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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, 2003
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Number of shares of Common Stock outstanding as of February 10, 2004: 1,891,237
Transitional Small Business Disclosure Format Yes [ ] No [X]
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 2003 (Unaudited) and September 30, 2003 1
Unaudited Consolidated Statements of Income for the Three
Months Ended December 31, 2003 and 2002 2
Unaudited Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended December 31, 2003 3
Unaudited Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 2003 and 2002 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 16
Item 4. Disclosure Controls and Procedures 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
-i-
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share amounts)
(Unaudited)
December 31 September 30
2003 2003
----------- ------------
ASSETS
Cash and amounts due from depository institutions $ 8,330 $ 10,439
Interest-bearing deposits with depository institutions 7,269 10,751
----------- ------------
Total cash and cash equivalents 15,599 21,190
Investment securities available for sale 73,179 77,700
Mortgage-related securities available for sale 119,957 124,656
Loans held for sale 250 4,498
Investment securities held to maturity - at amortized cost
(approximate fair value of $6,450 at December 31, 2003
and $6,450 at September 30, 2003) 6,308 6,315
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $15,160 at December 31, 2003
and $3,560 at September 30, 2003) 15,076 3,487
Loans receivable (net of allowance for loan loss of $2,017
and $1,986 at December 31, 2003 and September 30, 2003, respectively) 290,874 286,421
Accrued interest receivable 2,746 2,654
Real estate owned 1,420 1,420
Federal Home Loan Bank stock at cost 8,274 8,294
Office properties and equipment, net 3,548 3,427
Cash surrender value of life insurance 15,644 15,365
Prepaid expenses and other assets 3,099 4,185
----------- ------------
TOTAL ASSETS $ 555,974 $ 559,612
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 346,700 $ 362,605
Advances from Federal Home Loan Bank and other borrowings 150,108 136,272
Junior subordinated debt 21,584 21,593
Accrued interest payable 1,050 1,111
Advances from borrowers for taxes and insurance 1,944 958
Deferred income taxes 249 581
Accounts payable and accrued expenses 2,903 4,104
----------- ------------
Total liabilities 524,538 527,224
----------- ------------
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: 1,890,897 shares at December 31, 2003 and
1,925,337 shares at September 30, 2003 14 14
Additional paid-in capital 13,514 13,443
Employee stock ownership plan (786) (830)
Treasury stock at cost: 821,659 shares at December 31, 2003 and 787,219 shares
at September 30, 2003 (12,336) (11,378)
Accumulated other comprehensive income 2,425 3,069
Retained earnings - partially restricted 28,605 28,070
----------- ------------
Total stockholders' equity 31,436 32,388
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 555,974 $ 559,612
=========== ============
See notes to unaudited consolidated financial statements.
-1-
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
Three months ended
December 31
---------------------
2003 2002
--------- ---------
INTEREST INCOME:
Interest on:
Loans $ 4,445 $ 5,050
Mortgage-related securities 1,229 1,110
Investment securities:
Taxable 639 606
Tax-exempt 241 300
Dividends 64 95
Interest-bearing deposits 18 56
--------- ---------
Total interest income 6,636 7,217
--------- ---------
INTEREST EXPENSE:
Interest on:
Deposits 1,588 1,967
Federal Home Loan Bank advances and other borrowings 1,739 1,740
Trust preferred securities 413 429
--------- ---------
Total interest expense 3,740 4,136
--------- ---------
NET INTEREST INCOME 2,896 3,081
PROVISION FOR LOAN LOSSES 75 195
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,821 2,886
--------- ---------
NON-INTEREST INCOME:
Service charges and other fees 267 272
Net gain on sales of:
Loans held for sale 7 136
Investment securities 405 11
Increase in cash surrender value 273 167
Other income 112 38
--------- ---------
Total non-interest income 1,064 624
--------- ---------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,530 1,156
Occupancy and equipment 305 286
Professional fees 231 215
Federal deposit insurance premium 13 14
Data processing 111 120
Advertising 98 120
Net cost of operation of other real estate 87 5
Other 558 594
--------- ---------
Total non-interest expense 2,933 2,510
--------- ---------
INCOME BEFORE INCOME TAX EXPENSE 952 1,000
INCOME TAX EXPENSE 209 219
--------- ---------
NET INCOME $ 743 $ 781
========= =========
BASIC EARNINGS PER COMMON SHARE $ 0.40 $ 0.41
========= =========
DILUTED EARNINGS PER COMMON SHARE $ 0.37 $ 0.39
========= =========
See notes to unaudited consolidated financial statements.
-2-
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
Accumulated Retained
Additional Employee other earnings- Total
Common paid-in stock ownership Treasury comprehensive partially stockholders'
stock capital plan stock income restricted equity
------ ---------- --------------- -------- ------------- ---------- -------------
BALANCE AT OCTOBER 1, 2003 $ 14 $ 13,443 $ (830) $(11,378) $3,069 $ 28,070 $ 32,388
Net income 743 743
Other comprehensive income, net of tax:
Net unrealized loss on securities
net of reclassification adjustment(1) (644) (644)
------ --------
Comprehensive income 99
--------
ESOP stock committed to be released 44 44
Excess of fair value above cost of
ESOP shares committed to be released 86 86
Purchase of treasury stock (1,044) (1,044)
Exercise of stock options (15) 86 71
Dividends - $.11 per share (208) (208)
---- ---------- ------ -------- ------ -------- --------
BALANCE AT DECEMBER 31, 2003 $ 14 $ 13,514 $ (786) $(12,336) $2,425 $ 28,605 $ 31,436
==== ========== ====== ======== ====== ======== ========
(1) Disclosure of reclassification amount, net of tax for the three months ended
December 31, 2003:
Net unrealized depreciation arising during the period $(911)
Less: reclassification adjustment for net gains included in net income 267
-----
Net unrealized loss on securities $(644)
=====
See notes to unaudited consolidated financial statements.
-3-
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Three months ended
December 31
--------------------
2003 2002
-------- --------
OPERATING ACTIVITIES:
Net income $ 743 $ 781
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for depreciation and amortization 109 106
Amortization of premiums and discounts 22 176
Increase in cash surrender value of life insurance (279)
(Gain) loss on sales of:
Loans held for sale (7) (136)
Investment securities (405) (11)
Real estate owned -- (2)
Provision for loan losses 75 195
Amortization of employee stock ownership plan 130 79
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (1,923) (9,318)
Loans sold in the secondary market 1,988 9,189
Accrued interest receivable (92) 20
Prepaid expenses and other assets 1,086 (291)
Accrued interest payable (61) (93)
Accrued expenses (1,201) 622
-------- --------
Net cash provided by operating activities 185 1,317
-------- --------
INVESTING ACTIVITIES:
Loans originated (27,122) (40,823)
Purchases of:
Mortgage-related securities available for sale (7,060) (26,970)
Investment securities available for sale -- (3,998)
Mortgage-related securities held to maturity (11,951) --
Redemption (purchase) of FHLB stock 20 (493)
Proceeds from sales of real estate owned -- 15
Proceeds from sales of investment securities 2,204 2,011
Principal collected on loans 26,860 38,121
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 2,295 5,497
Mortgage-related securities available for sale 11,112 19,834
Mortgage-related securities held to maturity 360 2,432
Purchase of property and equipment (230) (55)
-------- --------
Net cash used in investing activities (3,512) (4,429)
-------- --------
FINANCING ACTIVITIES:
Net (decrease) increase in deposit accounts (15,905) 7,609
Net increase in FHLB advances 13,836 42
Net increase in advances from borrowers for taxes and insurance 986 1,224
Exercise of stock options 71 28
Purchase of treasury stock (1,044) (92)
Cash dividend (208) (201)
-------- --------
Net cash (used in) provided by financing activities (2,264) 8,610
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,591) 5,498
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,190 24,623
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,599 $ 30,121
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 3,801 $ 3,800
Transfer of loans held for sale to loan portfolio 4,186 --
See notes to unaudited consolidated financial statements.
-4-
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The accompanying unaudited 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
accounting principles generally accepted in the United States of
America 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 periods.
The results of operations for the three month period ended December 31,
2003 are not necessarily indicative of the results to be expected for
the fiscal year ending September 30, 2004 or any other period. 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 Form 10-K for the year
ended September 30, 2003.
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
available for sale and held to maturity, by contractual maturities, are
as follows:
December 31, 2003
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
Available for Sale:
U.S. Government and agency bonds
Less than 1 year $ 3,015 $ 2 $ -- $ 3,017
1 to 5 years 10,000 13 111 9,902
5 to 10 years 3,000 -- 62 2,938
Municipal obligations
Over 10 years 14,118 447 -- 14,565
Corporate bonds
1 to 5 years 5,970 564 -- 6,534
5 to 10 years 996 126 -- 1,122
Over 10 years 9,049 227 104 9,172
Asset-backed securities
5 to 10 years 1,615 9 -- 1,624
Mutual funds 14,009 -- 91 13,918
Preferred stocks 5,474 15 974 4,515
Other equity investments 2,876 2,996 -- 5,872
--------- ------ ------ --------
Total $ 70,122 $4,399 $1,342 $ 73,179
========= ====== ====== ========
Held to Maturity:
Municipal obligations
5 to 10 years $ 2,594 $ 26 $ -- $ 2,620
Over 10 years 667 3 -- 670
Corporate bonds
Less than 1 year 1,005 25 -- 1,030
1 to 5 years 2,042 88 -- 2,130
--------- ------ ------ --------
Total $ 6,308 $ 142 $ -- $ 6,450
========= ====== ====== ========
-5-
September 30, 2003
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
Available for Sale:
U.S. Government and agency bonds
1 to 5 years $13,020 $ 35 $ 51 $ 13,004
5 to 10 years 4,880 139 31 4,988
Municipal obligations
Over 10 years 14,112 503 -- 14,615
Corporate bonds
1 to 5 years 5,584 498 -- 6,082
5 to 10 years 2,932 458 -- 3,390
Over 10 years 9,051 332 332 9,051
Asset-backed securities
5 to 10 years 1,911 11 -- 1,922
Mutual funds 14,009 -- 57 13,952
Preferred stocks 5,474 34 524 4,984
Other equity investments 3,126 2,586 -- 5,712
------- ------ ----- --------
Total $74,099 $4,596 $ 995 $ 77,700
======= ====== ===== ========
Held to Maturity:
Municipal obligations
5 to 10 years $ 1,545 $ 5 -- $ 1,550
Over 10 years 1,715 15 -- 1,730
Corporate bonds
Less than 1 year 1,007 23 -- 1,030
1 to 5 years 2,048 92 -- 2,140
------- ------ ----- -------
Total $ 6,315 $ 135 -- $ 6,450
======= ====== ===== ========
3. MORTGAGE-RELATED SECURITIES
Mortgage-related securities available for sale and mortgage-related
securities held to maturity are summarized as follows:
December 31, 2003
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
Available for Sale:
FHLMC pass-through certificates $ 8,355 $ 110 $ 33 $ 8,432
FNMA pass-through certificates 48,092 328 195 48,225
GNMA pass-through certificates 10,800 504 14 11,290
Collateralized mortgage obligations 52,093 248 331 52,010
--------- ------- ----- ---------
Total $ 119,340 $ 1,190 $ 573 $ 119,957
========= ======= ===== =========
Held to Maturity:
FHLMC pass-through certificates $ 2,426 $ 24 $ 20 $ 2,430
FNMA pass-through certificates 11,868 97 5 11,960
Collateralized mortgage obligations 782 -- 12 770
--------- ------- ----- ---------
Total $ 15,076 $ 121 $ 37 $ 15,160
========= ======= ===== =========
-6-
September 30, 2003
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
Available for Sale:
FHLMC pass-through certificates $ 6,862 $ 126 $ 38 $ 6,950
FNMA pass-through certificates 45,740 412 122 46,030
GNMA pass-through certificates 13,043 596 -- 13,639
Collateralized mortgage obligations 57,961 433 357 58,037
--------- ------- ----- ---------
Total $ 123,606 $ 1,567 $ 517 $ 124,656
========= ======= ===== =========
Held to Maturity:
FHLMC pass-through certificates $ 478 $ 22 $ -- $ 500
FNMA pass-through certificates 2,123 40 3 2,160
Collateralized mortgage obligations 886 14 -- 900
--------- ------- ----- ---------
Total $ 3,487 $ 76 $ 3 $ 3,560
========= ======= ===== =========
4. LOANS RECEIVABLE
Loans receivable consist of the following:
December 31 September 30
2003 2003
----------- ------------
Real estate loans:
Single-family $ 165,400 $ 166,042
Construction and land 30,394 28,975
Multi-family and commercial 61,906 59,022
Home equity and lines of credit 37,000 33,459
Consumer loans 1,495 1,438
Commercial loans 9,328 10,161
----------- ------------
Total loans 305,523 299,097
Loans in process (12,596) (10,655)
Allowance for loan losses (2,017) (1,986)
Deferred loan fees (36) (35)
----------- ------------
Loans receivable - net $ 290,874 $ 286,421
=========== ============
The following is an analysis of the allowance for loan losses:
Three Months Ended
December 31
------------------
2003 2002
------- -------
Balance beginning of period $ 1,986 $ 2,358
Provisions charged to income 75 195
Charge-offs (82) (31)
Recoveries 38 8
------- -------
Total $ 2,017 $ 2,530
======= =======
At December 31, 2003 and September 30, 2003, non-performing loans
(which include loans in excess of 90 days delinquent) amounted to
approximately $1,715 and $1,556, respectively. At December 31, 2003,
non-performing loans primarily consisted of single-family residential
mortgage loans aggregating $1,000 and, to a lesser extent, commercial
real estate loans totaling $467.
-7-
5. DEPOSITS
Deposits consist of the following major classifications:
December 31 September 30
2003 2003
-------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
Non-interest bearing $ 20,540 5.9% $ 20,917 5.8%
NOW 52,565 15.2 60,221 16.6
Passbook 47,758 13.8 47,089 13.0
Money market demand 53,040 15.3 55,889 15.4
Certificates of deposit 172,797 49.8 178,489 49.2
--------- ----- --------- -----
Total $ 346,700 100.0% $ 362,605 100.0%
========= ===== ========= =====
6. 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 shares outstanding and
common share equivalents that would arise from the exercise of dilutive
securities. All dilutive shares consist of options the exercise price
of which is lower than the market price of the common stock covered
thereby at the dates presented.
The calculated basic and diluted earnings per share ("EPS") is as
follows:
Three Months Ended
December 31
-----------------------
2003 2002
---- ----
Numerator $ 743 $ 781
Denominators:
Basic shares outstanding 1,834,220 1,906,521
Effect of dilutive securities 153,630 111,212
---------- ---------
Dilutive shares outstanding 1,987,850 2,017,733
========== ==========
Earnings per share:
Basic $ 0.40 $ 0.41
Diluted $ 0.37 $ 0.39
-8-
7. STOCK-BASED COMPENSATION
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 option in
accordance with the fair value method in SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below.
Three Months Ended
December 31
-----------
2003 2002
---- ----
Net income, as reported $ 743 $ 781
Less: Total stock-based employee compensation expense
determined under fair value method for all
options, net of tax 5 18
----- -----
Pro forma net income $ 738 $ 763
===== =====
Earnings per share:
Basic - as reported $0.40 $0.41
Basic - pro forma $0.40 $0.40
Diluted - as reported $0.37 $0.39
Diluted - pro forma $0.37 $0.38
8. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." In December 2003, the FASB issued a revision of FIN
46 (FIN 46(R)). The Interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.
The Company has participated in the issue of trust preferred securities
through trusts established for such purpose. These trusts are subject
to the requirements of FIN No. 46 and FIN No. 46(R). Effective December
31, 2003, the Company adopted this statement requiring the Company to
deconsolidate the trust preferred security trusts. The Company
previously classified its trust preferred securities after total
liabilities and before stockholders' equity on the Consolidated
Statement of Financial Condition. Under the provisions of FIN No. 46
and FIN No. 46(R), these securities were reclassified as borrowed funds
effective December 31, 2003. Additionally, the related dividends were
reclassified from non-interest expense and included in interest expense
in the Consolidated Statement of Income. Reclassifications of prior
period amounts were made to conform to this presentation. The adoption
of FIN No. 46 and FIN No. 46(R) did not have a material impact on the
Company's financial statements. However, the effect of reclassifying
dividends from non-interest expense decreased the Company's net
interest margin for the first quarter of 2004 by approximately 32 basis
points from 2.62% to 2.30%.
-9-
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This statement requires that certain financial instruments,
which previously could be designated as equity, now be classified as
liabilities on the balance sheet. The adoption of SFAS No. 150 did not
have a material impact on the Company's financial statements.
In December 2003, the FASB Emerging Issues Task Force reached consensus
on several issues being addressed in EITF Issue No. 03-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain
Investments." The objectives of EITF 03-1 is to provide guidance on
other-than-temporary impairment and its application to debt and
marketable equity securities. The EITF reached consensus requiring
disclosures, tabular and narrative, that will provide sufficient
information to provide an understanding of the circumstances leading to
management's conclusion that the impairments are not
other-than-temporary. The requirements apply only to annual financial
statements for fiscal years ending after December 15, 2003. The Company
will apply the disclosure requirements to its annual financial
statements for the fiscal year ending September 30, 2004. The Company
does not anticipate this requirement will have a material impact on the
Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this Quarterly Report on Form 10-Q
includes certain "forward-looking statements" based on management's current
expectations and beliefs. The Company's actual results could differ materially,
as defined in the Securities Act of 1933 and the Securities Exchange Act of
1934, from management's expectations. Such forward-looking statements include
statements regarding management's current intentions, beliefs or expectations as
well as the assumptions on which such statements are based. These
forward-looking statements are subject to significant business, economic and
competitive uncertainties and contingencies, many of which are not subject to
the Company's control. Stockholders and potential stockholders are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Factors that could cause future results to vary from current management
expectations include, but are not limited to, general economic conditions,
legislative and regulatory changes, monetary and fiscal policies of the federal
government, changes in tax policies, rates and regulations of federal, state and
local tax authorities, changes in interest rates, deposit flows, the cost of
funds, demand for loan products, demand for financial services, competition,
changes in the quality or composition of the Company's loan and investment
portfolios, changes in accounting principles, policies or guidelines,
availability and cost of energy resources and other economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and fees.
The Company undertakes no obligation to update or revise any forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results that occur subsequent to the date
such forward-looking statements are made.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2003 AND SEPTEMBER 30, 2003
Total assets of the Company decreased slightly $3.6 million from $559.6 million
at September 30, 2003 to $556.0 million at December 31, 2003. Mortgage-related
securities held to maturity increased to $15.1 million from $3.5 million at
September 30, 2003 mainly due to the Company's strategy to reinvest the cash
flows from the loan and securities portfolio into the held to maturity portfolio
in order to minimize price volatility in the future as rates increase as the
Company expects they will. Loans receivable increased $4.5 million, or 1.6%,
from $286.4 million to $290.9 million at September 30, 2003 reflecting the
Company's strategy in increasing its investment in higher yielding assets. The
increase in loans receivable was in commercial real estate loans and home equity
loans partially offset by decreases in single-family residential loans. Loans
held for sale decreased $4.2 million due to management's reevaluation of the
Company's asset liability position and decision to retain $4.2 million of the
loans originally intended to be sold in the secondary market instead in its
residential loan portfolio.
-10-
Deposits decreased $15.9 million, or 4.4%, from $362.6 million at September 30,
2003 to $346.7 million at December 31, 2003. The decrease resulted from
decreases of $10.2 million, or 5.6%, in core deposits (which consist of
passbook, money market, NOW and non-interest bearing accounts) combined with a
decrease of $5.7 million, or 3.2%, in certificates of deposit. The decrease in
deposits resulted from declines in deposit accounts maintained by title
insurance companies due to a decrease in refinancing activity combined with
higher rates being offered by local competition. Due to the decrease in
deposits, borrowings increased $13.8 million, or 10.2%, in overnight advances
with the FHLB.
Stockholders' equity decreased $952,000 to $31.4 million primarily due to the
Company repurchasing 40,200 shares of stock during the first quarter of fiscal
2004 combined with dividend payments of $208,000 partially offset by net income
of $743,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2003
AND 2002
NET INCOME.
Net income was $743,000 for the three months ended December 31, 2003 as compared
to $781,000 for the same period in 2002. The $38,000, or 4.9%, decrease in net
income for the three months ended December 31, 2003 was primarily due to a
$185,000 decrease in net interest income combined with a $423,000 increase in
non-interest expense partially offset by a $440,000 increase in non-interest
income along with a $120,000 decrease in provision for loan losses.
NET INTEREST INCOME.
Net interest income decreased $185,000, or 6.0%, to $2.9 million for the three
months ended December 31, 2003 as compared to the same period in 2002. The
decrease was primarily due to a $581,000, or 8.1%, decrease in interest income
which was partially offset by a $396,000, or 9.6%, decrease in interest expense
as compared to the 2002 period. The $581,000 decrease in interest income was
primarily due to a 85 basis point (on a fully tax equivalent basis) decrease in
the weighted yield earned on the Company's interest-earning assets, partially
offset by a $34.5 million, or 7.1%, increase in the average balance of such
assets. The $396,000 decrease in interest expense was primarily due to a 56
basis point decrease in the weighted average rate paid on interest-bearing
liabilities offset, in part, by an increase of $37.7 million, or 7.9%, in the
average balance of such liabilities for the three months ended December 31,
2003, as compared to the same period in 2002.
The interest rate spread and net interest margin, on a fully tax equivalent
basis, were 2.28% and 2.30%, respectively, for the three months ended December
31, 2003 as compared to 2.57% and 2.62%, respectively, for the same period in
2002.
The Company's adoption of SFAS 150 required the Company to reclassify $21.6
million of trust preferred securities from the mezzanine section of the
Consolidated Statement of Condition to borrowed funds. The dividends paid on
these financial instruments, previously classified as non-interest expense, were
reclassified as interest expense adversely impacting the net interest margin by
31 and 35 basis points for the quarters ended December 31, 2003 and 2002,
respectively.
-11-
The following table presents the average balances for various categories of
assets and liabilities, and income and expense related to those assets and
liabilities for the three months ended December 31, 2003 and 2002. The
adjustment of tax exempt securities to a tax equivalent yield in the table below
may be considered to include non-GAAP financial information. Management believes
that it is a standard practice in the banking industry to present net interest
margin, net interest rate spread and net interest income on a fully tax
equivalent basis when a significant proportion of interest-earning assets are
tax-free. Therefore, management believes, these measures provide useful
information to investors by allowing them to make peer comparisons. A GAAP
reconciliation is included below.
FOR THE THREE MONTHS ENDED
---------------------------------------------------------------
DECEMBER 31, 2003 DECEMBER 31, 2002
---------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
--------- -------- ------ --------- -------- -------
Interest-earning assets:
Loans receivable(1)(2) $ 290,683 $ 4,445 6.12% $ 290,158 $ 5,050 6.96%
Mortgage-related securities(2) 127,640 1,229 3.85 92,282 1,110 4.81
Investment securities(2) 90,407 1,040 4.60 83,623 1,110 5.31
Other interest-earning assets 12,268 18 0.58 20,399 56 1.10
--------- -------- --------- --------
Total interest-earning assets 520,998 $ 6,732 5.17 486,462 $ 7,326 6.02
--------- -------- ------ --------- -------- ------
Non-interest-earning assets 36,724 29,973
--------- ---------
Total assets $ 557,722 $ 516,435
========= =========
Interest-bearing liabilities:
Deposits $ 352,429 $ 1,588 1.80 $ 331,802 $ 1,967 2.37
FHLB advances and other borrowings 143,540 1,739 4.85 126,395 1,740 5.52
Trust preferred securities 21,590 413 7.65 21,626 429 7.93
--------- -------- --------- --------
Total interest-bearing liabilities 517,559 3,740 2.89 479,823 4,136 3.45
--------- -------- ------ --------- -------- ------
Interest rate spread 2.28% 2.57%
====== ======
Non-interest-bearing liabilities 8,505 4,043
--------- ---------
Total liabilities 526,064 483,866
Stockholders' equity 31,658 32,569
========= =========
Total liabilities and stockholders' equity $ 557,722 $ 516,435
========= =========
Net interest-earning assets $ 3,439 $ 6,639
========= =========
Net interest income $ 2,992 $ 3,190
======== ========
Net interest margin(3) 2.30% 2.62%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 100.66% 101.38%
====== ======
(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.
-12-
Although management believes that the above mentioned non-GAAP financial
measures enhance investor's understanding of the Company's business and
performance, these non-GAAP financials measures should not be considered an
alternative to GAAP. The reconciliation of these non-GAAP financials measures
from GAAP to non-GAAP is presented below.
FOR THE THREE MONTHS ENDED
------------------------------------------------
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------------------------------
AVERAGE AVERAGE
(Dollars in thousands) INTEREST YIELD/COST INTEREST YIELD/COST
-------- ---------- -------- ----------
Investment securities - nontaxable $ 944 4.18% $ 1,001 4.79%
Tax equivalent adjustments 96 109
-------- --------
Investment securities - nontaxable to a
taxable equivalent yield $ 1,040 4.60% $ 1,110 5.31%
======== ========
Net interest income $ 2,896 $ 3,081
Tax equivalent adjustment 96 109
-------- --------
Net interest income, tax equivalent $ 2,992 $ 3,190
======== ========
Net interest rate spread, no tax adjustment 2.20% 2.48%
Net interest margin, no tax adjustment 2.22% 2.53%
PROVISION FOR LOAN LOSSES.
Provisions for loan losses are charged to earnings to maintain the total
allowance for loan losses at a level believed by management to cover all known
and inherent losses in the loan portfolio which are both probable and reasonably
estimable. Management's analysis includes consideration of the Company's
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 loans held for sale portfolios. For
the three months ended December 31, 2003 and 2002, the provision for loan losses
amounted to $75,000 and $195,000, respectively. The decrease in provision for
loan loss was primarily due to the decrease in non-performing assets from
December 31, 2002.
At December 31, 2003, non-performing assets increased slightly to $3.1 million,
or .56%, of total assets, from $3.0 million at September 30, 2003. The coverage
ratio, which is the ratio of the allowance for loan losses to non-performing
assets, was 64.3% and 66.7% at December 31, 2003 and September 30, 2003,
respectively. Included in non-performing assets is $1.4 million of real estate
owned consisting primarily of a $1.1 commercial real estate property. The Bank
owns a 25% participation interest in an 18-hole golf course and a golf house
located in Avondale, Pennsylvania. The golf facility is fully operational and
continues to generate revenues. However, in connection with the operations of
the facility, the Company has incurred its representative share of expenses
totaling of approximately $75,000 for the three months ended December 31, 2003.
Management believes that the Company will continue to incur expenses in the
upcoming quarters in connection with the operation of the golf facility. The
Bank's participation interest in a non-performing commercial real estate loan
totaling $320,000 was paid off during the quarter.
Management continues 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.
-13-
NON-INTEREST INCOME.
Non-interest income increased $440,000 or 70.5% to $1.1 million for the three
months ended December 31, 2003 as compared to the same period in 2002. The
increase for the three months ended December 31, 2003 was primarily due to a
$394,000 increase on the gain on sales of investment securities resulting from
taking advantage of market conditions, including a favorable tender offer for a
corporate security. The Company also experienced a $118,000 increase in the cash
surrender value of certain insurance policies held by the Bank to fund
retirement benefits with a corresponding increase in expenses providing for
retirement benefits. In addition, the Company had a $74,000 increase in other
income. These increases were partially offset by a $129,000 decrease in the gain
on sale of loans resulting from the significant slowdown in refinancing
activity.
NON-INTEREST EXPENSE.
Non-interest expense increased $423,000 or 16.9% during the three months ended
December 31, 2003 compared to the same period in 2002. The increase was
primarily due to increases of $374,000, $82,000, and $19,000 in compensation and
employee benefits, real estate operations and occupancy and equipment expenses,
respectively, partially offset by a $36,000 decrease in other non-interest
expense.
A majority of the increase in compensation and employee benefits reflected
increases in pension benefits, employee stock ownership expense and higher
employee medical costs. The increase in real estate operations was primarily due
to expenses related to a commercial property, as previously discussed.
Management believes that the Company will continue to incur expenses in the
upcoming quarters with the operation of the golf facility.
INCOME TAX EXPENSE.
Income tax expense decreased $10,000 to $209,000 during the three months ended
December 31, 2003 as compared to the same period in 2002. The decrease reflected
the decrease in income before income taxes as compared to the same period in
2002.
CRITICAL ACCOUNTING POLICIES.
The Company has identified the evaluation of the allowance for loan losses as a
critical accounting estimate where amounts are sensitive to material variation.
Critical accounting estimates are significantly affected by management judgment
and uncertainties and there is a likelihood that materially different amounts
would be reported under different, but reasonably plausible, conditions or
assumptions. The allowance for loan losses is considered a critical accounting
estimate because there is a large degree of judgment in (i) assigning individual
loans to specific risk levels (pass, special mention, substandard, doubtful and
loss), (ii) valuing the underlying collateral securing the loans, (iii)
determining the appropriate reserve factor to be applied to specific risk levels
for criticized and classified loans (special mention, substandard, doubtful and
loss) and (iv) determining reserve factors to be applied to pass loans based
upon loan type. To the extent that loans change risk levels, collateral values
change or reserve factors change, the Company may need to adjust its provision
for loan losses which would impact earnings.
Management has discussed the development and selection of this critical
accounting estimate with the Audit Committee of the Board of Directors and the
Audit Committee has reviewed the Company's disclosure relating to it in this
Management's Discussion and Analysis.
Management believes the allowance for loan losses at December 31, 2003 was at a
level to cover the known and inherent losses in the portfolio that were both
probable and reasonable to estimate. In the future, management may adjust the
level of its allowance for loan losses as economic and other conditions dictate.
Management reviews the allowance for loan losses not less than quarterly.
-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, repayments, prepayments 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, 2003, the Company had short-term
borrowings (due within one year or currently callable by the Federal Home Loan
Bank ("FHLB")) outstanding of $121.8 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, 2003, total approved
loan commitments outstanding amounted to $3.9 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$31.4 million. Certificates of deposit scheduled to mature in one year or less
at December 31, 2003 totaled $110.5 million. Based upon its historical
experience, management believes that a significant portion of maturing deposits
will remain with the Company.
As of December 31, 2003, the Bank had regulatory capital which was in excess of
applicable requirements. The Bank is required under applicable federal banking
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,
2003, the Bank had tangible capital and core capital equal to 8.1% of adjusted
total assets and total capital equal to 15.1% of risk-weighted assets.
INVESTMENT SECURITIES.
At December 31, 2003, the Company's investment securities available for sale
portfolio, including short-term investments, were carried at a fair value of
$73.2 million and had an amortized cost of $70.1 million. The average credit
quality on the portfolio is AA. The net unrealized gain on its investment assets
at September 30, 2003 was $3.1 million, or 4.4% of the amortized cost basis. The
net unrealized gain included gross unrealized gains of $4.4 million and gross
unrealized losses of $1.3 million.
The Company reviews the securities in our fixed income portfolio on a periodic
basis to specifically review individual securities for any meaningful decline in
market value below amortized cost. The analysis addresses all securities whose
fair value is significantly below amortized cost at the time of the analysis,
with additional emphasis placed on securities whose fair value has been below
amortized cost for an extended period of time. As part of the periodic review
process, the Company utilizes the expertise of outside professional asset
managers who provide an updated assessment of each issuer's current credit
situation based on recent issuer activities, such as quarterly earnings
announcements or other pertinent financial news for the issuer, recent
developments in a particular industry, economic outlook for a particular
industry and rating agency actions.
In addition to issuer-specific financial information and general economic data,
the Company also considers the ability and intent of its operations to hold a
particular security to maturity or until the market value of the security
recovers to a level in excess of the carrying value.
-15-
Ten securities in portfolio have been in an unrealized loss position for a
substantial period of time. Nine of these securities have an unrealized loss of
less than $369,000 and/or less than 4.0% of their amortized cost. These nine
securities have an average unrealized loss per security of approximately $41,000
and have fair values at September 30, 2003 that are 96% or more of the amortized
cost basis. There is only one security with an unrealized loss of approximately
$975,000 at December 31, 2003 with a market value of $4.0 million and a cost of
$5.0 million. The security is an equity security and is rated AAA. The Company
has no current plans to dispose of this security.
For all securities that are in an unrealized loss position for an extended
period of time, an evaluation is performed of the specific events attributable
to the decline in the market value of the security. Factors that are considered
are the length of time and extent to which the security's market value has been
below cost as well as the general market conditions, industry characteristics
and the fundamental operating results of the issuer to determine if the decline
is due to changes in interest rates, changes relating to a decline in credit
quality of the issuer, or general market conditions. An additional part of the
evaluation is the Company's intent and ability to hold the security until its
market value has recovered to a level at least equal to the amortized cost. If
the security's unrealized loss is other than temporary, a realized loss is
recognized in the period in which the decline in value is determined to be other
than temporary.
Based on our evaluation as of December 31, 2003, the Company determined the
declines in market value of securities of these ten securities were temporary.
The Company will continue to review these securities and evaluate the temporary
nature of the impairment on a quarterly basis.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE 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 Form 10-K for the year ended September 30, 2003.
The Company utilizes reports prepared by the Office of Thrift Supervision
("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.
-16-
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, 2003.
NET PORTFOLIO VALUE
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------
Changes in Net
Rates in Dollar Percentage Portfolio Value As
Basis Points Amount Change Change a % of Assets Change
- -------------------------------------------------------------------------------------------------------
300 $29,203 $(22,189) (43.18)% 5.48% (354)bp
200 37,912 (13,480) (26.23) 6.95 (207)bp
100 45,691 (5,701) (11.09) 8.19 (83)bp
0 51,392 -- -- 9.02 --
(100) 50,874 (518) (1.01) 8.83 (19)bp
As of December 31, 2003, the Company's NPV was $51.4 million or 9.02% of the
market value of assets. Following a 200 basis point increase in interest rates,
the Company's "post shock" NPV was $37.9 million or 6.95% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(2.07)%.
As of September 30, 2003, the Company's NPV was $47.1 million or 8.24% of the
market value of assets. Following a 200 basis point increase in interest rates,
the Company's "post shock" NPV was $34.0 million or 6.22% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(2.02)%.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) occurred during the most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
-17-
PART II OTHER INFORMATION
Item 1. Legal Proceedings
No material changes have occurred with respect to the legal proceedings
previously disclosed in Item 3 of the Company's Form 10-K for the year
ended September 30, 2003.
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 28, 2004, 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:
Votes
-------------------------
Nominee For Withheld
- ------------------- --------- --------
Bruce C. Hendrixson 1,761,498 1,717
Thomas M. Kelly 1,761,652 1,563
With respect to the ratification of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending September 30,
2004, the results were as follows: 1,757,398 votes for, 5,760 votes
against and 56 votes abstaining.
Item 5. Other Information
None
-18-
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
Exhibit Description
- ------- -----------------------------------------------------------------------
31.1 Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934 and Section 302 of the Sarbanes-Oxley Act of 2002 certification of
the Chief Executive Officer
31.2 Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934 and Section 302 of the Sarbanes-Oxley Act of 2002 certification of
the Chief Financial Officer
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
(b) Reports on Form 8-K
Date Item and Description
- ---------- -------------------------------------------------------------
11/14/2003 Item 12. On November 12, 2003, the Company issued a press
release reporting its earnings for the quarter and year ended
September 30, 2003.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST KEYSTONE FINANCIAL, INC.
Date: February 13, 2004 By: /s/ Donald S. Guthrie
------------------------------------
Donald S. Guthrie
Chairman and Chief Executive Officer
Date: February 13, 2004 By: /s/ Rose M. DiMarco
------------------------------------
Rose M. DiMarco
Chief Financial Officer
-20-