<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number: 000-25328
FIRST KEYSTONE FINANCIAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0469351
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
22 West State Street
Media, Pennsylvania 19063
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (610) 565-6210
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
Number of shares of Common Stock outstanding as of February 10, 2000: 2,251,716
Transitional Small Business Disclosure Format Yes No X
----- -----
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<PAGE> 2
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1999 (Unaudited) and September 30, 1999 ............ 1
Consolidated Statements of Income for the Three
Months Ended December 31, 1999 and 1998 (Unaudited) ............. 2
Consolidated Statement of Changes in Stockholders'
Equity for the Three Months Ended December 31, 1999
(Unaudited) ..................................................... 3
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1999 and 1998 (Unaudited) .................... 4
Notes to Consolidated Financial Statements (Unaudited) .......... 5
Item 2. Managements's Discussion and Analysis of Financial Condition
and Results of Operations. ...................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk. ..... 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 15
Item 2. Changes in Securities and Use of Proceeds ....................... 15
Item 3. Defaults Upon Senior Securities ................................. 15
Item 4. Submission of Matters to a Vote of Security Holders ............. 15
Item 5. Other Information ............................................... 15
Item 6. Exhibits and Reports on Form 8-K ................................ 15
SIGNATURES ................................................................. 16
i
<PAGE> 3
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
December 31 September 30
ASSETS 1999 1999
- ------ ----------- ------------
(Unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 4,282 $ 3,010
Interest-bearing deposits with depository institutions 21,514 17,005
-------- --------
Total cash and cash equivalents 25,796 20,015
Investment securities available for sale 43,259 44,315
Mortgage-related securities available for sale 107,544 113,046
Loans held for sale 2,260 1,792
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $13,550 at December 31, 1999
and $14,100 at September 30, 1999) 14,146 14,497
Loans receivable - net 226,288 226,375
Accrued interest receivable 2,866 3,096
Real estate owned 939 297
Federal Home Loan Bank stock - at cost 6,157 6,157
Office properties and equipment - net 3,460 3,076
Deferred income taxes 3,710 2,749
Prepaid expenses and other assets 14,423 14,711
-------- --------
TOTAL ASSETS $450,848 $450,126
======== ========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $263,153 $260,826
Advances from Federal Home Loan Bank 122,107 123,137
Securities sold under agreements to repurchase 19,300 19,300
Accrued interest payable 2,587 2,321
Advances from borrowers for taxes and insurance 2,043 946
Accounts payable and accrued expenses 2,785 3,492
-------- --------
Total liabilities 411,975 410,022
-------- --------
Company-obligated mandatorily redeemable preferred securities of a subsidiary
trust holding solely junior subordinated debentures of the Company 16,200 16,200
Stockholders' Equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued
Common stock, $.01 par value, 20,000,000 shares authorized; issued
and outstanding: 2,251,716 shares at December 31, 1999
and September 30, 1999 14 14
Additional paid-in capital 13,433 13,408
Common stock acquired by stock benefit plans (1,465) (1,531)
Treasury stock at cost: 468,284 shares (5,622) (5,622)
Accumulated other comprehensive loss (4,860) (2,992)
Retained earnings - partially restricted 21,173 20,627
-------- --------
Total stockholders' equity 22,673 23,904
-------- --------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY $450,848 $450,126
======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
December 31
-------------------
1999 1998
------ ------
<S> <C> <C>
INTEREST INCOME:
Interest on:
Loans $4,442 $4,224
Mortgage-related securities 2,104 2,112
Investments 803 733
Interest-bearing deposits 121 96
------ ------
Total interest income 7,470 7,165
------ ------
INTEREST EXPENSE:
Interest on:
Deposits 2,683 2,614
Federal Home Loan Bank advances 1,566 1,359
Other borrowings 297 297
------ ------
Total interest expense 4,546 4,270
------ ------
NET INTEREST INCOME 2,924 2,895
PROVISION FOR LOAN LOSSES 105 25
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,819 2,870
------ ------
NON-INTEREST INCOME:
Service charges and other fees 218 227
Net gain (loss) on sales of:
Loans 54 101
Real estate owned (11)
Real estate operations (28) (12)
Other 183 6
------ ------
Total non-interest income 416 322
------ ------
NON-INTEREST EXPENSE:
Salaries and employee benefits 872 866
Occupancy and equipment expenses 258 255
Professional fees 153 244
Federal deposit insurance premium 38 35
Bank service charges 121 103
Data processing 100 97
Advertising 89 77
Minority interest in expense of subsidiaries 393 393
Other 239 357
------ ------
Total non-interest expense 2,354 2,336
------ ------
INCOME BEFORE INCOME TAX EXPENSE 881 856
INCOME TAX EXPENSE 178 196
------ ------
NET INCOME $ 703 $ 660
====== ======
BASIC EARNINGS PER COMMON SHARE $ 0.34 $ 0.32
====== ======
DILUTED EARNINGS PER COMMON SHARE $ 0.33 $ 0.31
====== ======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Common
stock Accumulated Retained
Additional acquired by other earnings- Total
Common paid-in stock benefit Treasury comprehensive partially stockholders'
stock capital plans stock loss restricted equity
------ ---------- ------------- -------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1999 $14 $13,408 $(1,531) $(5,622) $(2,992) $20,627 $23,904
Net income 703 703
Other comprehensive loss, net of tax (1,868) (1,868)
ESOP stock committed to be released 31 31
Excess of fair value above cost of
ESOP and RRP shares
committed to be released 25 25
RRP amortization 35 35
Dividends - $.07 per share (157) (157)
--- ------- ------- ------- ------- ------- -------
BALANCE AT DECEMBER 31, 1999 $14 $13,433 $(1,465) $(5,622) $(4,860) $21,173 $22,673
=== ======= ======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
December 31
-----------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 703 $ 660
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization 101 109
Amortization (accretion) of premiums and discounts (35) 82
Gain (loss) on sales of:
Loans (54) (101)
Real estate owned 11
Provision for loan losses 105 25
Provision for real estate owned losses 50
Amortization of stock benefit plans 91 118
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (11,038) (15,725)
Loans sold in the secondary market 10,570 14,087
Deferred income taxes 1
Accrued interest receivable 230 166
Prepaid expenses and other assets 288 (6,900)
Accrued interest payable 266 (35)
Accounts payable and accrued expenses (707) 997
-------- --------
Net cash provided by (used in) operating activities 531 (6,466)
-------- --------
INVESTING ACTIVITIES:
Loans originated (14,411) (30,883)
Purchases of:
Mortgage-related securities available for sale (10,016)
Investment securities available for sale (5,000)
Purchase of FHLB stock (215)
Proceeds from sales of real estate owned 37 624
Principal collected on loans 13,909 19,370
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 75
Mortgage-related securities available for sale 3,694 13,935
Mortgage-related securities held to maturity 348 1,387
Purchase of property and equipment (485) (120)
Net expenditures on real estate acquired through foreclosure and in development (79) (240)
-------- --------
Net cash provided by (used in) investing activities 3,013 (11,083)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 2,327 7,184
Net (decrease) increase in FHLB advances (1,030) 2,772
Net increase in advances from borrowers for taxes and insurance 1,097 1,122
Purchase of treasury stock (831)
Cash dividend (157) (136)
-------- --------
Net cash provided by financing activities 2,237 10,111
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,781 (7,438)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,015 24,126
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,796 $ 16,688
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 4,280 $ 4,305
Cash payments of income taxes 217
Transfers of loans receivable into real estate owned 729 1,212
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 (UNAUDITED) AND SEPTEMBER 30, 1999 AND
(UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
However, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the unaudited
interim periods.
The results of operations of the three month period ended December 31,
1999 are not necessarily indicative of the results to be expected for
the fiscal year ending September 30, 2000. The consolidated financial
statements presented herein should be read in conjunction with the
audited consolidated financial statements and related notes thereto
included in the Company's Annual Report to Stockholders for the year
ended September 30, 1999.
Certain information in this quarterly statement may constitute
forward-looking information that involves risks and uncertainties that
could cause actual results to differ materially from those estimated.
Persons are cautioned that such forward-looking statements are not
guarantees of future performance and are subject to various factors
which could cause actual results to differ materially from those
estimated. These factors include changes in general economic and market
conditions and the development of an interest rate environment that
adversely affects the interest rate spread or other income from the
Company's investments and operations.
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities,
by contractual maturities, are as follows:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury securities and securities
of U.S. Government agencies:
1 to 5 years $ 5,746 $ 149 $ 5,597
5 to 10 years 6,995 $5 331 6,669
Municipal obligations 18,925 1,622 17,303
Corporate bonds 4,910 338 4,572
Mutual funds 2,000 30 1,970
Preferred stocks 5,532 592 4,940
Other equity investments 2,390 182 2,208
------- -- ------ -------
Total $46,498 $5 $3,244 $43,259
======= == ====== =======
</TABLE>
5
<PAGE> 8
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury securities and securities
of U.S. Government agencies:
1 to 5 years $ 5,746 $ 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>
3. MORTGAGE-RELATED SECURITIES
Mortgage-related securities available for sale and mortgage-related
securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale:
FHLMC pass-through certificates $ 11,261 $ 26 $ 260 $ 11,027
FNMA pass-through certificates 32,159 22 1,302 30,879
GNMA pass-through certificates 33,444 2 1,115 32,331
Collateralized mortgage obligations 34,819 72 1,584 33,307
-------- ---- ------ --------
Total $111,683 $122 $4,261 $107,544
======== ==== ====== ========
Held to Maturity:
FHLMC pass-through certificates $ 3,137 $ 1 $ 108 $ 3,030
FNMA pass-through certificates 6,525 275 6,250
Collateralized mortgage obligations 4,484 214 4,270
-------- ---- ------ --------
Total $ 14,146 $ 1 $ 597 $ 13,550
======== ==== ====== ========
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for Sale:
FHLMC pass-through certificates $ 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>
The collateralized mortgage obligations contain both fixed and
adjustable classes of bonds which are repaid in accordance with a
predetermined priority. The underlying collateral of the bonds
primarily consist of loans which are insured by FHLMC, FNMA, or the
GNMA.
The mortgage-related securities designated as available for sale, by
definition, may be sold in response to changes in interest rates and
cash flows or for restructuring purposes.
5. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
December 31 September 30
1999 1999
----------- ------------
<S> <C> <C>
Real estate loans:
Single-family $163,864 $166,802
Construction and land 18,833 18,426
Multi-family and commercial 30,378 31,188
Consumer loans:
Home equity and lines of credit 18,431 18,624
Deposit 263 243
Education 276 365
Other 1,001 1,080
Commercial loans 5,453 2,190
-------- --------
Total loans 238,499 238,918
Loans in process (8,922) (9,005)
Allowance for loan losses (1,858) (1,928)
Deferred loan fees (1,431) (1,610)
-------- --------
Loans receivable - net $226,288 $226,375
======== ========
</TABLE>
7
<PAGE> 10
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Ended
December 31
----------------------
1999 1998
------ ------
<S> <C> <C>
Balance beginning of period $1,928 $1,738
Provisions charged to income 105 25
Charge-offs (175) (8)
------ ------
Total $1,858 $1,755
====== ======
</TABLE>
At December 31, 1999 and September 30, 1999, non-performing loans
(which include loans in excess of 90 days delinquent) amounted to
approximately $2,480 and $3,180, respectively.
6. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
December 31 September 30
1999 1999
----------------- ------------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Non-interest bearing $ 5,649 2.1% $ 7,912 3.0%
NOW 37,608 14.3 33,412 12.8
Passbook 38,710 14.7 40,324 15.5
Money market demand 17,248 6.6 19,417 7.4
Certificates of deposit 163,938 62.3 159,761 61.3
-------- ----- -------- -----
Total $263,153 100.0% $260,826 100.0%
======== ===== ======== =====
</TABLE>
7. COMPREHENSIVE INCOME
In 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement
requires disclosure of amounts from transactions and other events which
are currently excluded from the statement of operations and are
recorded directly to stockholders' equity. These transactions and other
events represent foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in
debt and equity securities. Only the last of these items is currently
applicable to the Company. For the three months ended December 31, 1999
and 1998, the Company's comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31
--------------------
1999 1998
------- -----
<S> <C> <C>
Net income $ 703 $ 660
Net SFAS 115 adjustment (1,868) (639)
------- -----
Total comprehensive income (loss) $(1,165) $ 21
======= =====
</TABLE>
8
<PAGE> 11
8. EARNINGS PER SHARE
Basic net income per share is based upon the weighted average number of
common shares outstanding, while diluted net income per share is based
upon the weighted average number of common share outstanding and common
share equivalents that would arise from the exercise of dilutive
securities (stock options).
The calculated basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31
--------------------
1999 1998
------- -----
<S> <C> <C>
Numerator $ 703 $ 660
Denominators:
Basic shares outstanding 2,054,236 2,034,945
Effect of dilutive securities 64,171 113,294
--------- ---------
Dilutive shares outstanding 2,118,407 2,148,239
========= =========
Earnings per share:
Basic $0.34 $0.32
Diluted $0.33 $0.31
</TABLE>
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 (UNAUDITED) AND
SEPTEMBER 30, 1999
Total assets of the Company remained relatively unchanged at $450.8 million at
December 31, 1999 as compared to $450.1 million at September 30, 1999. Cash and
cash equivalents increased by $5.8 million or 28.9% from $20.0 million at
September 30, 1999 to $25.8 million at December 31, 1999 in accordance with the
Company's liquidity plan for the year 2000 rollover.
Deposits increased $2.3 million or .9% from $260.8 million at September 30, 1999
to $263.1 million at December 31, 1999. The increase resulted primarily from the
growth in certificates of deposit.
Stockholders' equity decreased $1.2 million primarily due to a decrease in the
market valuation, net of taxes, of securities available for sale as well as
dividends paid partially offset by the Company's net income for the quarter.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
AND 1998
Net Income.
Net income was $703,000 for the three months ended December 31, 1999 as compared
to $660,000 for the same period in 1998. The $43,000 or 6.5% increase in net
income for the three months ended December 31, 1999 was due to a $94,000 or
29.2% increase in other income offset by a $51,000 or 1.8% decrease in net
interest income after provision for loan losses.
Net Interest Income.
Net interest income increased $29,000 or 1.0% to $2.9 million for the three
months ended December 31, 1999 as compared to the same period in 1998. The
increase was due to a $305,000 or 4.3% increase in interest income which was
partially offset by a $276,000 or 6.5% increase in interest expense for the 1998
period. The $305,000 increase in interest income was primarily due to a $8.7
million or 2.2% increase in the average balance of interest-earning assets and
by a 14 basis point increase in the yield earned thereon. The $276,000 increase
in interest expense was primarily due to an increase of $24.7 million or 6.7% in
the average balance of interest-bearing liabilities combined however, with, by
comparison, only a 1 basis point decrease in the weighted average rate paid
thereon for the three months ended December 31, 1999, as compared to the same
period in 1998. The interest rate spread and net interest margin, on a fully tax
equivalent basis, were 2.71% and 2.92%, respectively, for the three months ended
December 31, 1999 as compared to 2.56% and 2.96%, respectively, for the same
period in 1998.
Provision 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 amount of the Company's primary market area, and other factors related
to the collectibility of the Company's loan and
10
<PAGE> 13
loans held for sale portfolios. For the three months ended December 31, 1999,
the provision for loan losses amounted to $105,000 as compared to $25,000 for
the same period in 1998. The provision in fiscal 1999 reflected a $50,000
allocation of expense to real estate owned. The remaining increase is due to
normal allocations for the current loan portfolio. At December 31, 1999,
non-performing assets totaled $3.4 million or .76% of total assets, a decrease
of $64,000 from September 30, 1999. The Company's coverage ratio, which is the
loan loss reserve to non-performing assets, was 54.1% and 55.1% at December 31,
1999 and September 30, 1999, respectively.
Management will continue to review its loan portfolio to determine the extent,
if any, to which further additional loss provisions may be deemed necessary.
There can be no assurance that the allowance for losses will be adequate to
cover losses which may in fact be realized in the future and that additional
provisions for losses will not be required.
Other Income.
Other income increased $94,000 or 29.2% to $416,000 for the three months ended
December 31, 1999 as compared to the same period in 1998. The increase was
primarily a result of a $177,000 increase in the other non-interest income due
to the purchase of bank owned life insurance product and was partially offset by
a decrease in the gain on sale of loans of $47,000, loss on sale of real estate
owned of $28,000, and a small decrease in service charges and other fees of
$9,000.
Operating Expenses.
Operating expenses had a modest overall increase of $18,000 or .8% during the
three months ended December 31, 1999 as compared to the same period in 1998. The
increase was primarily due to a $91,000 increase in professional fees, $18,000
increase in bank service charges, and a $12,000 in advertising offset by a
$118,000 decrease in other non-interest expenses.
Income Tax Expense.
Income tax expense decreased $18,000 to $178,000 during the three months ended
December 31, 1999 as compared to the same period in 1998. The decrease was
primarily a result of the implementation of various tax planning strategies
including investment in tax-exempt securities.
The Year 2000 Issue.
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 causing
disruptions of operation. While lingering concern exists about certain dates
during Year 2000, the most significant date, January 1, 2000, has passed without
material incident. The Company is pleased to report as a result of its diligent
efforts, no interruptions of business or financial losses resulting from Year
2000 issues.
11
<PAGE> 14
Liquidity and Capital Resources.
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing and financing activities. The Company's primary
sources of funds are deposits, amortization, prepayment and maturities of
outstanding loans and mortgage-related securities, sales of loans, maturities of
investment securities and other short-term investments, borrowing and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-related securities and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, the Company invests excess
funds in overnight deposits and other short-term interest-earning assets which
provide liquidity to meet lending requirements. The Company has been able to
generate sufficient cash through its deposits as well as borrowings to satisfy
its funding commitments. At December 31, 1999, the Company had short-term
borrowings outstanding of $46.0 million, all of which consisted of advances from
the FHLB of Pittsburgh.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer term basis, the Company maintains a
strategy of investing in various lending products, mortgage-related securities
and investment securities. The Company uses its sources of funds primarily to
meet its ongoing commitments, to fund maturing certificates of deposit and
savings withdrawals, fund loan commitments and maintain a portfolio of
mortgage-related and investment securities. At December 31, 1999, total approved
loan commitments outstanding amounted to $9.1 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$13.0 million. Certificates of deposit scheduled to mature in one year or less
at December 31, 1999 totaled $113.8 million. Based upon its historical
experience, management believes that a significant portion of maturing deposits
will remain with the Company.
The Bank is required by the Office of Thrift Supervision ("OTS") to maintain
average daily balances of liquid assets and short-term liquid assets (as
defined) in amounts equal to 4% of net withdrawable deposits and borrowings
payable in one year or less to assure its ability to meet demand from
withdrawals and repayments of short-term borrowings. The liquidity requirements
may vary from time to time at the direction of the OTS depending upon economic
conditions and deposit flows. The Bank's average monthly liquidity ratio for
December 31, 1999 was 7.29%.
As of December 31, 1999, the Bank had regulatory capital which was in excess of
applicable limits. The Bank is required under certain federal regulations to
maintain tangible capital equal to at least 1.5% of its adjusted total assets,
core capital equal to at least 4.0% of its adjusted total assets and total
capital to at least 8.0% of its risk-weighted assets. At December 31, 1999, the
Bank had tangible capital and core capital equal to 8.3% of adjusted total
assets and total capital equal to 18.7% of risk-weighted assets.
12
<PAGE> 15
Impact of Inflation and Changing Prices.
The Consolidated Financial Statements of the Company and related notes presented
herein have been prepared in accordance with generally accepted accounting
principles which requires the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation to a larger
extent than interest rates. In the current interest rate environment, liquidity
and the maturity structure of the Company's assets and liabilities are critical
to the maintenance of acceptable performance levels.
13
<PAGE> 16
QUANTITATIVE AND QUALITATIVE DISCLOSURES
DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's asset and liability management policies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" in the Company's Annual Report on Form 10-K for the year ended
September 30, 1999.
The Company utilizes reports prepared by the OTS to measure interest rate risk.
Using data from the Bank's quarterly thrift financial reports, the OTS models
the net portfolio value ("NPV") of the Bank over a variety of interest rate
scenarios. The NPV is defined as the present value of expected cash flows from
existing assets less the present value of expected cash flows from existing
liabilities plus the present value of net expected cash inflows from existing
off-balance sheet contracts. The model assumes instantaneous, parallel shifts in
the U.S. Treasury Securities yield curve of 100 to 300 basis points, either up
or down, and in 100 basis point increments.
The interest rate risk measures used by the OTS include an "Exposure Measure" or
"Post-Shock" NPV ratio and a "Sensitivity Measure". The "Post-Shock" NPV ratio
is the net present value as a percentage of assets over the various yield curve
shifts. A low "Post-Shock" NPV ratio indicates greater exposure to interest rate
risk and can result from a low initial NPV ratio or high sensitivity to changes
in interest rates. The "Sensitivity Measure" is the decline in the NPV ratio, in
basis points, caused by a 2% increase or decrease in rates, whichever produces a
larger decline. The following sets forth the Bank's NPV as of December 31, 1999.
<TABLE>
<CAPTION>
Net Portfolio Value
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------
Changes in
Rates in Dollar Percentage Net Portfolio Value Change in
Basis Points Amount Change Change As a % of Assets Percentage (1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
300 $13,519 $(27,702) (67.20)% 3.25% (64.44)%
200 22,857 (18,364) (44.55) 5.34 (41.58)
100 32,343 (8,878) (21.53) 7.35 (19.58)
0 41,221 9.14
(100) 49,194 7,974 19.34 10.65 16.52
(200) 53,271 12,050 29.23 11.37 24.40
(300) 55,947 14,726 35.72 11.81 29.21
</TABLE>
(1) Based on the portfolio value of the Bank's assets in the base case
scenario
As of December 31, 1999, the Company's NPV was $41.2 million or 9.14% of the
market value of assets. Following a 200 basis point increase in interest rates,
the Company's "post shock" NPV was $22.9 million or 5.34% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(3.80)%.
14
<PAGE> 17
PART II
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On January 26, 2000, the Annual Meeting of stockholders of the Company
was held to elect management's nominees for director and to ratify the
appointment of the Company's independent auditors. No other nominations
for directors were submitted. With respect to the election of
directors, the results were as follows:
Nominee For Withheld
------- --- --------
Olive J. Faulkner 1,694,397 187,931
Thomas M. Kelly 1,695,597 186,731
Donald A. Purdy 1,694,321 188,006
With respect to the ratification of Deloitte & Touche LLP as the
Company's independent auditors, the results were as follows: 1,753,338
votes for, 124,149 votes against, and 4,840 votes abstaining for the
fiscal year ending September 30, 2000.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST KEYSTONE FINANCIAL, INC.
Date: February 16, 2000 By: /s/ Donald S. Guthrie
-------------------------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: February 16, 2000 By: /s/ Thomas M. Kelly
-------------------------------------
Thomas M. Kelly
Executive Vice-President
and Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,282
<INT-BEARING-DEPOSITS> 21,514
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 150,803
<INVESTMENTS-CARRYING> 14,146
<INVESTMENTS-MARKET> 13,550
<LOANS> 226,288
<ALLOWANCE> 1,858
<TOTAL-ASSETS> 450,848
<DEPOSITS> 263,153
<SHORT-TERM> 41,028
<LIABILITIES-OTHER> 7,415
<LONG-TERM> 100,379
6,360
0
<COMMON> 0
<OTHER-SE> 16,313
<TOTAL-LIABILITIES-AND-EQUITY> 22,673
<INTEREST-LOAN> 4,442
<INTEREST-INVEST> 2,907
<INTEREST-OTHER> 121
<INTEREST-TOTAL> 7,470
<INTEREST-DEPOSIT> 2,683
<INTEREST-EXPENSE> 4,546
<INTEREST-INCOME-NET> 2,924
<LOAN-LOSSES> 105
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,354
<INCOME-PRETAX> 881
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 703
<EPS-BASIC> .34
<EPS-DILUTED> .33
<YIELD-ACTUAL> 7.31
<LOANS-NON> 2,460
<LOANS-PAST> 20
<LOANS-TROUBLED> 18
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,928
<CHARGE-OFFS> 175
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,858
<ALLOWANCE-DOMESTIC> 1,252
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 606
</TABLE>
