participants, processes and equipment that will be necessary to permit the
Company to continue operations. The plans include providing off-line system
processing, back-up electrical and telephone systems and other methods to ensure
the Company's ability to continue to operate. The costs of modifications to the
existing software is being primarily absorbed by the third party vendors. The
Company recognizes that the need exists to purchase new hardware and software
regardless of year 2000 implications. Based upon current estimates, the Company
has identified the hardware and software that would have to be replaced, and
have found the amounts to not be material and consistent with the Company's
normal expenditures for technology upgrades. The Company has paid $25,000 to
participate in the data service processor's Year 2000 testing.
FORWARD LOOKING STATEMENTS
In this Report, the Company has included certain "forward looking
statements" concerning the future operations of the Company. It is management's
desire to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. This statement is for the express
purpose of availing the Company of the protections of such safe harbor with
respect to all "forward looking statements" contained in this Report. The
Company has used "forward looking statements" to describe the future plans and
strategies including management's expectations of the Company's Year 2000
readiness and future financial results. Management's ability to predict results
or the effect of future plans and strategy is inherently uncertain. Factors that
could affect results include interest rate trends, competition, the general
economic climate in Delaware and Chester Counties, the mid-Atlantic region and
the country as a whole, loan delinquency rates, changes in federal and state
regulation, Year 2000 uncertainties and other uncertainties described in the
Company's filings with the Securities and Exchange Commission, including its
Form 10-K for the year ended September 30, 1999. These factors should be
considered in evaluating the "forward looking statements", and undue reliance
should not be placed on such statements.
16
<PAGE> 19
[Deloitte & Touche Logo]
DELOITTE & TOUCHE LLP Telephone: (215) 246-2300
Twenty-Fourth Floor Facsimile: (215) 569-2441
1700 Market Street
Philadelphia, Pennsylvania 19103-3984
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Keystone Financial, Inc. and Subsidiaries
Media, Pennsylvania 19063
We have audited the accompanying consolidated statements of financial condition
of First Keystone Financial, Inc. and Subsidiaries (the "Company") as of
September 30, 1999 and 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of First Keystone
Financial, Inc. and Subsidiaries at September 30, 1999 and 1998 and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1999 in accordance with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
November 5, 1999
- ---------------
DELOITTE TOUCHE
TOHMATSU
17
<PAGE> 20
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 3,010 $ 2,457
Interest-bearing deposits with depository institutions 17,005 21,669
--------- ---------
Total cash and cash equivalents 20,015 24,126
Investment securities available for sale 44,315 40,621
Mortgage-related securities available for sale 113,046 115,486
Loans held for sale 1,792 2,799
Mortgage-related securities held to maturity -- at amortized cost
(approximate fair value of $14,100 and $18,700 at
September 30, 1999 and 1998, respectively) 14,497 18,769
Loans receivable -- net 226,375 198,343
Accrued interest receivable 3,096 3,117
Real estate owned 297 1,663
Federal Home Loan Bank stock -- at cost 6,157 5,079
Office properties and equipment -- net 3,076 2,612
Deferred income taxes 2,749 283
Prepaid expenses and other assets 14,711 2,965
--------- ---------
Total Assets $ 450,126 $ 415,863
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARY
AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 260,826 $ 247,311
Advances from Federal Home Loan Bank 123,137 101,578
Securities sold under agreements to repurchase 19,300 19,300
Accrued interest payable 2,321 1,683
Advances from borrowers for taxes and insurance 946 1,036
Accounts payable and accrued expenses 3,492 2,091
--------- ---------
Total liabilities 410,022 372,999
--------- ---------
Company-obligated mandatorily redeemable preferred securities
of a subsidiary trust holding solely junior subordinated
debentures of the Company 16,200 16,200
--------- ---------
Stockholders' Equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized; none issued
Common stock, $.01 par value, 20,000,000 shares authorized; issued
and outstanding; September 30, 1999 and 1998, 2,251,716
and 2,329,216 shares, respectively 14 14
Additional paid in capital 13,408 13,204
Common stock acquired by stock benefit plans (1,531) (1,789)
Treasury stock at cost, 468,284 and 390,784 shares
at September 30, 1999 and 1998, respectively (5,622) (4,575)
Accumulated other comprehensive (loss) income (2,992) 1,487
Retained earnings -- partially restricted 20,627 18,323
--------- ---------
Total stockholders' equity 23,904 26,664
--------- ---------
Total Liabilities, Minority Interest in Subsidiary
and Stockholders' Equity $ 450,126 $ 415,863
========= =========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 21
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Interest on:
Loans $ 17,366 $ 16,447 $ 14,737
Mortgage-related securities 7,965 8,029 6,197
Investments 2,949 2,429 1,478
Interest-bearing deposits 414 488 338
-------- -------- --------
TOTAL INTEREST INCOME 28,694 27,393 22,750
-------- -------- --------
INTEREST EXPENSE:
Interest on:
Deposits 10,265 9,937 9,182
Federal Home Loan Bank advances 5,511 4,206 3,381
Securities sold under agreements to repurchase 1,180 1,482 76
-------- -------- --------
TOTAL INTEREST EXPENSE 16,956 15,625 12,639
-------- -------- --------
Net interest income 11,738 11,768 10,111
Provision for loan losses 259 186 239
-------- -------- --------
Net interest income after provision for loan losses 11,479 11,582 9,872
-------- -------- --------
OTHER INCOME (LOSS):
Service charges and other fees 934 898 972
Net gain on sale of:
Investments and mortgage-related securities 291 51
Loans held for sale 325 526 285
Real estate owned 25 7 32
Other assets 1 46
Real estate operations (138) (32) (25)
Other income 350 57 40
-------- -------- --------
TOTAL OTHER INCOME 1,787 1,508 1,350
-------- -------- --------
OPERATING EXPENSES:
Salaries and employee benefits 3,567 3,642 3,174
Occupancy and equipment 1,030 1,013 858
Professional fees 617 580 733
Federal deposit insurance premium 147 145 207
Bank service charges 445 417 384
Data processing 386 360 335
Advertising 322 293 280
Provision for real estate owned losses 350 200
Minority interest in expense of subsidiary 1,571 1,571 153
Other 1,066 838 797
-------- -------- --------
TOTAL OPERATING EXPENSES 9,501 9,059 6,921
-------- -------- --------
Income before income tax expense 3,765 4,031 4,301
Income tax expense 917 1,250 1,664
-------- -------- --------
NET INCOME $ 2,848 $ 2,781 $ 2,637
======== ======== ========
EARNINGS PER COMMON SHARE:
Basic $ 1.40 $ 1.31 $ 1.20
Diluted $ 1.32 $ 1.23 $ 1.13
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 22
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
COMMON
STOCK
ACQUIRED
BY ACCUMULATED RETAINED
ADDITIONAL STOCK OTHER EARNINGS- TOTAL
COMMON PAID-IN BENEFIT TREASURY COMPREHENSIVE PARTIALLY STOCKHOLDERS'
STOCK CAPITAL PLANS STOCK INCOME (LOSS) RESTRICTED EQUITY
----- ------- ----- ----- ------------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996 $ 14 $ 12,659 $(1,437) $(1,288) $ (494) $ 13,630 $ 23,084
Comprehensive income:
Net income 2,637 2,637
Other comprehensive income, net of tax:
Net unrealized gain on securities,
net of reclassification adjustment(1) 902 902
Comprehensive income 3,539
Common stock acquired
by stock benefit plans (775) (775)
ESOP stock committed to be released 33 33
Excess of fair value above cost of ESOP
and RRP shares committed to be released 237 237
RRP amortization 141 141
Exercise of stock options 11 11
Purchase of treasury stock (1,268) (1,268)
Dividends paid (250) (250)
------ -------- ------- ------- -------- -------- --------
Balance at September 30, 1997 14 12,896 (2,038) (2,545) 408 16,017 24,752
Comprehensive income:
Net income 2,781 2,781
Other comprehensive income, net of tax:
Net unrealized gain on securities,
net of reclassification adjustment(1) 1,079 1,079
Comprehensive income 3,860
ESOP stock committed to be released 108 108
Excess of fair value above cost of ESOP
and RRP shares committed to be released 308 308
RRP amortization 141 141
Exercise of stock options 6 6
Purchase of treasury stock (2,036) (2,036)
Dividends paid (475) (475)
------ -------- ------- ------- -------- -------- --------
Balance at September 30, 1998 14 13,204 (1,789) (4,575) 1,487 18,323 26,664
Comprehensive income:
Net income 2,848 2,848
Other comprehensive income, net of tax:
Net unrealized loss on securities
net of reclassification adjustment(1) (4,479) (4,479)
Comprehensive income (loss) (1,631)
ESOP stock committed to be released 117 117
Excess of fair value above cost of ESOP
and RRP shares committed to be released 204 204
RRP amortization 141 141
Purchase of treasury stock (1,047) (1,047)
Dividends paid (544) (544)
------ -------- ------- ------- -------- -------- --------
Balance at September 30, 1999 $ 14 $ 13,408 $(1,531) $(5,622) $ (2,992) $ 20,627 $ 23,904
====== ======== ======= ======= ======== ======== ========
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Disclosure of reclassification amount, net of tax for the years ended: 1999 1998 1997
------- ------ -----
Net unrealized (depreciation) appreciation arising during the year $(4,671) $1,113 $ 902
Less: Reclassification adjustment for net gains included in net income 192 34
------- ------ -----
Net unrealized (loss) gain on securities $(4,479) $1,079 $ 902
======= ====== =====
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 23
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,848 $ 2,781 $ 2,637
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for depreciation and amortization 444 453 364
Amortization of discounts (288) (609) (872)
Gain on sales of:
Loans held for sale (325) (526) (285)
Investment securities available for sale (4)
Mortgage-related securities available for sale (291) (47)
Real estate owned (25) (7) (32)
Other assets (1) (46)
Provision for loan losses 259 186 239
Provision for real estate owned losses 350 200
Amortization of stock benefit plans 462 563 422
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (46,199) (56,398) (37,209)
Loans sold in the secondary market 47,206 58,176 35,079
Deferred income taxes (140) (112) 862
Accrued interest receivable 21 (552) (161)
Prepaid expenses and other assets (11,746) (590) (740)
Accrued interest payable 638 108 74
Accounts payable and accrued expenses 1,401 6 (705)
-------- -------- --------
Net cash (used in) provided by operating activities (5,385) 3,627 (373)
-------- -------- --------
INVESTING ACTIVITIES:
Loans originated (96,238) (64,979) (56,049)
Purchases of:
Investment securities held to maturity (2,000) (12,000)
Investment securities available for sale (24,949) (40,892) (6,030)
Mortgage-related securities held to maturity (2,687)
Mortgage-related securities available for sale (45,895) (52,422) (51,654)
Purchase of FHLB stock (1,078) (1,310) (1,432)
Proceeds from sales of investment and
mortgage-related securities available for sale 6,791 20,299
Proceeds from sales of real estate owned 2,373 1,451 944
Proceeds from sales of other assets 30 101
Principal collected on loans 67,481 55,694 35,418
Proceeds from maturities, calls or repayments of:
Investment securities available for sale 12,075 5,070 12,500
Mortgage-related securities available for sale 44,031 28,129 9,243
Investment securities held to maturity 12,000 2,000
Mortgage-related securities held to maturity 4,221 4,663 2,483
Purchase of property and equipment (908) (542) (409)
Net expenditures on real estate acquired through
foreclosure and in development (23) (1,462) (734)
-------- -------- --------
Net cash used in investing activities (32,119) (38,958) (65,619)
-------- -------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 13,515 19,393 8,713
Net proceeds from FHLB and other borrowings 21,559 20,891 53,247
Net (decrease) increase in advances from
borrowers for taxes and insurance (90) 123 (8)
Proceeds from issuance of capital securities 16,200
Common stock acquired by stock benefit plans (775)
Purchase of treasury stock (1,047) (2,036) (1,268)
Cash dividends (544) (475) (250)
-------- -------- --------
Net cash provided by financing activities 33,393 37,896 75,859
-------- -------- --------
(Decrease) increase in cash and cash equivalents (4,111) 2,565 9,867
Cash and cash equivalents at beginning of year 24,126 21,561 11,694
-------- -------- --------
Cash and cash equivalents at end of year $ 20,015 $ 24,126 $ 21,561
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 16,318 $ 15,517 $ 12,600
Cash payments of income taxes 915 1,150 630
Transfers of loans receivable into real estate owned 1,317 207 411
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 24
NOTES TO CONSOLIDATED STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND ORGANIZATION STRUCTURE
- --------------------------------------------------------------------------------
On September 21, 1994, the Board of Directors of First Keystone Federal
Savings Bank (the "Bank") adopted a plan of conversion to convert from a
federally chartered mutual savings bank to a federally chartered capital stock
savings bank with the concurrent formation of a holding company (the
"Conversion").
The Conversion was completed on January 25, 1995 with the issuance by the
holding company, First Keystone Financial, Inc. (the "Company"), of 1,360,000
shares of its common stock in a public offering to the Bank's eligible
depositors and borrowers, members of the general public and the Bank's employee
stock ownership plan (the "ESOP"). In exchange for the net conversion proceeds
of $11.5 million, less $1.0 million retained by the Company, the Company
acquired 100% of the issued and outstanding capital stock of the Bank.
The Bank is principally in the business of attracting deposits through its
branch offices and investing those deposits together with funds from borrowings
and operations in single-family residential, commercial real estate and
commercial business loans. The Bank is primarily supervised and regulated by the
Office of Thrift Supervision ("OTS").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, the Bank, and the Company's and the Bank's wholly-owned
subsidiaries. Intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE
Securities held to maturity are carried at amortized cost only if the Company
has the positive intent and ability to hold these securities to maturity.
Securities available for sale are carried at fair value with resulting
unrealized gains or losses recorded to equity, net of tax. For the years ended
September 30, 1999 and 1998, the Company did not maintain a trading portfolio.
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level that management
considers adequate to provide for probable losses based upon an evaluation of
known and inherent risks in the loan portfolio. Management's evaluation of the
portfolio is based upon past loss experience, current economic conditions and
other relevant factors. While management uses the best information available to
make such evaluation, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations.
The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114 "Accounting by Creditors for
Impairment of a Loan" and No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures." Impaired loans are predominantly
measured based on the fair value of the collateral. The provision for loan
losses charged to expense is based upon past loan loss experience and an
evaluation of probable losses and impairment existing in the current loan and
lease portfolio. A loan is considered to be impaired when, based upon current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the original contractual terms of the loan.
An insignificant delay or insignificant shortfall in amounts of payments does
not necessarily result in the loan being identified as impaired. For this
purpose, delays less than 90 days are considered to be insignificant. Large
groups of smaller balance homogeneous loans, including residential real estate
and consumer loans, are collectively evaluated for impairment, except for loans
restructured under a troubled debt restructuring.
MORTGAGE BANKING ACTIVITIES
The Company originates mortgage loans held for investment and for sale. At
origination, the mortgage loan is identified as either held for sale or for
investment. Mortgage loans held for sale are carried at the lower of cost or
forward committed contracts (which approximates market), determined on a net
aggregate basis.
22
<PAGE> 25
NOTES TO CONSOLIDATED STATEMENTS (continued)
- --------------------------------------------------------------------------------
At September 30, 1999, 1998, and 1997, loans serviced for others totalled
approximately $77,186, $96,275 and $114,554, respectively. Servicing loans for
others consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors, and processing foreclosures. Loan servicing
income is recorded on a cash basis and includes servicing fees from investors
and certain charges collected from borrowers, such as late payment fees. The
Company has fiduciary responsibility for related escrow and custodial funds
aggregating approximately $720 and $824 at September 30, 1999 and 1998,
respectively.
The Company assesses the retained interest in the servicing asset or
liability associated with the sold loans based on the relative fair values. The
servicing asset or liability is amortized in proportion to and over the period
of estimated net servicing income or net servicing loss, as appropriate.
Assessment of the fair value of the retained interest is performed on a
continuing basis.
INCOME RECOGNITION ON LOANS
Interest on loans is credited to income when earned. Accrual of loan interest
is discontinued and a reserve established on existing accruals if management
believes after considering, among other things, economic and business conditions
and collection efforts, that the borrowers' financial condition is such that
collection of interest is doubtful.
REAL ESTATE OWNED
Real estate owned consists of properties acquired by foreclosure or deed
in-lieu-of foreclosure. These assets are initially recorded at the lower of
carrying value of the loan or estimated fair value less selling costs at the
time of foreclosure and at the lower of the new cost basis or net realizable
value thereafter. The amounts recoverable from real estate owned could differ
materially from the amounts used in arriving at the net carrying value of the
assets at the time of foreclosure because of future market factors beyond the
control of the Company. Costs relating to the development and improvement of
real estate owned properties are capitalized and those relating to holding the
property are charged to expense.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the expected useful lives of the
assets. The costs of maintenance and repairs are expensed as they are incurred,
and renewals and betterments are capitalized.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
INTEREST RATE RISK
At September 30, 1999 and 1998, the Company's assets consist primarily of
assets that earned interest at either adjustable or fixed interest rates and the
average life of which is long term. Those assets were funded primarily with
shorter-term liabilities that have interest rates which vary over time with
market rates and certain call features that are impacted by changes in market
rates. Since the assets and liabilities reprice at different times, the Company
is exposed to interest rate risk.
EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number of
shares of common stock outstanding. Diluted earnings per common share is
computed based on the weighted average number of shares of common stock
outstanding, increased by the number of common shares that are assumed to have
been purchased with the proceeds from the exercise of stock options. The
calculation of the weighted average shares, after giving effect to the stock
split, was as follows:
<TABLE>
<CAPTION>
Year Ended September 30
------------------------------------------
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Average common
share outstanding 2,043,780 2,130,712 2,198,453
Increase in shares
due to options -
diluted basis 76,724 135,100 125,316
--------- --------- ---------
Adjusted shares
outstanding - diluted 2,120,504 2,265,812 2,323,769
--------- --------- ---------
</TABLE>
ACCOUNTING FOR STOCK OPTIONS
The Company accounts for stock options in accordance with SFAS No. 123
"Accounting for Stock-Based Compensation," which allows an entity to choose
between the intrinsic value method, as defined in Accounting Principals Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" or the fair
value method of accounting for stock-based compensation described in SFAS No.
123. An entity using the intrinsic value method must disclose pro forma net
income and earnings per share as if the stock-based compensation was accounted
23
<PAGE> 26
NOTES TO CONSOLIDATED STATEMENTS (continued)
- --------------------------------------------------------------------------------
for using the fair value method. The Company continues to account for
stock-based compensation using the intrinsic value method and has not recognized
compensation expense under this method.
OTHER COMPREHENSIVE INCOME
In 1999, the Company adopted SFAS No. 130 "Reporting Comprehensive Income."
This statement requires the Company to present, as a component of comprehensive
income, the amounts from transactions and other events which currently are
excluded from the statement of income and are recorded directly to stockholders'
equity.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
and amounts due from depository institutions and interest-bearing deposits with
depository institutions.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. This statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. This statement is effective for fiscal
years beginning after June 15, 2000, and will not be applied retroactively to
financial statements of prior periods. Management of the Company does not
believe this statement will have a material impact on the Company's financial
position or results of operations when adopted.
RECLASSIFICATIONS
Certain reclassifications have been made to the September 30, 1998 and 1997
consolidated financial statements to conform with the September 30, 1999
presentation. Such reclassifications had no impact on the reported net income.
3. INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The amortized cost and approximate fair value of investment securities are as
follows:
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
------------------------------------------------------
Available for Sale:
<S> <C> <C> <C> <C>
U.S. Treasury securities and securities
of U.S. Government agencies:
1 to 5 years $ 5,746 $ 94 $ 5,652
5 to 10 years 6,994 214 6,780
Municipal obligations 18,924 $ 1 1,052 17,873
Corporate bonds 4,909 270 4,639
Mutual funds 2,000 28 1,972
Preferred stocks 5,534 286 5,248
Other equity investments 2,390 239 2,151
------- ---- ------ --------
Total $46,497 $ 1 $2,183 $ 44,315
======= ==== ====== ========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
------------------------------------------------------
Available for Sale:
<S> <C> <C> <C> <C>
U.S. Treasury securities and securities
of U.S. Government agencies:
5 to 10 years $12,000 $ 109 $12,109
Municipal obligations 18,993 484 19,477
Mutual funds 2,000 $ 8 1,992
Preferred stocks 5,500 263 5,763
Other equity investments 1,390 110 1,280
------- ----- ----- -------
Total $39,883 $ 856 $ 118 $40,621
======= ===== ===== =======
</TABLE>
For the years ended September 30, 1999 and 1998, gross realized gains on
sales of investment securities available for sale amounted to $161 and $12,
respectively. Gross realized losses on sales of investment securities available
for sale amounted to $8 for the year ended September 30, 1998.
24
<PAGE> 27
NOTES TO CONSOLIDATED STATEMENTS (continued)
- --------------------------------------------------------------------------------
4. MORTGAGE-RELATED SECURITIES
- --------------------------------------------------------------------------------
Mortgage-related securities available for sale and mortgage-related
securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------------------------------------------------------
Available for Sale:
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $ 11,927 $ 81 $ 174 $ 11,834
FNMA pass-through certificates 32,795 37 877 31,955
GNMA pass-through certificates 34,639 75 755 33,959
Collateralized mortgage obligations 36,054 111 867 35,298
-------- -------- ------- ---------
Total $ 115,415 $ 304 $ 2,673 $ 113,046
========= ======== ======= =========
Held to Maturity:
FHLMC pass-through certificates $ 3,156 $ 11 $ 67 $ 3,100
FNMA pass-through certificates 6,832 232 6,600
Collateralized mortgage obligations 4,509 109 4,400
-------- -------- ------- ---------
Total $ 14,497 $ 11 $ 408 $ 14,100
======== ======== ======= =========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
-------------------------------------------------------
Available for Sale:
<S> <C> <C> <C> <C>
FHLMC pass-through certificates $ 10,968 $ 197 $ 11,165
FNMA pass-through certificates 25,600 503 26,103
GNMA pass-through certificates 41,379 562 41,941
Collateralized mortgage obligations 36,022 327 $ 72 36,277
-------- -------- ---- ---------
Total $113,969 $ 1,589 $ 72 $ 115,486
======== ======== ==== =========
Held to Maturity:
FHLMC pass-through certificates $ 4,698 $ 33 $ 1 $ 4,730
FNMA pass-through certificates 8,747 46 103 8,690
Collateralized mortgage obligations 5,324 1 45 5,280
-------- -------- ---- ---------
Total $ 18,769 $ 80 $149 $ 18,700
======== ======== ==== =========
</TABLE>
The collateralized mortgage obligations contain both fixed and adjustable
classes of securities which are repaid in accordance with a predetermined
priority. The underlying collateral of the securities are loans which are
primarily insured by FHLMC, FNMA, and GNMA.
Mortgage-related securities with a carrying value of $37,504 and $27,846 were
pledged as collateral for public funds on deposit, treasury tax and loan
processing and financings at September 30, 1999 and 1998, respectively (see
Notes 9 and 11).
For the year ended September 30, 1998, gross realized gains and losses on
sales of mortgage-related securities available for sale amounted to $83 and $36,
respectively.
25
<PAGE> 28
NOTES TO CONSOLIDATED STATEMENTS (continued)
5. ACCRUED INTEREST RECEIVABLE
The following is a summary of accrued interest receivable by category:
<TABLE>
<CAPTION>
September 30
------------------------
1999 1998
------ ------
<S> <C> <C>
Loans $1,602 $1,542
Mortgage-related securities 755 823
Investment securities 739 752
------ ------
Total $3,096 $3,117
====== ======
</TABLE>
6. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
September 30
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Real estate loans:
Single-family $ 166,802 $ 148,088
Construction and land 18,426 15,858
Multi-family and commercial 31,188 20,563
Consumer loans:
Home equity and lines of credit 18,624 19,609
Deposit 243 181
Education 365 449
Other 1,080 1,429
Commercial loans 2,190 1,390
--------- ---------
Total loans 238,918 207,567
Loans in process (9,005) (5,781)
Allowance for loan losses (1,928) (1,738)
Deferred loan fees (1,610) (1,705)
--------- ---------
Loans receivable -- net $ 226,375 $ 198,343
========= =========
</TABLE>
The Company originates loans primarily in its local market area of
Delaware and Chester Counties, Pennsylvania to borrowers that share similar
attributes. This concentration of credit exposes the Company to a higher degree
of risk associated with this economic region.
The Company also participates in the origination and sale of nonagency,
non-conforming sub-prime loans to the secondary market. The Company recognized
gains on sale of loans held for sale of $325, $526 and $281 for fiscal years
ended September 30, 1999, 1998 and 1997, respectively.
The Company offers loans to its directors and senior officers on terms
permitted by OTS regulations. There were approximately $575 and $388 of loans
outstanding to senior officers and directors as of September 30, 1999 and 1998,
respectively. The amount of repayments during the years ended September 30, 1999
and 1998 totalled $28 and $102, respectively. There were $215 and $50 of new
loans granted during fiscal year 1999 and 1998, respectively.
The Company has undisbursed portions under consumer and commercial lines
of credit as of September 30, 1999 of $4,323 and $8,891, respectively.
The Company originates both adjustable and fixed interest rate loans and
purchases mortgage-backed securities and collateralized mortgage obligations in
the secondary market. The originated adjustable-rate loans have interest rate
adjustment limitations and are generally indexed to U.S. Treasury securities
plus a fixed margin. Future market factors may affect the correlation of the
interest rate adjustment with rates the Company pays on the short-term deposits
that have been the primary source funds for these loans. The adjustable-rate
mortgage-related securities adjust to various national indices plus a fixed
margin. At September 30, 1999, the composition of these loans and
mortgage-related securities follows:
<TABLE>
<CAPTION>
FIXED-RATE
- ------------------------------------------------------
TERM TO MATURITY BOOK VALUE
- ------------------------------------------------------
<S> <C>
1 month to 1 year $ 3,317
1 year to 3 years 5,290
3 years to 5 years 8,712
5 years to 10 years 23,204
Over 10 years 227,754
---------
Total $ 268,277
=========
</TABLE>
<TABLE>
<CAPTION>
ADJUSTABLE-RATE
- ------------------------------------------------------
TERM TO RATE ADJUSTMENT BOOK VALUE
- ------------------------------------------------------
<S> <C>
1 month to 1 year $ 73,723
1 year to 3 years 12,329
3 years to 5 years 3,127
---------
Total $ 89,179
=========
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
-----------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Beginning balance $ 1,738 $ 1,628 $ 2,624
Provisions charged
to income 259 186 239
Charge-offs (72) (114) (1,252)
Recoveries 3 38 17
------- ------- -------
Total $ 1,928 $ 1,738 $ 1,628
======= ======= =======
</TABLE>
At September 30, 1999 and 1998, non-performing loans (which include loans
in excess of 90 days delinquent) amounted to approximately $3,180 and $3,704,
respectively. All non-performing loans are collectively evaluated for
impairment.
26
<PAGE> 29
NOTES TO CONSOLIDATED STATEMENTS (continued)
7. REAL ESTATE OWNED
Real estate owned is comprised of:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------
1999 1998
------ ------
<S> <C> <C>
Real estate acquired
in settlement of loans $ 297 $ 196
Real estate acquired
and in development 1,467
------ ------
Total $ 297 $1,663
====== ======
</TABLE>
In fiscal year 1996, First Pointe, Inc., a subsidiary of the Company,
accepted a deed in lieu of foreclosure on a construction loan for the
acquisition and improvement of a 106-lot real estate development project located
in Pennsylvania. As of September 30, 1999, all townhomes have been completed and
sold. Remaining items to be completed consist of township improvements under a
tri-party agreement.
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classification as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------
1999 1998
------- -------
<S> <C> <C>
Land and buildings $ 4,990 $ 4,220
Furniture, fixtures
and equipment 3,860 3,753
------- -------
Total 8,850 7,973
Accumulated depreciation
and amortization (5,774) (5,361)
------- -------
Net $ 3,076 $ 2,612
======= =======
</TABLE>
The future minimum rental payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
September 30:
<S> <C>
2000 $ 181
2001 125
2002 117
2003 116
2004 120
Thereafter 563
------
Total minimum future rental payments $1,222
======
</TABLE>
Lease hold expense was approximately $182, $197 and $148 for the years ended
September 30, 1999, 1998 and 1997, respectively.
9. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------------------------------------------
1999 1998
------------------------ -------------------------
AMOUNT PERCENT Amount Percent
------- ----- -------- -----
<S> <C> <C> <C> <C>
Non-interest bearing $ 7,912 3.0% $ 8,254 3.3%
NOW 33,412 12.8 28,181 11.4
Passbook 40,324 15.5 37,988 15.4
Money market
demand 19,417 7.4 16,087 6.5
Certificates of
deposit 159,761 61.3 156,801 63.4
------- ----- -------- -----
Total 260,826 100.0% $247,311 100.0%
======= ===== ======== =====
</TABLE>
The weighted average interest rates on deposits were 3.96% and 4.21% at
September 30, 1999 and 1998, respectively.
Included in deposits as of September 30, 1999 are deposits greater than
$100,000 totalling approximately $41,740.
At September 30, 1999 and 1998, the Company had pledged certain
mortgage-related securities aggregating approximately $5,849 and $1,633,
respectively, as collateral for municipal deposits.
A summary of scheduled maturities of certificates is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999
--------
<S> <C>
Within one year $122,597
One to two years 23,036
Two to three years 4,332
Thereafter 9,796
--------
Total $159,761
========
</TABLE>
A summary of interest expense on deposits is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
---------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
NOW $ 440 $ 376 $ 360
Passbook 955 923 949
Money market demand 502 452 450
Certificates of deposit 8,368 8,186 7,423
------- ------- -------
Total $10,265 $ 9,937 $ 9,182
======= ======= =======
</TABLE>
27
<PAGE> 30
NOTES TO CONSOLIDATED STATEMENTS (continued)
10. ADVANCES FROM FEDERAL HOME LOAN BANK
A summary of advances from the Federal Home Loan Bank ("FHLB") of
Pittsburgh follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------------------------------------------
1999 1998
------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
-------- --- -------- ---
<S> <C> <C> <C> <C>
Advances from FHLB
due by September 30,
1999 $ 30,325 5.8%
2000 $ 47,055 5.4% 5,159 5.4
2001
Thereafter 76,082 5.4 66,094 5.5
-------- --- -------- ---
Total $123,137 5.4 $101,578 5.6%
======== === ======== ===
</TABLE>
The advances are collateralized by FHLB stock and substantially all first
mortgage loans held by the company.
Included in the table above at September 30, 1999 and 1998 are convertible
advances whereby the FHLB has the option at a predetermined time to convert the
fixed interest rate to an adjustable rate tied to LIBOR. The Company then has
the option to prepay these advances if the FHLB converts the interest rate.
These advances are included in the year in which they mature.
The Company has available various lines of credit with the FHLB up to the
Company's maximum borrowing capacity which was $220.6 million, of which $123.1
million was outstanding, at September 30, 1999.
11. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
The Company sold, under agreements to repurchase, mortgage-related
securities to broker-dealers. Securities underlying the agreements with
broker-dealers were delivered to the dealer who arranged the transaction.
Securities delivered to broker-dealers may have been sold, loaned, or otherwise
disposed of, to other parties in the normal course of their operations.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------
1999 1998
------- -------
<S> <C> <C>
Average balance
for months outstanding $19,300 $24,411
Average interest
rate for months outstanding 6.11% 6.07%
Maximum month-end
balance during the year $19,300 $24,600
Mortgage-related securities
underlying the agreements
at year-end:
Carrying value $20,972 $23,055
Estimated fair value $20,681 $23,385
</TABLE>
12. INCOME TAXES
As of October 1, 1996, the Company changed its method of computing
reserves for bad debts to the experience method. The bad debt deduction
allowable under this method is available to small banks with assets less than
$500 million. Generally, this method allowed the Company to deduct an annual
addition to the reserve for bad debts equal to the increase in the balance of
the Company's reserve for bad debts at the end of the year to an amount equal to
the percentage of total loans at the end of the year, computed using the ratio
of the previous six years net chargeoffs divided by the sum of the previous six
years total outstanding loans at year end.
The Company treated such change as a change in a method of accounting
determined solely with respect to the "applicable excess reserves" of the
institution. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after December 31, 1995. For financial reporting purposes, the
Company will not incur any additional tax expense. At September 30, 1997, under
SFAS No. 109, deferred taxes were provided on the difference between the book
reserve at September 30, 1997 and the applicable excess reserve in the amount
equal to the Bank's increase in the tax reserve from December 31, 1987 to
September 30, 1996. Retained earnings at September 30, 1999 and 1998 included
approximately $2.5 million representing bad debt deductions for which no
deferred income taxes have been provided.
28
<PAGE> 31
NOTES TO CONSOLIDATED STATEMENTS (continued)
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current
Federal $ 1,057 $ 1,362 $ 489
State 313
------- ------- -------
Subtotal 1,057 1,362 802
Deferred (140) (112) 862
------- ------- -------
Total $ 917 $ 1,250 $ 1,664
======= ======= =======
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax accounts, calculated at 34%, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------
1999 1998
------- -------
<S> <C> <C>
Accelerated depreciation $ 326 $ 249
Allowance for loan losses 824 634
Deferred loan fees (135) (61)
Accrued expenses 111 161
Unrealized (gain) loss
on available for sale securities 1,559 (767)
Other 64 67
------- -------
Total deferred tax asset $ 2,749 $ 283
======= =======
</TABLE>
The Company's effective tax rate is less than the statutory federal income
tax rate for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30
------------------------------------------------------------------------------
1999 1998 1997
PERCENTAGE PERCENTAGE PERCENTAGE
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $ 1,280 34.0% $ 1,370 34.0% $ 1,462 34.0%
Increase (decrease) in taxes resulting from:
Tax exempt interest, net (284) (7.5) (149) (3.7) (24) (.6)
State tax -- net of federal tax effect 207 4.8
Other (79) (2.1) 29 .7 19 .5
------- ------- ------- ------- ------- -------
Total $ 917 24.4% $ 1,250 31.0% $ 1,664 38.7%
======= ======= ======= ======= ======= =======
</TABLE>
29
<PAGE> 32
NOTES TO CONSOLIDATED STATEMENTS (continued)
13. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible and core capital (as defined in the regulations) to adjusted
assets (as defined), and of Tier I and total capital (as defined) to average
assets (as defined). Management believes, as of September 30, 1999, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1999, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier-1 risk-based, and Tier-1
leveraged-ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
The Bank's actual capital amounts and ratios are also presented in the
table. At September 30, 1999 and 1998, risk-based capital, for regulatory
requirements, is increased by $1,813 and $1,688, respectively, of general loan
loss reserves for a total of $38,280 and $35,389, respectively.
<TABLE>
<CAPTION>
REQUIRED FOR WELL CAPITALIZED
CAPITAL ADEQUACY UNDER PROMPT
ACTUAL PURPOSES CORRECTIVE ACTION
------------------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
At September 30, 1999:
Core Capital (to Adjusted Tangible Assets) 36,467 8.2% 17,586 4.0% 22,320 5.0%
Tier I Capital (to Risk Weighted Assets) 36,467 17.9 N/A N/A 26,784 6.0
Total Capital (to Risk Weighted Assets) 38,280 18.8 16,294 8.0 20,367 10.0
Tangible Capital (to Tangible Assets) 36,467 8.2 6,696 1.5 N/A N/A
At September 30, 1998:
Core Capital (to Adjusted Tangible Assets) 33,701 8.3% 16,301 4.0% 20,376 5.0%
Tier I Capital (to Risk Weighted Assets) 33,701 20.1 N/A N/A 24,451 6.0
Total Capital (to Risk Weighted Assets) 35,389 21.1 13,424 8.0 16,780 10.0
Tangible Capital (to Tangible Assets) 33,701 8.3 6,113 1.5 N/A N/A
</TABLE>
At the date of the Conversion, the Bank established a liquidation account in
an amount equal to its retained income as of August 31, 1995. The liquidation
account is maintained for the benefit of eligible account holders and
supplemental eligible account holders who continue to maintain their accounts at
the Bank after the Conversion. The liquidation account is reduced annually to
the extent that eligible account holders and supplemental eligible account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases in such balances will not restore an eligible account
holder's or supplemental eligible account holder's interest in the liquidation
account. In the event of a complete liquidation of the Bank, each eligible
account holder and supplemental eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held.
The Bank may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause equity to be reduced
below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements.
30
<PAGE> 33
NOTES TO CONSOLIDATED STATEMENTS (continued)
14. EMPLOYEE BENEFITS
401(k) PROFIT SHARING PLAN
The Bank's 401(k) profit sharing plan covers substantially all full-time
employees of the Company and provides for pre-tax contributions by the employees
with matching contributions at the discretion of the Board of Directors
determined at the beginning of the calendar year. All amounts are fully vested.
For calendar years 1999 and 1998, there were no contributions to the 401(k)
profit sharing plan. For calendar year 1997, the Board approved a 1% of salary
profit sharing contribution of all contributing participants.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Conversion, the Company established an ESOP for the
benefit of eligible employees. The ESOP purchased 217,600 shares of common stock
in the Conversion. During November 1996, the ESOP purchased an additional 77,550
shares of common stock. At September 30, 1999, 114,022 shares of the total
number of shares held by the ESOP were committed to be released. The Company
accounts for its ESOP in accordance with AICPA Statement of Position 93-6,
"Employers Accounting for Employee Stock Ownership Plans," which requires the
Company to recognize compensation expense equal to the fair value of the ESOP
shares during the periods in which they become committed to be released. To the
extent that the fair value of the ESOP shares released differs from the cost of
such shares, this difference is charged or credited to equity as additional
paid-in capital. Management expects the recorded amount of expense to fluctuate
as continuing adjustments are made to reflect changes in the fair value of the
ESOP shares. The Company's ESOP, which is internally leveraged, does not report
the loan receivable from the ESOP as an asset and does not report the ESOP debt
from the employer as a liability. The Company recorded compensation and employee
benefit expense related to the ESOP of $348, $450 and $275 for the years ended
September 30, 1999, 1998 and 1997, respectively.
RECOGNITION AND RETENTION PLAN
Under the 1995 Recognition and Retention Plan and Trust (the "RRP"), the
Company had outstanding awards aggregating 21,216 shares as of September 30,
1999 to the Company's Board of Directors and executive officers subject to
vesting and other provisions of the RRP.
At September 30, 1999 and 1998, the deferred cost of unearned RRP shares
totaled $117 and $258, respectively, and is recorded as a charge against
stockholders' equity. Compensation expense will be recognized ratably over the
five year vesting period for shares awarded. For the fiscal years ended
September 30, 1999, 1998 and 1997, the Company recorded compensation and
employee benefit expense of $141 for each fiscal year relating to the RRP.
STOCK OPTION PLAN
Under the 1995 Stock Option Plan (the "Plan"), Common Stock totaling
272,000 shares has been reserved for issuance for the Plan. During fiscal year
1999, shareholders approved the adoption of the 1998 Stock Option Plan ("1998
Option Plan")(collectively the "Plans") which reserves an additional 111,200
shares of common stock for issuance. An aggregate of 351,050 stock options have
been granted to the Company's executive officers, nonemployee directors and
other key employees, subject to vesting and other provisions of the Plans.
During the year ended September 30, 1998 and 1997, 578 and 1,088 shares were
exercised at a weighted average exercise price of $7.56 and $7.50, respectively.
The following table summarizes transactions regarding stock option plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
NUMBER OF PRICE PRICE
OPTION SHARES RANGE PER SHARE
------- ------------- -------------
<S> <C> <C> <C>
Outstanding at
October 1, 1996 236,368 $7.50 - 8.50 $ 7.53
Granted 15,720 12.38 - 14.25 13.52
Canceled (5,032) 7.50 - 8.50 7.64
Exercised (1,088) 7.50 - 7.50 7.50
------- ------------- -------------
Outstanding at
September 30, 1997 245,968 $7.50 - 14.25 $ 7.91
Granted 5,700 12.88 - 12.88 12.88
Exercised (578) 7.50 - 8.50 7.56
------- ------------- -------------
Outstanding at
September 30, 1998 251,090 $7.50 - 14.25 $ 8.02
Granted 99,960 12.13 - 12.13 12.13
------- ------------- -------------
Outstanding at
September 30, 1999 351,050 $7.50 - 14.25 $ 9.19
======= ============= =============
</TABLE>
A summary of the exercise price range at September 30, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
EXERCISE AVERAGE AVERAGE
NUMBER OF PRICE REMAINING EXERCISE PRICE
OPTION SHARES RANGE CONTRACTUAL LIFE PER SHARE
- ------------- ----- ---------------- ---------
<S> <C> <C> <C>
229,670 $ 7.50 - 8.50 7.03 $ 7.53
121,380 12.38 - 14.25 9.69 12.34
------- -------------- ---- ------
351,050 $ 7.50 - 14.25 7.29 $ 9.19
======= ============== ==== ======
</TABLE>
31
<PAGE> 34
NOTES TO CONSOLIDATED STATEMENTS(continued)
The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, no compensation expense has been recognized in the financial
statements. Had the Company determined compensation expense based on the fair
value at the grant date for its stock options under SFAS 123, the Company's net
income and income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $ 2,848 $ 2,781 $ 2,637
Pro forma 2,770 2,771 $ 2,598
Net income per common and common equivalent share:
Earnings per common share
-As report $ 1.32 $ 1.23 $ 1.13
-Pro forma 1.31 1.22 1.12
Weighted average fair
value of options granted
during the period $ 4.43 $ 5.15 $ 10.55
</TABLE>
The binomial option-pricing model was used to determine the grant date fair
value of options. Significant assumptions used to calculate the above fair value
of the awards are as follows:
<TABLE>
<CAPTION>
September 30
------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk free interest
rate of return 5.83% 4.69% 6.12%
Expected option
life (months) 60 60 60
Expected volatility 41% 45% 37%
Expected Dividends 2.6% 1.9% 1.0%
</TABLE>
OTHER
The Company established an expense accrual in connection with the anticipated
funding of a trust to be created to formalize the Company's deferred
compensation arrangements with four former officers of the Company. A total of
$308 and $377 was included in the Company's liabilities at September 30, 1999
and 1998, respectively.
15. COMMITMENTS AND CONTINGENCIES
The Company has outstanding loan commitments, excluding undisbursed portion
of loans in process and equity lines of credit, of approximately $6,405 and
$11,759 as of September 30, 1999 and 1998, respectively, which are all expected
to be funded within four months. Of these commitments outstanding, the breakdown
between fixed and adjustable rate loans is as follows:
<TABLE>
<CAPTION>
September 30
------------
1999 1998
---- ----
<S> <C> <C>
Fixed-rate (ranging
from 5.875% to 13.50%) $ 6,122 $ 6,859
Adjustable-rate 2,706 4,900
------- -------
Total $ 8,828 $11,759
======= =======
</TABLE>
Generally, non-conforming loans are sold in the secondary market, depending
on cash flow, interest rate, risk management and other considerations. There
were approximately $2,733 and $6,029 in outstanding commitments to sell loans at
September 30, 1999 and 1998, respectively.
16. RELATED PARTY TRANSACTIONS
The Company retains the services of a law firm in which one of the Company's
Directors is a member. In addition to providing general legal counsel to the
Company, the firm also prepares mortgage documents and attends loan closings for
which it is paid directly by the borrower.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures about
the Fair Value of Financial Instruments." The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
32
<PAGE> 35
NOTES TO CONSOLIDATED STATEMENTS(continued)
<TABLE>
<CAPTION>
September 30
1999 1998
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets:
Cash and
interest-earning
deposits $ 20,015 $ 20,015 $ 24,126 $ 24,126
Investment securities 44,315 44,315 40,621 40,621
Loans 226,375 222,007 198,343 214,020
Loans held for sale 1,792 1,792 2,799 2,799
Mortgage-related
securities 127,543 127,146 134,255 134,146
FHLB stock 6,157 6,157 5,079 5,079
Liabilities:
Passbook deposits 40,324 40,324 37,988 37,988
NOW and MMDA
deposits 60,741 60,741 52,522 52,522
Certificates of deposit 159,761 158,165 156,801 158,526
Advances from
Federal Home
Loan Bank 123,137 121,800 101,578 120,235
Securities sold under
agreements to
repurchase 19,300 19,226 19,300 19,884
Off balance sheet
commitments 31,047 31.047 26,365 26,365
</TABLE>
The fair value of cash and interest-earning deposits is their carrying value
due to their short-term nature. The fair value of investments and
mortgage-related securities is based on quoted market prices, dealer quotes, and
prices obtained from independent pricing services. The fair value of loans is
estimated, based on present values using approximate current entry-value
interest rates, applicable to each category of such financial instruments. The
fair value of FHLB stock approximates its carrying amount.
The fair value of NOW deposits, MMDA deposits, and passbook deposits is the
amount reported in the financial statements. The fair value of certificates of
deposit and FHLB advances is based on a present value estimate, using rates
currently offered for deposits of similar remaining maturity.
No adjustment was made to the entry-value interest rates for changes in
credit performing commercial loans, construction loans, and land loans for which
there are no known credit concerns. Management believes that the risk factor
embedded in the entry-value interest rates, along with the general reserves
applicable to the performing commercial, construction, and land loan portfolios
for which there are no known credit concerns, result in a fair valuation of such
loans on an entry-value basis. The fair value of non-performing loans, with a
recorded book value of approximately $3,180 and $3,704 (which are collateralized
by real estate properties with property values in excess of carrying amounts) as
of September 30, 1999 and 1998, respectively, was not estimated because it is
not practicable to reasonably assess the credit adjustment that would be applied
in the marketplace for such loans. The fair value estimates presented herein are
based on pertinent information available to management as of September 30, 1999
and 1998. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
18. CAPITAL SECURITIES
On August 21, 1997, First Keystone Capital Trust I ("the Trust"), a trust
formed under Delaware law, that is a subsidiary of the Company, issued $16.2
million of preferred securities at an interest rate of 9.7%, with a scheduled
maturity of August 15, 2027. The Company owns all the common stock of the Trust.
The proceeds from the issue were invested in Junior Subordinated Debentures (the
"Debentures") issued by the Company. The Debentures are unsecured and rank
subordinate and junior in right of payment to all indebtedness, liabilities and
obligations of the Company. The Debentures represent the sole assets of the
Trust. Interest on the Preferred Securities is cumulative and payable
semi-annually in arrears. The Company has the option, subject to required
regulatory approval, to prepay the securities beginning August 15, 2007.
The securities are shown on the liability side of the balance sheet as
"Company-obligated mandatorily redeemable preferred securities of a subsidiary
trust holding solely junior subordinated debentures of the Company." The Company
has, under the terms of the Debentures and the related Indenture as well as the
other operative corporate documents, agreed to irrevocably and unconditionally
guarantee the Trust's obligations under the Debentures. The Company contributed
approximately $6.0 million of the net proceeds to the Bank to support the Bank's
lending activities. The interest cost associated with this issue is treated as a
non-interest expense on the consolidated statement of operations rather than
interest expense.
33
<PAGE> 36
NOTES TO CONSOLIDATED STATEMENTS (continued)
19. PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial statements of First Keystone Financial, Inc. are as
follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30
------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Interest-bearing deposits $ 606 $ 222
Investment securities
available for sale 7,400 7,043
Investment in subsidiaries 34,403 35,622
Other assets 793 884
------- -------
Total assets $43,202 $43,771
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Junior subordinated debt $16,702 $16,702
Other borrowed money 2,232 100
Other liabilities 364 305
------- -------
Total liabilities 19,298 17,107
Stockholders' equity 23,904 26,664
Total liabilities and
stockholders' equity ------- -------
$43,202 $43,771
======= =======
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
Year Ended
September 30
------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest and dividend Income:
Dividends from subsidiary $ 750 $ 1,000
Loan to Employee Stock Ownership Plan 127 $ 136 129
Interest and dividends on investments 549 502
Interest on deposits 9 43 48
------ ------ ------
Total interest and dividend income 1,435 681 1,177
Interest on debt and other borrowed money 1,788 1,620 153
Other Income 130 5
Operating expenses 129 107 26
------ ------ ------
Income (loss) before income taxes and equity in
undistributed income of subsidiaries (352) (1,041) 998
Income tax expense (benefit) (374) (343) 10
------ ------ ------
Income (loss) before equity in undistributed
income of subsidiaries 22 (698) 988
Equity in undistributed income of subsidiaries 2,826 3,479 1,649
----- ----- -----
Net income $ 2,848 $ 2,781 $ 2,637
======= ======= =======
</TABLE>
34
<PAGE> 37
NOTES TO CONSOLIDATED STATEMENTS (continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,848 $ 2,781 $ 2,637
Adjustments to reconcile net income to cash
provided by operations:
(Equity in) return of undistributed earnings of subsidiaries (2,826) (3,479) (1,649)
Increase in investment of subsidiaries (48)
Amortization of common stock acquired by stock benefit plans 462 563 411
Gain on sale of investment available for sale (130) (5)
Amortization of premium 1
Decrease (increase) in other assets 91 (172) (677)
Increase in other liabilities 302 47 184
--- ---- ---
Net cash provided by (used in) operating activities 748 (313) 906
--- ---- ---
Cash flows from investing activities:
Purchases of investments available for sale (3,535) (8,891)
Proceeds from sale of investments available for sale 2,630 2,005
----- -----
Net cash used in investing activities (905) (6,886)
--- ----
Cash flows from financing activities:
Proceeds from issuance of debentures 16,200
Increase in other borrowed money 2,132 100
Capital contribution to subsidiary (6,000)
Common stock acquired by stock benefit plans (775)
Purchase of treasury stock (1,047) (2,036) (1,257)
Dividends paid (544) (475) (250)
-------- -------- -------
Net cash provided by (used in) financing activities 541 (2,411) 7,918
-------- -------- -------
Increase (decrease) in cash 384 (9,610) 8,824
Cash at beginning of period 222 9,832 1,008
-------- -------- --------
Cash at end of period $ 606 $ 222 $ 9,832
======== ======== ========
</TABLE>
35
<PAGE> 38
NOTES TO CONSOLIDATED STATEMENTS(continued)
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial data for the years ended September 30, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
1st 2nd 3rd 4th 1st 2nd 3rd 4th
QTR QTR QTR QTR QTR QTR QTR QTR
--- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $7,165 $7,083 $7,050 $7,396 $6,762 $6,836 $6,776 $7,019
Interest Expense 4,270 4,162 4,146 4,378 3,827 3,834 3,852 4,112
------ ------ ------ ------ ------ ------ ------ ------
Net Interest Income 2,895 2,921 2,904 3,018 2,935 3,002 2,924 2,907
Provision for Loan Losses 25 75 84 75 75 76 20 15
------ ------ ------ ------ ------ ------ ------ ------
Net Interest Income after
Provision for Loan Losses 2,870 2,846 2,820 2,943 2,860 2,926 2,904 2,892
Non-Interest Income 322 687 372 406 385 408 320 407
Non-Interest Expense 2,336 2,594 2,223 2,348 2,155 2,256 2,363 2,298
------ ------ ------ ------ ------ ------ ------ ------
Income Before Income Taxes 856 939 969 1,001 1,090 1,078 861 1,001
Provision for Income Taxes 196 228 244 249 418 394 160 278
------ ------ ------ ------ ------ ------ ------ ------
Net Income $ 660 $ 711 $ 725 $ 752 $ 672 $ 684 $ 701 $ 723
====== ====== ====== ====== ====== ====== ====== ======
Per Share:
Earnings Per Share - Basic $ .32 $ .35 $ .35 $ .37 $ .31 $ .32 $ .33 $ .35
Earnings Per Share - Diluted $ .31 $ .33 $ .34 $ .35 $ .29 $ .30 $ .31 $ .33
Common Stock Price Range
of the Company
High $16.00 $14.63 $14.25 $14.00 $18.75 $19.00 $22.25 $17.75
Low $12.25 $12.00 $12.00 $12.13 $14.63 $16.38 $17.25 $11.63
</TABLE>
Earnings per share is computed independently for each period presented
Consequently, the sum of the quarters may not equal the total earnings per share
for the year.
36
<PAGE> 39
First Keystone Financial, Inc. is a unitary savings and loan holding company
conducting business through its wholly-owned subsidiary, First Keystone Federal
Savings Bank. The savings bank is a federally chartered SAIF-insured savings
institution operating through six full-service offices located in Delaware and
Chester Counties, Pennsylvania. The Company's headquarters is located at 22 West
State Street, Media, PA 19063.
DIRECTORS
Donald A. Purdy, Esquire
Chairman of the Board
William K. Betts; retired
Former Senior Vice President of Human Resources
First Keystone Federal Savings Bank
Edward Calderoni
President of Century-21 Alliance
Silvio F. D'Ignazio
Owner of the Towne House Restaurant
Olive J. Faulkner; retired
Former Vice President and Corporate Secretary
First Keystone Federal Savings Bank
Donald S. Guthrie, Esquire
President and Chief Executive Officer
Edmund Jones, Esquire
Chairman Emeritus
Member Jones, Strohm, Crain & Guthrie, P.C.
Thomas M. Kelly
Executive Vice President and Chief Financial Officer
Willard F. Letts
President and Principal Stockholder
Eastern Flame Hardening Company
Walter J. Lewicki; retired
Former associate of Looker, Lees and Melcher, Inc.
Joan G. Taylor; retired
Former Executive Director of the Young Women's Christian Association (YWCA)
SENIOR OFFICERS
Donald S. Guthrie
President and Chief Executive Officer
Thomas M. Kelly
Executive Vice President and Chief Financial Officer
Stephen J. Henderson
Senior Vice President/Lending
Elizabeth M. Mulcahy
Senior Vice President/Human Resources
Carol Walsh
Corporate Secretary
EXECUTIVE OFFICES
22 West State Street
Media, PA 19063
(610) 565-6210
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
COUNSEL
Lawrence G. Strohm, Jr., Esquire
Jones, Strohm, Crain & Guthrie, P.C
10 Beatty Road
Media, PA 19063
SPECIAL COUNSEL
Elias, Matz, Tiernan and Herrick L.L.P.
Suite 1200
734 15th Street, N.W.
Washington, DC 20005
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Twenty-Fourth Floor
1700 Market Street
Philadelphia, PA 19103-3984
INVESTOR INFORMATION
Thomas M. Kelly
Executive Vice President and Chief Financial Officer
(610) 565-6210
SHAREHOLDER INFORMATION
Carol Walsh
Corporate Secretary
(610) 565-6210
STOCK INFORMATION
First Keystone Financial, Inc. is traded on the Nasdaq National Market under the
symbol of "FKFS." There were approximately 435 shareholders of record as of
October 1, 1999, not including the number of persons or entities whose stock is
held in nominee or street name through various brokerage firms or banks.
The Annual Meeting of Shareholders is scheduled for Wednesday, January 26, 2000,
at 2:00 p.m. to be held at the Towne House Restaurant, 117 Veterans Square,
Media, Pennsylvania.
[FIRST KEYSTONE FINANCIAL, Inc. LOGO]
<PAGE> 40
[FIRST KEYSTONE FINANCIAL, Inc. LOGO]
FIRST KEYSTONE FINANCIAL, INC.
22 West State Street - Media, Pennsylvania 19063 - 610.565.6210
http://www.firstkeystone.com
