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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 March 31, 2004
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 May 10, 2004: 1,925,171
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition as of
March 31, 2004 and September 30, 2003 1
Unaudited Consolidated Statements of Income for the Three and Six
Months Ended March 31, 2004 and 2003 2
Unaudited Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended March 31, 2004 3
Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2004 and 2003 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Disclosure Controls and Procedures 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
i
FIRST KEYSTONE FINANCIAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share amounts)
March 31, September 30,
2004 2003
--------- -------------
ASSETS
Cash and amounts due from depository institutions $ 9,243 $ 10,439
Interest-bearing deposits with depository institutions 15,455 10,751
-------- --------
Total cash and cash equivalents 24,698 21,190
Investment securities available for sale 67,861 77,700
Mortgage-related securities available for sale 112,846 124,656
Loans held for sale 485 4,498
Investment securities held to maturity- at amortized cost
(approximate fair value of $6,464 at March 31, 2004 6,301 6,315
and $6,450 at September 30, 2003
Mortgage-related securities held to maturity - at amortized cost (approximate
fair value of $28,782 at March 31, 2004
and $3,560 at September 30, 2003) 28,590 3,487
Loans receivable (net of allowance for loan loss of $2,084 at March 31, 2004
and $1,986 at September 30, 2003) 293,425 286,421
Accrued interest receivable 2,585 2,654
Real estate owned 1,345 1,420
Federal Home Loan Bank stock - at cost 8,783 8,294
Office properties and equipment, net 3,592 3,427
Cash surrender value of life insurance 15,849 15,365
Prepaid expenses and other assets 4,397 4,185
-------- --------
TOTAL ASSETS $570,757 $559,612
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $352,956 $362,605
Advances from Federal Home Loan Bank and other borrowings 153,278 136,272
Junior subordinated debentures 21,575 21,593
Accrued interest payable 1,070 1,111
Advances from borrowers for taxes and insurance 1,920 958
Deferred income taxes 709 581
Accounts payable and accrued expenses 6,158 4,104
-------- --------
Total liabilities 537,666 527,224
-------- --------
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: 1,924,871 shares at March 31, 2004 and
1,925,337 shares at September 30, 2003 14 14
Additional paid-in capital 13,480 13,443
Employee stock ownership plan (796) (830)
Treasury stock at cost: 787,685 shares at March 31, 2004 and 787,219 shares
at September 30, 2003 (11,946) (11,378)
Accumulated other comprehensive income 3,319 3,069
Retained earnings - partially restricted 29,020 28,070
-------- --------
Total stockholders' equity 33,091 32,388
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $570,757 $559,612
======== ========
See notes to unaudited consolidated financial statements.
- 1 -
FIRST KEYSTONE FINANCIAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
Three months ended Six months ended
March 31, March 31,
----------------- -----------------
2004 2003 2004 2003
------ ------ ------- -------
INTEREST INCOME:
Interest on:
Loans $4,378 $4,783 $ 8,823 $ 9,834
Mortgage-related securities 1,296 1,192 2,525 2,302
Investment securities:
Taxable 474 596 1,141 1,202
Tax-Exempt 222 275 435 575
Dividends 52 97 116 192
Interest-bearing deposits 17 30 35 85
------ ------ ------- -------
Total interest income 6,439 6,973 13,075 14,190
------ ------ ------- -------
INTEREST EXPENSE:
Interest on:
Deposits 1,489 1,866 3,076 3,833
Federal Home Loan Bank advances and other borrowings 1,762 1,707 3,502 3,448
Junior subordinated debentures 415 418 828 847
------ ------ ------- -------
Total interest expense 3,666 3,991 7,406 8,128
------ ------ ------- -------
NET INTEREST INCOME 2,773 2,982 5,669 6,062
PROVISION FOR LOAN LOSSES 75 195 150 390
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,698 2,787 5,519 5,672
------ ------ ------- -------
NON-INTEREST INCOME:
Service charges and other fees 258 242 525 514
Net gain on sales of:
Loans held for sale 25 75 32 212
Investment and mortgage-related securities 1,060 39 1,465 50
Increase in cash surrender value 196 166 326 333
Other income 630 29 885 67
------ ------ ------- -------
Total non-interest income 2,169 551 3,233 1,176
------ ------ ------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,586 1,236 4,116 2,392
Occupancy and equipment 320 328 625 613
Professional fees 253 149 484 364
Federal deposit insurance premium 14 14 27 28
Data processing 125 128 236 248
Advertising 83 78 182 198
Net cost of operation of other real estate 90 17 178 22
Other 623 557 1,180 1,152
------ ------ ------- -------
Total non-interest expense 4,094 2,507 7,028 5,017
------ ------ ------- -------
INCOME BEFORE INCOME TAX EXPENSE 773 831 1,724 1,831
INCOME TAX EXPENSE 146 138 355 357
------ ------ ------- -------
NET INCOME $ 627 $ 693 $ 1,369 $ 1,474
====== ====== ======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.34 $ 0.36 $ 0.75 $ 0.77
====== ====== ======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.32 $ 0.34 $ 0.70 $ 0.73
====== ====== ======= =======
See notes to unaudited consolidated financial statements.
- 2 -
FIRST KEYSTONE FINANCIAL, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
Employee Accumulated Retained
Additional stock other earnings- Total
Common paid-in 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 -- -- -- -- -- 1,369 1,369
Other comprehensive income, net of tax:
Net unrealized gain on securities
net of reclassification adjustment(1) -- -- -- -- 250 -- 250
-------- -------- -------- -------- -------- -------- --------
Comprehensive income -- -- -- -- -- -- 1,619
-------- -------- -------- -------- -------- -------- --------
Common stock acquired by stock benefit plans -- -- (172) -- -- -- (172)
ESOP stock committed to be released -- -- 206 -- -- -- 206
Excess of fair value above cost of
ESOP shares committed to be released -- 395 -- -- -- -- 395
Purchase of treasury stock -- -- -- (1,339) -- -- (1,339)
Exercise of stock options -- (358) -- 771 -- -- 413
Dividends - $.22 per share -- -- -- -- -- (419) (419)
-------- -------- -------- -------- -------- -------- --------
BALANCE AT MARCH 31, 2004 $ 14 $ 13,480 $ (796) $(11,946) $ 3,319 $ 29,020 $ 33,091
======== ======== ======== ======== ======== ======== ========
(1) Disclosure of reclassification amount, net of tax for the six months ended
March 31, 2004:
Net unrealized appreciation arising during the period $1,217
Less: reclassification adjustment for net gains included in net income
(net of tax of $498) 967
------
Net unrealized gain on securities $ 250
======
See notes to unaudited consolidated financial statements.
- 3 -
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Six months ended
March 31,
---------------------
2004 2003
-------- --------
OPERATING ACTIVITIES:
Net income $ 1,369 $ 1,474
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for depreciation and amortization 235 210
Amortization of premiums and discounts 196 309
Increase in cash surrender value of life insurance (484) (371)
(Gain) loss on sales of:
Loans held for sale (32) (212)
Investment securities (1,465) (50)
Mortgage-related securities 4 --
Real estate owned -- 1
Provision for loan losses 150 390
Amortization of employee stock ownership plan 601 173
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (5,105) (13,621)
Loans sold in the secondary market 4,935 13,592
Accrued interest receivable 69 39
Prepaid expenses and other assets (212) (21)
Accrued interest payable (41) (136)
Accrued expenses 2,054 (2,970)
-------- --------
Net cash provided by (used in) operating activities 2,274 (1,193)
-------- --------
INVESTING ACTIVITIES:
Loans originated (61,244) (71,742)
Purchases of:
Mortgage-related securities available for sale (9,076) (77,276)
Investment securities available for sale (3,668) (6,998)
Mortgage-related securities held to maturity (26,221) (3,069)
Purchase of FHLB stock (489) (1,200)
Proceeds from sales of real estate owned 137 150
Proceeds from sales of investment and mortgage-related securities 9,464 6,543
Principal collected on loans 58,359 71,600
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 7,063 10,453
Mortgage-related securities available for sale 19,403 35,524
Mortgage-related securities held to maturity 1,104 3,972
Purchase of property and equipment (400) (92)
-------- --------
Net cash used in investing activities (5,568) (32,135)
-------- --------
FINANCING ACTIVITIES:
Net (decrease) increase in deposit accounts (9,649) 15,478
Net increase in FHLB advances 17,006 11,283
Common stock acquired by stock benefit plan (172) --
Net increase in advances from borrowers for taxes and insurance 962 1,240
Exercise of stock options 413 182
Purchase of treasury stock (1,339) (1,009)
Cash dividend (419) (400)
-------- --------
Net cash provided by financing activities 6,802 26,774
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,508 (6,554)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,190 24,623
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,698 $ 18,069
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 7,447 $ 8,264
Transfer of loans held for sale to loan portfolio 4,186 --
Transfers of loans receivable into real estate owned 43 231
Cash payments of income taxes 130 450
See notes to unaudited consolidated financial statements.
- 4 -
FIRST KEYSTONE FINANCIAL, INC.
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 and six month period ended March
31, 2004 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:
March 31, 2004
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
Available for Sale:
U.S. Government and agency bonds
Less than 1 year $ 3,010 $ 3 $ -- $ 3,013
1 to 5 years 10,000 16 15 10,001
5 to 10 years 3,000 15 -- 3,015
Municipal obligations
Over 10 years 12,515 483 -- 12,998
Corporate bonds
1 to 5 years 5,970 650 -- 6,620
5 to 10 years 997 155 -- 1,152
Over 10 years 6,135 492 -- 6,627
Asset-backed securities
5 to 10 years 1,452 8 -- 1,460
Mutual funds 14,009 -- 49 13,960
Preferred stocks 5,474 -- 824 4,650
Other equity investments 1,755 2,610 -- 4,365
------- ------ ------ -------
Total $64,317 $4,432 $ 888 $67,861
======= ====== ====== =======
Held to Maturity:
Municipal obligations
5 to 10 years $ 2,594 $ 57 $ -- $ 2,651
Over 10 years 667 10 -- 677
Corporate bonds
Less than 1 year 2,007 58 -- 2,065
1 to 5 years 1,033 38 -- 1,071
------- ------ ------ -------
Total $ 6,301 $ 163 $ -- $ 6,464
======= ====== ====== =======
- 5 -
The table below sets forth investment securities which have an unrealized loss
position as of March 31, 2004.
Less than 12 Months 12 Months or Longer Total
-------------------- -------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------ ------ ------ ------ ------ ------
U.S. Government and
Agency Bonds $3,991 $(64) $ -- $ -- $3,991 $ (64)
Preferred Securities -- -- 4,128 (824) 4,128 (824)
------ ---- ------ ----- ------ -----
Total $3,991 $(64) $4,128 $(824) $8,119 $(888)
====== ==== ====== ===== ====== =====
For all securities that are in an unrealized loss position for an extended
period of time, we perform an evaluation of the specific events attributable to
the market decline of the security. We consider 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. We also consider as part of the evaluation our intent and
ability to hold the security until its market value has recovered to a level at
least equal to the amortized cost. Where we determine that a 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.
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
======= ====== ==== =======
- 6 -
3. MORTGAGE-RELATED SECURITIES
Mortgage-related securities available for sale and mortgage-related
securities held to maturity are summarized as follows:
March 31, 2004
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
-------- ---------- ---------- -----------
Available for Sale:
FHLMC pass-through certificates $ 7,924 $ 156 $ 18 $ 8,062
FNMA pass-through certificates 47,817 593 118 48,292
GNMA pass-through certificates 7,849 441 -- 8,290
Collateralized mortgage obligations 47,772 521 91 48,202
-------- ------ ---- --------
Total $111,362 $1,711 $227 $112,846
======== ====== ==== ========
Held to Maturity:
FHLMC pass-through certificates $ 10,441 $ 49 $ 5 $ 10,485
FNMA pass-through certificates 17,457 147 5 17,599
Collateralized mortgage obligations 692 6 -- 698
-------- ------ ---- --------
Total $ 28,590 $ 202 $ 10 $ 28,782
======== ====== ==== ========
The table below sets forth mortgage-related securities which have an unrealized
loss position as of March 31, 2004.
Less than 12 Months 12 Months or Longer Total
--------------------- --------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------- ---------- ------- ---------- ------- ----------
Pass-through
certificates $ 9,203 $ (146) $ -- $ -- $ 9,203 $ (146)
Collateralized
mortgage
obligations 11,898 (91) -- -- 11,898 (91)
------- ---------- ------- ---------- ------- ----------
Total $21,101 $ (237) $ -- $ -- $21,101 $ (237)
======= ========== ======= ========== ======= ==========
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
========= ========== ========== ===========
- 7 -
4. LOANS RECEIVABLE
Loans receivable consist of the following:
March 31, September 30,
2004 2003
--------- -------------
Real estate loans:
Single-family $ 162,302 $ 166,042
Construction and land 27,479 28,975
Multi-family and commercial 66,904 59,022
Home equity and lines of credit 38,910 33,459
Consumer loans 1,380 1,438
Commercial loans 9,464 10,161
--------- -------------
Total loans 306,439 299,097
Loans in process (10,883) (10,655)
Allowance for loan losses (2,084) (1,986)
Deferred loan fees (47) (35)
--------- -------------
Loans receivable - net $ 293,425 $ 286,421
========= =============
The following is an analysis of the allowance for loan losses:
Six Months Ended
March 31,
---------------------
2004 2003
------ ------
Balance beginning of period $1,986 $2,358
Provisions charged to income 150 390
Charge-offs (90) (38)
Recoveries 38 10
------ ------
Total $2,084 $2,720
====== ======
At March 31, 2004 and September 30, 2003, non-performing loans (which
include loans in excess of 90 days delinquent) amounted to approximately
$1,557 and $1,556, respectively. At March 31, 2004, non-performing loans
primarily consisted of $711 in single-family residential mortgage loans,
$374 in commercial real estate loans and $260 in commercial loans.
5. DEPOSITS
Deposits consist of the following major classifications:
March 31, September 30,
2004 2003
------------------- ------------------
Amount Percent Amount Percent
-------- ------- -------- -------
Non-interest bearing $ 20,157 5.7% $ 20,917 5.8%
NOW 61,856 17.5 60,221 16.6
Passbook 50,604 14.4 47,089 13.0
Money market demand 51,984 14.7 55,889 15.4
Certificates of deposit 168,355 47.7 178,489 49.2
-------- ----- -------- -----
Total $352,956 100.0% $362,605 100.0%
======== ===== ======== =====
- 8 -
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 share 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:
For the Three Months Ended For the Six Months Ended
March 31, March 31,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator $ 627 $ 693 $ 1,369 $ 1,474
Denominators:
Basic shares outstanding 1,826,967 1,912,579 1,832,759 1,909,516
Effect of dilutive securities 124,393 131,603 123,002 116,849
------------ ------------ ------------ ------------
Diluted shares outstanding 1,951,360 2,044,182 1,955,761 2,026,365
============ ============ ============ ============
EPS:
Basic $ 0.34 $ 0.36 $ 0.75 $ 0.77
Diluted $ 0.32 $ 0.34 $ 0.70 $ 0.73
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 Six Months Ended
March 31, March 31,
------------------------------ ------------------------------
2004 2003 2003 2004
------------ ------------ ------------ ------------
Net income, as reported $ 627 $ 693 $ 1,369 $ 1,474
Less: Total stock-based employee compensation
expense determined under fair value method
for all options, net of tax 10 18 20 37
------------ ------------ ------------ ------------
Pro forma net income $ 617 $ 675 $ 1,349 $ 1,437
============ ============ ============ ============
Earnings per share:
Basic - as reported $ 0.34 $ 0.36 $ 0.75 $ 0.77
Basic - pro forma $ 0.34 $ 0.35 $ 0.74 $ 0.75
Diluted - as reported $ 0.32 $ 0.34 $ 0.70 $ 0.73
Diluted - pro forma $ 0.32 $ 0.33 $ 0.69 $ 0.71
-9-
8. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("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
second quarter of fiscal 2004 by approximately 17 basis points from 2.33%
to 2.16%.
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 March 2004, the FASB Emerging Issues Task Force reached a consensus
regarding EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The consensus
provides guidance for evaluating whether an investment is
other-than-temporarily impaired. The EITF 03-1 guidance for determining
other-than-temporary impairment will be effective beginning with the third
quarter of 2004. The Company is currently evaluating the impact that EITF
03-1 may have on its financial statements.
-10-
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. 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.
GENERAL
First Keystone Financial, Inc. is a Pennsylvania corporation and sole
shareholder of First Keystone Bank, a federally chartered stock savings bank
(the "Bank"), which converted to the stock form of organization in January 1995.
The Bank is a community oriented bank emphasizing customer service and
convenience. The Bank's primary business is attracting deposits from the general
public and using those funds together with other available sources of funds,
primarily borrowings, to originate loans. The Bank's management remains focused
on its long-term strategic plan to continue to shift its loan composition toward
commercial business, construction and home equity loans and lines of credit in
order to provide a higher yielding portfolio with generally shorter terms.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND SEPTEMBER 30, 2003
Total assets of the Company increased $11.2 million or 2.0% from $559.6 million
at September 30, 2003 to $570.8 million at March 31, 2004. Mortgage-related
securities held to maturity increased to $28.6 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 the effect of price volatility to the Company's financial
statements as interest rates increase. Loans receivable increased to $293.4
million from $286.4 million at September 30, 2003 reflecting the Company's
strategy of increasing its investment in higher yielding assets. The increase in
loans receivable was primarily the result of increases in multi-family and
commercial real estate loans and home equity loans and lines of credit partially
offset by a decline in single-family residential loans. Loans held for sale
decreased $4.0 million due to management's reevaluation of the Company's asset
liability position and decision to retain in its residential loan portfolio $4.2
million of the loans originally intended to be sold in the secondary market.
-11-
Total liabilities increased $10.4 million or 2.0% from $527.2 million at
September 30, 2003 to $537.7 million at March 31, 2004 primarily due to
increases in borrowings partially offset by a decrease in deposits. Deposits
decreased $9.6 million or 2.7% from $362.6 million at September 30, 2003 to
$353.0 million at March 31, 2004. The decrease is attributable to a $10.1
million, or 5.7%, decline in certificates of deposits reflecting the Company's
strategy of conservatively pricing the Company certificate of deposits. At March
31, 2004, core deposits (which consist of passbook, money market, NOW and
non-interest bearing accounts) slightly increased to $184.6 million or 52.3% of
the Company's deposit portfolio from $184.1 million or 50.8% of total deposits
at September 30, 2003. Borrowings increased $17.0 million, or 12.5%, as a result
of advances from the Federal Home Loan Bank funding asset growth.
Stockholders' equity increased by $703,000, or 2.2 %, to $33.1 million due to
net income of $1.4 million and an increase in the accumulated other
comprehensive income partially offset by the cost of repurchasing 51,092 shares
of common stock and dividends paid of $419,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
2004 AND 2003
NET INCOME.
Net income for the quarter ended March 31, 2004 was $627,000, or $.32 per
diluted share, a decrease of $66,000, or 9.5%, as compared to net income of
$693,000, or $.34 per diluted share, for the quarter ended March 31, 2003. Net
income for the six months ended March 31, 2004 was $1.4 million, or $.70 per
diluted share, a decrease of $105,000, or 7.1%, as compared to $1.5 million, or
$.73 per diluted share, for the same period in 2003.
NET INTEREST INCOME.
Net interest income decreased $209,000, or 7.0%, to $2.8 million and $393,000,
or 6.5%, to $5.7 million for the three and six months ended March 31, 2004,
respectively compared to the same periods in 2003. Such decreases were primarily
due to decreases in interest income of $534,000, or 7.7%, and $1.1 million, or
7.9%, for the three and six months ended March 31, 2004, respectively, which
were partially offset by a $325,000, or 8.1%, and a $722,000, or 8.9%, decrease
in interest expense during such periods. The average balance of interest-earning
assets increased $32.8 million and $35.8 million for the three and six months
ended March 31, 2004, respectively, as compared to the same periods in 2003.
Calculated on a tax-equivalent basis, the weighted average yield earned on
interest-earning assets for the three months ended March 31, 2004 decreased 75
basis points to 4.93% compared to the 2003 period and 83 basis points to 5.03%
for the six months ended March 31, 2004. In addition, net interest expense was
affected by an increase in the average balance of interest-bearing liabilities
of $35.1 million and $36.6 million for the three and six months ended March 31,
2004, respectively, as compared to the same periods in 2003. For the three
months ended March 31, 2004, the weighted average rate paid on such liabilities
decreased 46 basis points to 2.81% from 3.27% for the same period in the prior
fiscal year and 51 basis points to 2.85% for the six months ended March 31, 2004
as compared to 3.36% for the six months ended March 31, 2003. The decline in net
interest income reflected the continued interest rate compression being
experienced by the Company as the weighted average yield on interest-earning
assets continues to decrease more rapidly than the cost of interest-bearing
liabilities
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 and six months ended March 31, 2004 and 2003.
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.
-12-
FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------------------
MARCH 31, 2004 MARCH 31, 2003
---------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
---------- ---------- ---------- ---------- ---------- ----------
Interest-earning assets:
Loans receivable(1) (2) $ 292,437 $ 4,378 5.99% $ 289,419 $ 4,783 6.61%
Mortgage-related securities(2) 136,784 1,296 3.79 109,511 1,192 4.35
Investment securities(2) 87,313 836 3.83 82,547 1,066 5.17
Other interest-earning assets 13,544 17 0.50 15,762 30 0.76
---------- ---------- ---------- ----------
Total interest-earning assets 530,078 $ 6,527 4.93 497,239 $ 7,071 5.68
---------- ---------- ---------- ---------- ---------- ----------
Non-interest-earning assets 33,176 29,395
---------- ----------
Total assets $ 563,254 $ 526,634
========== ==========
Interest-bearing liabilities:
Deposits $ 344,826 $ 1,489 1.73 $ 338,640 $ 1,866 2.20
FHLB advances and other borrowings 156,277 1,762 4.51 127,305 1,707 5.36
Junior subordinated debentures 21,581 415 7.69 21,617 418 7.73
---------- ---------- ---------- ----------
Total interest-bearing liabilities 522,684 3,666 2.81 487,562 3,991 3.27
---------- ---------- ---------- ---------- ---------- ----------
Interest rate spread 2.12% 2.41%
========== ==========
Non-interest-bearing liabilities 8,497 6,068
---------- ----------
Total liabilities 531,181 493,630
Stockholders' equity 32,073 33,004
---------- ----------
Total liabilities and stockholders'
equity $ 563,254 $ 526,634
========== ==========
Net interest-earning assets $ 7,394 $ 9,677
========== ==========
Net interest income $ 2,861 $ 3,080
========== ==========
Net interest margin(3) 2.16% 2.48%
========== ==========
Ratio of average interest-earning
assets to average interest-bearing
liabilities 101.41% 101.98%
========== ==========
- --------------
(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.
-13-
FOR THE SIX MONTHS ENDED
-----------------------------------------------------------------------------------
MARCH 31, 2004 MARCH 31, 2003
---------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
---------- ---------- ---------- ---------- ---------- ----------
Interest-earning assets:
Loans receivable(1) (2) $ 291,577 $ 8,823 6.05% $ 289,690 $ 9,834 6.79%
Mortgage-related securities(2) 132,174 2,525 3.82 100,388 2,302 4.59
Investment securities(2) 90,557 1,876 4.14 83,124 2,176 5.24
Other interest-earning assets 12,897 35 0.54 18,157 85 0.94
---------- ---------- ---------- ----------
Total interest-earning assets 527,205 $ 13,259 5.03 491,359 $ 14,397 5.86
---------- ---------- ---------- ---------- ---------- ----------
Non-interest-earning assets 33,733 29,997
---------- ----------
Total assets $ 560,938 $ 521,356
========== ==========
Interest-bearing liabilities:
Deposits $ 348,651 $ 3,076 1.76 $ 335,175 $ 3,833 2.29
FHLB advances and other borrowings 149,874 3,502 4.67 126,759 3,448 5.44
Junior subordinated debentures 21,585 828 7.67 21,622 847 7.83
---------- ---------- ---------- ----------
Total interest-bearing liabilities 520,110 7,406 2.85 483,556 8,128 3.36
---------- ---------- ---------- ---------- ---------- ----------
Interest rate spread 2.18% 2.50%
========== ==========
Non-interest-bearing liabilities 8,962 5,016
---------- ----------
Total liabilities 529,072 488,572
Stockholders' equity 31,866 32,784
---------- ----------
Total liabilities and stockholders'
equity $ 560,938 $ 521,356
========== ==========
Net interest-earning assets $ 7,095 $ 7,803
========== ==========
Net interest income $ 5,853 $ 6,269
========== ==========
Net interest margin(3) 2.22% 2.55%
========== ==========
Ratio of average interest-earning
assets to average interest-bearing
liabilities 101.36% 101.61%
========== ==========
- ----------------
(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.
-14-
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
------------------------------------------------------
MARCH 31, 2004 MARCH 31, 2003
------------------------- ------------------------
AVERAGE AVERAGE
(Dollars in thousands) INTEREST YIELD/COST INTEREST YIELD/COST
---------- ---------- ---------- ----------
Investment securities - nontaxable $ 748 3.43% $ 968 4.69%
Tax equivalent adjustments 88 98
---------- ----------
Investment securities - nontaxable to
a taxable equivalent yield $ 836 3.83% $ 1,066 5.17%
========== ==========
Net interest income $ 2,773 $ 2,982
Tax equivalent adjustment 88 98
---------- ----------
Net interest income, tax equivalent $ 2,861 $ 3,080
========== ==========
Net interest rate spread, no tax adjustment 2.05% 2.34%
Net interest margin, no tax adjustment 2.09% 2.40%
FOR THE SIX MONTHS ENDED
------------------------------------------------------
MARCH 31, 2004 MARCH 31, 2003
------------------------- ------------------------
AVERAGE AVERAGE
(Dollars in thousands) INTEREST YIELD/COST INTEREST YIELD/COST
---------- ---------- ---------- ----------
Investment securities - nontaxable $ 1,692 3.74% $ 1,969 4.74%
Tax equivalent adjustments 184 207
---------- ----------
Investment securities - nontaxable to
a taxable equivalent yield $ 1,876 4.14% $ 2,176 5.24%
========== ==========
Net interest income $ 5,669 $ 6,062
Tax equivalent adjustment 184 207
---------- ----------
Net interest income, tax equivalent $ 5,853 $ 6,269
========== ==========
Net interest rate spread, no tax adjustment 2.11% 2.41%
Net interest margin, no tax adjustment 2.15% 2.47%
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. The
Company's provision for loan losses decreased to $75,000 for the three months
ended March 31, 2004 as compared to $195,000 for the same period in 2003. For
the six months ended March 31, 2004 and 2003, the provision for loan losses
amounted to $150,000 and $390,000, respectively.
-15-
At March 31, 2004, non-performing assets decreased slightly to $2.9 million, or
..51% to 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 71.9% and 66.7% at March 31, 2004 and September 30, 2003,
respectively. Included in non-performing assets is $1.4 million of real estate
owned consisting primarily of a $1.1 million commercial real estate property.
This commercial real estate property is 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 incurred its
representative share of expenses totaling $75,000 and $150,000 for the three and
six months ended March 31, 2004, respectively. In April 2004, the lead lender
has agreed on terms to sell the property and is in the process of finalizing an
agreement of sale. Presently, the Bank expects no further loss upon the sale of
this property.
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.
NON-INTEREST INCOME.
Non-interest income increased $1.6 million to $2.2 million for the three months
ended March 31, 2004 from the same period last year. The increase was primarily
the result of a $1.0 million increase in the gain on sales of investment
securities and a $601,000 increase in other non-interest income. The gain on the
sales of investment securities reflected primarily the proceeds from the sale of
exchange of securities of entities which were acquired in which the Company had
an equity interest. The increase in other non-interest income was a result of
the Company recognizing income of $550,000 in connection with a repayment of a
commercial real estate loan. Under the terms of the loan, certain additional
contingent payments were due upon repayment of the loan in full. Non-interest
income increased $2.1 million to $3.2 million for the six months ended March 31,
2004 by comparison to the same period last year. Increases in income of $1.4
million and $818,000 were recognized from the sale of investment and
mortgage-related securities and other non-interest income, respectively,
partially offset by a $180,000 decrease in the gain on sales of loans held for
sale.
NON-INTEREST EXPENSE.
Non-interest expense for the quarter ended March 31, 2004 increased $1.6 million
or 63.3%, from the same period last year primarily due to a $1.4 million
increase in salaries and employee benefits. The increase in salaries and
employee benefits was due to an additional $598,000 benefit expense relating to
the funding of a non-qualified supplemental retirement plan for certain
executive officers and the prepayment of the outstanding loan balance on the
original loan to the Company's employee stock ownership plan ("ESOP") which
resulted in an additional $452,000 expense. The partial funding of the
retirement benefits and prepayment of the loan for the Company's ESOP will
decrease the cost of these benefit plans over the next several years. The
increase in salary and employee benefits also reflected merit increases, the
hiring of additional personnel and higher employee benefit costs. In addition,
the increase in non-interest expense was also due to increases of $104,000,
$73,000 and $66,000 in professional fees, real estate operations and other
non-interest expense, respectively. Non-interest expense for the six months
ended March 31, 2004 increased by $2.0 million, or 40.1%, in comparison to the
same period in the prior year.
INCOME TAX EXPENSE.
Income tax expense increased $8,000 to $146,000 for the three months ended March
31, 2004 compared to the same period in 2003 while decreasing $2,000 to $355,000
for the six months ended March 31, 2004. The increase for the second quarter of
fiscal 2004 resulted from the reduction in tax-free income as compared to the
same period in 2003.
-16-
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 March 31, 2004 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.
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 March 31, 2004, the Company had short-term
borrowings (due within one year or currently callable by the Federal Home Loan
Bank ("FHLB")) outstanding of $135.0 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 March 31, 2004, total approved
loan commitments outstanding amounted to $6.7 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$30.3 million. Certificates of deposit scheduled to mature in one year or less
at March 31, 2004 totaled $110.1 million. Based upon its historical experience,
management believes that a significant portion of maturing deposits will remain
with the Company.
As of March 31, 2004, 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 March 31,
2004, the Bank had tangible capital and core capital equal to 8.0% of adjusted
total assets and total capital equal to 14.9% of risk-weighted assets.
-17-
INVESTMENT SECURITIES.
The Company reviews the investment and mortgage-related securities portfolios 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.
Of the securities in a unrealized loss position, there is only one security in
the portfolio with an unrealized loss position longer than 12 months with a fair
value of $4.1 million and a cost of $5.0 million. The preferred security is
rated AAA with an unrealized loss of $846,000. The preferred security is at a
loss because of the low interest rate environment. The Company has no current
plans to dispose of this security. The Company believes that all the securities
with an unrealized loss are only temporarily impaired.
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 up and 100 points down, in 100 basis point
increments.
-18-
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 March 31, 2004.
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 $ 28,013 $ (21,399) (43)% 5.11% (333) bp
200 36,934 (12,478) (25) 6.58 (186) bp
100 44,393 (5,019) (10) 7.74 (70) bp
0 49,412 -- -- 8.44 --
(100) 47,226 (2,186) (4) 8.00 (44) bp
As of March 31, 2004, the Company's NPV was $49.4 million or 8.44% of the market
value of assets. Following a 200 basis point increase in interest rates, the
Company's "post shock" NPV was $36.9 million or 6.58% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(1.86) %.
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) %.
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.
-19-
PART II OTHER INFORMATION
Item 1. Legal Proceedings
No material changes in the legal proceedings previously disclosed in
section Item 3 of the Company's Annual Report on Form 10-K for the year
ended September 30, 2003.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
(a) - (d) Not applicable
(e) The following table sets forth information with respect to purchases
made by or on behalf of the Company of shares of common stock of the
Company during the indicated periods.
Total Number of Shares
Total Number Average Purchased as Part of Maximum Number of Shares
of Shares Price Paid Publicly Announced that May Yet Be
Period (1) Purchased per Share Plan Purchased Under the Plan
- ------------------- ------------ ---------- ---------------------- ------------------------
January 1-31, 2004 -- -- -- 67,224
February 1-29, 2004 6,932 $ 27.10 6,932 60,292
March 1-31, 2004 3,960 $ 27.10 3,960 56,332
------ -------
Total 10,892 $ 27.10 10,892 56,332
====== ========== ======= =======
-------------------------
(1) On January 31, 2003, the Company announced its current program to
repurchase up to 101,000 of shares of common stock of the Company.
The program has an expiration date of July 31, 2004.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
-20-
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
Exhibit Description
10.17 First Keystone Bank Supplemental Executive Retirement Plan
31.1 Certification of the Chief Executive Officer 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
31.2 Certification of the Chief Financial Officer 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
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
---------- --------------------
02/03/2004 Item 12. On February 2, 2004, the Company issued a press
release reporting its earnings for the quarter ended December
31, 2003.
-21-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST KEYSTONE FINANCIAL, INC.
Date: May 17, 2004 By: /s/ Donald S. Guthrie
------------------------------------
Donald S. Guthrie
Chairman and Chief Executive Officer
Date: May 17, 2004 By: /s/ Rose M. DiMarco
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Rose M. DiMarco
Chief Financial Officer
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