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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, 2005
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 23-2576479
- --------------------------------- ----------------------
(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 11, 2005: 2,029,940
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition as of
March 31, 2005 and September 30, 2004 1
Unaudited Consolidated Statements of Income for the Three and Six
Months Ended March 31, 2005 and 2004 2
Unaudited Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended March 31, 2005 3
Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2005 and 2004 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 19
Item 4. Controls and Procedures 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
SIGNATURES 23
FIRST KEYSTONE FINANCIAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share amounts)
March 31, September 30,
ASSETS 2005 2004
- ------ --------- ---------
Cash and amounts due from depository institutions $ 5,958 $ 5,185
Interest-bearing deposits with depository institutions 14,435 12,790
--------- ---------
Total cash and cash equivalents 20,393 17,975
Investment securities available for sale 43,207 63,615
Mortgage-related securities available for sale 111,865 97,620
Loans held for sale 496 172
Investment securities held to maturity- at amortized cost
(approximate fair value of $4,259 at March 31, 2005 4,276 5,287
and $5,370 at September 30, 2004)
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $51,124 at March 31, 2005
and $37,312 at September 30, 2004) 52,155 37,363
Loans receivable (net of allowance for loan loss of $2,079 at March 31, 2005
and $2,039 at September 30, 2004) 305,647 304,248
Accrued interest receivable 2,536 2,577
Real estate owned 925 1,229
Federal Home Loan Bank stock - at cost 8,977 9,827
Office properties and equipment, net 4,968 4,275
Deferred income taxes 1,492 657
Cash surrender value of life insurance 16,521 16,110
Prepaid expenses and other assets 2,568 10,964
--------- ---------
TOTAL ASSETS $ 576,026 $ 571,919
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 355,128 $ 344,880
Advances from Federal Home Loan Bank and other borrowings 163,692 171,149
Junior subordinated debentures 21,538 21,557
Accrued interest payable 1,158 1,095
Advances from borrowers for taxes and insurance 1,948 815
Accounts payable and accrued expenses 3,413 2,725
--------- ---------
Total liabilities 546,877 542,221
--------- ---------
Commitments and contingencies
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 2,712,556
shares; outstanding at March 31, 2005 and September 30, 2004, 2,002,132
and 1,927,744 shares, respectively 14 14
Additional paid-in capital 12,980 13,622
Employee stock ownership plan (3,231) (3,189)
Treasury stock at cost: 710,424 shares at March 31, 2005 and 787,219 shares
at September 30, 2004 (10,922) (11,913)
Accumulated other comprehensive income 114 1,734
Retained earnings - partially restricted 30,194 29,430
--------- ---------
Total stockholders' equity 29,149 29,698
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 576,026 $ 571,919
========= =========
See notes to unaudited consolidated financial statements.
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,
--------------------- ---------------------
2005 2004 2005 2004
------- ------- ------- -------
INTEREST INCOME:
Interest and fees on loans $ 4,408 $ 4,378 $ 8,871 $ 8,823
Interest and dividends on:
Mortgage-related securities 1,552 1,296 2,953 2,525
Investment securities:
Taxable 321 474 771 1,141
Tax-Exempt 187 222 380 435
Dividends 271 52 357 116
Interest-bearing deposits 40 17 81 35
------- ------- ------- -------
Total interest income 6,779 6,439 13,413 13,075
------- ------- ------- -------
INTEREST EXPENSE:
Interest on:
Deposits 1,474 1,489 2,926 3,076
Federal Home Loan Bank advances and other borrowings 1,900 1,762 3,828 3,502
Junior subordinated debentures 444 415 878 828
------- ------- ------- -------
Total interest expense 3,818 3,666 7,632 7,406
------- ------- ------- -------
NET INTEREST INCOME 2,961 2,773 5,781 5,669
PROVISION FOR LOAN LOSSES 45 75 90 150
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,916 2,698 5,691 5,519
------- ------- ------- -------
NON-INTEREST INCOME:
Service charges and other fees 378 258 798 525
Net gain on sales of:
Loans held for sale 18 25 37 32
Investment and mortgage-related securities 449 1,060 524 1,465
Increase in cash surrender value of life insurance 151 196 411 326
Other real estate fees -- 550 -- 550
Other income 105 80 230 335
------- ------- ------- -------
Total non-interest income 1,101 2,169 2,000 3,233
------- ------- ------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,711 2,586 3,241 4,116
Occupancy and equipment 383 320 745 625
Professional fees 284 253 528 484
Federal deposit insurance premium 12 14 25 27
Data processing 136 125 264 236
Advertising 86 83 182 182
Net cost of operation of other real estate 3 90 5 178
Deposit processing 154 150 316 305
Other 435 473 944 875
------- ------- ------- -------
Total non-interest expense 3,204 4,094 6,250 7,028
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 813 773 1,441 1,724
INCOME TAX EXPENSE 175 146 280 355
------- ------- ------- -------
NET INCOME $ 638 $ 627 $ 1,161 $ 1,369
======= ======= ======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.35 $ 0.34 $ 0.64 $ 0.75
======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.34 $ 0.32 $ 0.63 $ 0.70
======= ======= ======= =======
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, 2004 $ 14 $ 13,622 $ (3,189) $(11,913) $ 1,734 $ 29,430 $ 29,698
Net income -- -- -- -- -- 1,161 1,161
Other comprehensive income, net of tax:
Net unrealized loss on securities
net of reclassification adjustment(1) -- -- -- -- (1,620) -- (1,620)
-------- -------- -------- -------- -------- -------- --------
Comprehensive loss -- -- -- -- -- -- (459)
-------- -------- -------- -------- -------- -------- --------
Common stock acquired by stock benefit plans -- -- (72) -- -- -- (72)
ESOP stock committed to be released -- -- 30 -- -- -- 30
Excess of fair value above cost of
ESOP shares committed to be released -- 29 -- -- -- -- 29
Purchase of treasury stock -- -- -- (110) -- -- (110)
Exercise of stock options -- (671) -- 1,101 -- -- 430
Dividends - $.22 per share -- -- -- -- -- (397) (397)
-------- -------- -------- -------- -------- -------- --------
BALANCE AT MARCH 31, 2005 $ 14 $ 12,980 $ (3,231) $(10,922) $ 114 $ 30,194 $ 29,149
======== ======== ======== ======== ======== ======== ========
(1) Disclosure of reclassification amount, net of tax for the six months
ended March 31, 2005:
Net unrealized depreciation arising during the period $(1,966)
Less: reclassification adjustment for net gains included in net income
(net of tax of $178) 346
-------
Net unrealized loss on securities $(1,620)
=======
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,
------------------------
2005 2004
-------- --------
OPERATING ACTIVITIES:
Net income $ 1,161 $ 1,369
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for depreciation and amortization 261 235
Amortization of premiums and discounts 244 196
Increase in cash surrender value of life insurance (411) (484)
(Gain) loss on sales of:
Loans held for sale (37) (32)
Investment securities (524) (1,465)
Mortgage-related securities -- 4
Provision for loan losses 90 150
Amortization of ESOP 59 601
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (6,041) (5,105)
Loans sold in the secondary market 5,717 4,935
Accrued interest receivable 41 69
Prepaid expenses and other assets 8,396 (212)
Accrued interest payable 63 (41)
Accrued expenses 688 2,054
-------- --------
Net cash provided by operating activities 9,707 2,274
-------- --------
INVESTING ACTIVITIES:
Loans originated (64,493) (61,244)
Purchases of:
Mortgage-related securities available for sale (30,955) (9,076)
Investment securities available for sale (2,673) (3,668)
Mortgage-related securities held to maturity (18,591) (26,221)
Redemption (purchase) of FHLB stock 850 (489)
Insurance proceeds on real estate owned 29 --
Proceeds from sales of real estate owned 250 137
Proceeds from sales of investment and mortgage-related securities 25,508 9,464
Principal collected on loans 63,108 58,359
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 324 7,063
Mortgage-related securities available for sale 11,816 19,403
Mortgage-related securities held to maturity 3,717 1,104
Investment securities held to maturity 1,000 --
Purchase of property and equipment (954) (400)
-------- --------
Net cash used in investing activities (11,064) (5,568)
-------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts 10,248 (9,649)
Net (decrease) increase in FHLB advances (7,457) 17,006
Common stock acquired by ESOP (72) (172)
Net increase in advances from borrowers for taxes and insurance 1,133 962
Exercise of stock options 430 413
Purchase of treasury stock (110) (1,339)
Cash dividends (397) (419)
-------- --------
Net cash provided by financing activities 3,775 6,802
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 2,418 3,508
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 17,975 21,190
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,393 $ 24,698
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:
Cash payments for interest on deposits and borrowings $ 7,569 $ 7,447
Transfer of loans held for sale to loan portfolio -- 4,186
Transfers of loans receivable into real estate owned -- 43
Cash payments of income taxes -- 130
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 periods ended
March 31, 2005 are not necessarily indicative of the results to be
expected for the fiscal year ending September 30, 2005 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, 2004.
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, 2005
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
Available for Sale:
U.S. Government bonds
Less than 1 year $ 1,697 $ -- $ (9) $ 1,688
Municipal obligations
5 to 10 years 130 4 -- 134
Over 10 years 11,835 350 -- 12,185
Corporate bonds
Less than 1 year 1,000 16 -- 1,016
1 to 5 years 1,000 86 -- 1,086
5 to 10 years 2,000 -- (39) 1,961
Over 10 years 6,999 144 (28) 7,115
Asset-backed securities
1 to 5 years 865 5 -- 870
Mutual funds 14,009 -- (334) 13,675
Other equity investments 1,756 1,794 (73) 3,477
------- ------- ------- -------
Total $41,291 $ 2,399 $ (483) $43,207
======= ======= ======= =======
Held to Maturity:
Municipal obligations
5 to 10 years $ 3,259 $ 7 $ (3) $ 3,263
Corporate bonds
Less than 1 year 1,017 -- (21) 996
------- ------- ------- -------
Total $ 4,276 $ 7 $ (24) $ 4,259
======= ======= ======= =======
5
The table below sets forth investment securities which have an
unrealized loss position as of March 31, 2005.
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 $ 1,688 $ (9) $ -- $ -- $ 1,688 $ (9)
Municipal
obligations 1,284 (3) 1,284 (3)
Corporate bonds 5,050 (88) -- -- 5,050 (88)
Mutual funds -- -- 13,675 (334) 13,675 (334)
Equity investments 504 (73) -- -- 504 (73)
------- ------- ------- ------- ------- -------
Total $ 8,526 $ (173) $13,675 $ (334) $22,201 $ (507)
======= ======= ======= ======= ======= =======
At March 31, 2005, investment securities in a gross unrealized loss
position for twelve months or longer consisted of shares in mutual
funds that at such date had an aggregate depreciation of 2.4% from the
Company's amortized cost basis. Management believes that the estimated
fair value of the securities disclosed above is primarily dependent
upon the movement in market interest rates. The Company has the ability
and intent to hold these securities until the anticipated recovery of
fair value occurs. Management does not believe any individual
unrealized loss as of March 31, 2005 represents an other-than-temporary
impairment.
September 30, 2004
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
Available for Sale:
U.S. Government and agency bonds
1 to 5 years $14,694 $ -- $ (199) $14,495
Municipal obligations
5 to 10 years 130 6 -- 136
Over 10 years 11,833 412 -- 12,245
Corporate bonds
Less than 1 year 1,000 43 -- 1,043
1 to 5 years 4,968 479 -- 5,447
5 to 10 years 2,000 -- (5) 1,995
Over 10 years 5,341 248 -- 5,589
Asset-backed securities
1 to 5 years 1,189 8 -- 1,197
Mutual funds 14,009 -- (205) 13,804
Preferred stocks 3,900 -- -- 3,900
Other equity investments 1,755 2,009 -- 3,764
------- ------- ------- -------
Total $60,819 $ 3,205 $ (409) $63,615
======= ======= ======= =======
Held to Maturity:
Municipal obligations
5 to 10 years $ 3,260 $ 50 $ -- $ 3,310
Over 10 years -- -- -- --
Corporate bonds
Less than 1 year 1,002 21 -- 1,023
1 to 5 years 1,025 12 -- 1,037
------- ------- ------- -------
Total $ 5,287 $ 83 $ -- $ 5,370
======= ======= ======= =======
6
3. MORTGAGE-RELATED SECURITIES
Mortgage-related securities available for sale and mortgage-related
securities held to maturity are summarized as follows:
March 31, 2005
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
Available for Sale:
FHLMC pass-through certificates $ 5,306 $ 10 $ (124) $ 5,192
FNMA pass-through certificates 48,731 80 (880) 47,931
GNMA pass-through certificates 4,458 19 (15) 4,462
Collateralized mortgage obligations 55,113 25 (858) 54,280
-------- -------- -------- --------
Total $113,608 $ 134 $ (1,877) $111,865
======== ======== ======== ========
Held to Maturity:
FHLMC pass-through certificates $ 19,019 $ 12 $ (373) $ 18,658
FNMA pass-through certificates 32,724 17 (686) 32,055
Collateralized mortgage obligations 412 -- (1) 411
-------- -------- -------- --------
Total $ 52,155 $ 29 $ (1,060) $ 51,124
======== ======== ======== ========
The table below sets forth mortgage-related securities which have an
unrealized loss position as of March 31, 2005.
Less than 12 Months 12 Months or Longer Total
------------------------ ------------------------ ------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Pass-through
certificates $ 93,899 $ (1,797) $ 6,139 $ (281) $100,038 $ (2,078)
Collateralized
mortgage
obligations 43,562 (497) 8,714 (362) 52,276 (859)
-------- -------- -------- -------- -------- --------
Total $137,461 $ (2,294) $ 14,853 $ (643) $152,314 $ (2,937)
======== ======== ======== ======== ======== ========
At March 31, 2005, mortgage-related securities in a gross unrealized
loss position for twelve months or longer consist of seven securities
having an aggregate depreciation of 1.9% from the Company's amortized
cost basis. Management does not believe any individual unrealized loss
as of March 31, 2005 represents an other-than-temporary impairment. The
unrealized losses reported for mortgage-related securities relate
primarily to securities issued by the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation and private
institutions. The majority of the unrealized losses associated with
mortgage-related securities are primarily attributable to changes in
interest rates and not from the deterioration of the creditworthiness
of the issuer.
7
September 30, 2004
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
Available for Sale:
FHLMC pass-through certificates $ 5,838 $ 15 $ (42) $ 5,811
FNMA pass-through certificates 42,805 259 (203) 42,861
GNMA pass-through certificates 1,250 20 -- 1,270
Collateralized mortgage obligations 47,895 141 (358) 47,678
------- ------- ------- -------
Total $97,788 $ 435 $ (603) $97,620
======= ======= ======= =======
Held to Maturity:
FHLMC pass-through certificates $16,226 $ 85 $ (101) $16,210
FNMA pass-through certificates 20,613 74 (106) 20,581
Collateralized mortgage obligations 524 -- (3) 521
------- ------- ------- -------
Total $37,363 $ 159 $ (210) $37,312
======= ======= ======= =======
4. LOANS RECEIVABLE
Loans receivable consist of the following:
March 31, September 30,
2005 2004
--------- ---------
Real estate loans:
Single-family $ 157,785 $ 163,907
Construction and land 35,824 38,078
Multi-family and commercial 69,609 64,509
Home equity and lines of credit 44,559 43,621
Consumer loans 1,323 1,471
Commercial loans 10,948 10,624
--------- ---------
Total loans 320,048 322,210
Loans in process (12,193) (15,807)
Allowance for loan losses (2,079) (2,039)
Deferred loan fees (129) (116)
--------- ---------
Loans receivable - net $ 305,647 $ 304,248
========= =========
The following is an analysis of the allowance for loan losses:
Six Months Ended
March 31,
------------------------
2005 2004
------- -------
Balance beginning of period $ 2,039 $ 1,986
Provisions charged to income 90 150
Charge-offs (50) (90)
Recoveries -- 38
------- -------
Total $ 2,079 $ 2,084
======= =======
At March 31, 2005 and September 30, 2004, non-performing loans (which
include loans in excess of 90 days delinquent) amounted to
approximately $4,748 and $2,033, respectively. At March 31, 2005,
non-performing loans primarily consisted of single-family residential
mortgage loans aggregating $576,000, commercial real estate loans
aggregating $3.8 million and commercial loans totaling $244,000.
8
5. DEPOSITS
Deposits consist of the following major classifications:
March 31, September 30,
2005 2004
----------------------- -----------------------
Amount Percent Amount Percent
-------- -------- -------- --------
Non-interest bearing $ 20,260 5.7% $ 21,046 6.1%
NOW 61,767 17.4 55,864 16.2
Passbook 51,474 14.5 51,371 14.9
Money market demand 53,804 15.1 51,682 15.0
Certificates of deposit 167,823 47.3 164,917 47.8
-------- -------- -------- --------
Total $355,128 100.0% $344,880 100.0%
======== ======== ======== ========
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:
For the Three Months Ended For the Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Numerator - Net income $ 638 $ 627 $ 1,161 $ 1,369
Denominators:
Basic shares outstanding 1,824,419 1,826,967 1,804,703 1,832,759
Effect of dilutive securities 49,486 124,393 48,808 123,002
---------- ---------- ---------- ----------
Diluted shares outstanding 1,873,905 1,951,360 1,853,511 1,955,761
========== ========== ========== ==========
EPS:
Basic $ 0.35 $ 0.34 $ 0.64 $ 0.75
Diluted $ 0.34 $ 0.32 $ 0.63 $ 0.70
9
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,
------------------------- -------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Net income, as reported $ 638 $ 627 $ 1,161 $ 1,369
Less: Total stock-based employee compensation
expense determined under fair value method
for all options, net of tax 4 10 8 20
--------- --------- --------- ---------
Pro forma net income $ 634 $ 617 $ 1,153 $ 1,349
========= ========= ========= =========
Earnings per share:
Basic - as reported $ 0.35 $ 0.34 $ 0.64 $ 0.75
Basic - pro forma $ 0.35 $ 0.34 $ 0.64 $ 0.74
Diluted - as reported $ 0.34 $ 0.32 $ 0.63 $ 0.70
Diluted - pro forma $ 0.34 $ 0.32 $ 0.62 $ 0.69
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (Revised 2004), "Share-Based Payment" (SFAS
123(R)). This Statement revises SFAS No. 123 by eliminating the option
to account for employee stock options under APB No. 25 and generally
requires companies to recognize the cost of employee services received
in exchange for awards of equity instruments based on the grant-date
fair value of those awards (the "fair-value-based" method). The
provisions of SFAS 123(R) were to be effective for the Company's
financial statements issued for the first interim period beginning
after June 15, 2005. However, the SEC in April 2005 amended the
compliance dates such that SFAS(R) becomes effective at the beginning
of the fiscal year that begins after June 15, 2005. Accordingly, the
Company will adopt SFAS 123(R) on October 1, 2005 and plans to use the
modified prospective method. The impact of adopting SFAS 123(R) will be
consistent with the impact disclosed above pursuant to the pro forma
disclosure requirements of SFAS No. 123.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB Emerging Issues Task Force ("EITF") reached a
consensus regarding EITF 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 and was effective for
other-than-temporary impairment evaluations made in reporting periods
beginning after June 15, 2004. However, the guidance contained in
paragraphs 10-20 of this Issue has been delayed by FASB Staff Position
("FSP") EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF
Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments," posted September 30, 2004. The
delay of the effective date for paragraphs 10-20 will be superseded
concurrent with the final issuance of proposed FSP EITF Issue 03-1a,
"Implication Guidance for the Application of Paragraph 16 of EITF Issue
No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." The proposed FSP would provide
implementation guidance with respect to debt securities that are
impaired solely due to interest rates and/or sector spreads and
analyzed for other-than-temporary impairment. The disclosures continue
to be effective for the Company's consolidated financial statements for
fiscal years ending after December 15, 2003, for investments accounted
for under SFAS No. 115 and No. 124. For all other investments within
the scope of this Issue, the disclosures continue to be effective for
fiscal years ending after June 15, 2005. The additional disclosures for
cost method investments continue to be effective for fiscal years
ending after June 15, 2004.
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 First
Keystone Financial, Inc.'s (the "Company") 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, 2005 AND SEPTEMBER 30, 2004
Total assets of the Company increased $4.1 million from $571.9 million at
September 30, 2004 to $576.0 million at March 31, 2005. Mortgage-related
securities held to maturity increased by $14.8 million from $37.4 million at
September 30, 2004 mainly due to implementation of the Company's asset-liability
strategy of reinvesting the proceeds from the sale of investment securities into
the held to maturity portfolio in order to minimize volatility of the Company's
equity in the future as market rates of interest increase. Loans receivable
increased slightly to $305.6 million at March 31, 2005 as the Company continued
to modestly increase its percentage of its portfolio consisting of commercial
real estate loans and home equity loans and lines of credit, partially offset by
a decrease in single-family residential loans. Prepaid expenses and other assets
decreased $8.4 million primarily due to funds received for settlement of
securities sales. Deposits increased $10.2 million, or 2.97%, from $344.9
million at September 30, 2004 to $355.1 million at March 31, 2005, while
borrowings decreased $7.5 million, or 4.4%, from $171.1 million at September 30,
2004. The increase in deposits resulted from an increase of $7.3 million, or
4.1%, in core deposits (which consist of passbook, money market, NOW and
non-interest bearing accounts) combined with an increase of $2.9 million, or
1.8%, in certificates of deposit. The growth in deposits is attributable to the
Company's commitment to focus on business development and aggressively pursue
these relationships.
Stockholders' equity decreased $549,000 to $29.1 million at March 31, 2005
primarily due to the reduction in accumulated other comprehensive income of $1.6
million, the cost of repurchasing 4,900 shares of common stock and dividend
payments totaling $397,000, partially offset by net income of $1.2 million as
well as a $430,000 increase in equity resulting from the exercise of stock
options during the six months ended March 31, 2005.
11
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
2005 AND 2004
NET INCOME.
Net income for the quarter ended March 31, 2005 was $638,000, or $.34 per
diluted share, an increase of $11,000, or 1.8%, as compared to net income of
$627,000, or $.32 per diluted share, for the quarter ended March 31, 2004. Net
income for the six months ended March 31, 2005 was $1.2 million, or $.63 per
diluted share, a decrease of $208,000, or 15.2%, as compared to $1.4 million, or
$.70 per diluted share, for the same period in 2004.
NET INTEREST INCOME.
Net interest income increased $188,000, or 6.8%, to $3.0 million and $112,000,
or 2.0%, to $5.8 million for the three and six months ended March 31, 2005,
respectively, compared to the same periods in 2004. Such increases were
primarily due to increases in interest income of $340,000, or 5.3%, and
$338,000, or 2.6%, for the three and six months ended March 31, 2005,
respectively, which were partially offset by a $152,000, or 4.1%, and a
$226,000, or 3.1%, increase in interest expense during such periods. The average
balance of interest-earning assets increased $2.8 million and $8.2 million for
the three and six months ended March 31, 2005, respectively, as compared to the
same periods in 2004. Calculated on a tax-equivalent basis, the weighted average
yield earned on interest-earning assets for the three months ended March 31,
2005 increased 22 basis points to 5.15% compared to the 2004 period and 4 basis
points to 5.07% for the six months ended March 31, 2005. In addition, net
interest expense was affected by an increase in the average balance of
interest-bearing liabilities of $7.0 million and $12.7 million for the three and
six months ended March 31, 2005, respectively, as compared to the same periods
in 2004. For the three months ended March 31, 2005, the weighted average rate
paid on such liabilities increased 7 basis points to 2.88% from 2.81% for the
same period in the prior fiscal year and 2 basis points to 2.87% for the six
months ended March 31, 2005 as compared to 2.85% for the six months ended March
31, 2004. The improvement in net interest income for the three months ended
March 31, 2005 was primarily the effect of a special cash dividend from an
investment security. Excluding the special dividend and in response to increases
in short-term interest rates, the weighted average yield on interest-earning
assets increased to a greater degree than the cost of interest-bearing
liabilities which resulted in a slight improvement in the interest rate margin
for the three months ended March 31, 2005.
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, 2005 and 2004.
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 practice followed by many institutions 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, 2005 MARCH 31, 2004
----------------------------- -----------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost(4) Balance Interest Cost(4)
--------- --------- ------- --------- --------- -------
Interest-earning assets:
Loans receivable(1) (2) $ 306,418 $ 4,408 5.75% $ 292,437 $ 4,378 5.99%
Mortgage-related securities(2) 156,053 1,552 3.98 136,784 1,296 3.79
Investment securities(2) 60,138 863 5.74 87,313 836 3.83
Other interest-earning assets 10,256 40 1.56 13,544 17 0.50
--------- --------- --------- ---------
Total interest-earning assets 532,865 $ 6,863 5.15 530,078 $ 6,527 4.93
--------- --------- ------- --------- --------- -------
Non-interest-earning assets 32,861 33,176
--------- ---------
Total assets $ 565,726 $ 563,254
========= =========
Interest-bearing liabilities:
Deposits $ 344,275 $ 1,474 1.71 $ 344,826 $ 1,489 1.73
FHLB advances and other borrowings 163,856 1,900 4.64 156,277 1,762 4.51
Junior subordinated debentures 21,544 444 8.24 21,581 415 7.69
--------- --------- --------- ---------
Total interest-bearing liabilities 529,675 3,818 2.88 522,684 3,666 2.81
--------- --------- ------- --------- --------- -------
Interest rate spread 2.27% 2.12%
======= =======
Non-interest-bearing liabilities 6,050 8,497
--------- ---------
Total liabilities 535,725 531,181
Stockholders' equity 30,001 32,073
--------- ---------
Total liabilities and stockholders'
equity $ 565,726 $ 563,254
========= =========
Net interest-earning assets $ 3,190 $ 7,394
========= =========
Net interest income $ 3,045 $ 2,861
========= =========
Net interest margin(3) 2.29% 2.16%
======= =======
Ratio of average interest-earning
assets to average interest-bearing
liabilities 100.60% 101.41%
======= =======
- ----------
(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.
(4) Presented on a tax-equivalent basis.
13
FOR THE SIX MONTHS ENDED
-------------------------------------------------------------
MARCH 31, 2005 MARCH 31, 2004
----------------------------- -----------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost(4) Balance Interest Cost(4)
--------- --------- ------- --------- --------- -------
Interest-earning assets:
Loans receivable(1) (2) $ 306,207 $ 8,871 5.79% $ 291,577 $ 8,823 6.05%
Mortgage-related securities(2) 149,144 2,953 3.96 132,174 2,525 3.82
Investment securities(2) 67,848 1,677 4.94 90,557 1,876 4.14
Other interest-earning assets 12,167 81 1.33 12,897 35 0.54
--------- --------- --------- ---------
Total interest-earning assets 535,366 $ 13,582 5.07 527,205 $ 13,259 5.03
--------- --------- ------- --------- --------- -------
Non-interest-earning assets 32,742 33,733
--------- ---------
Total assets $ 568,108 $ 560,938
========= =========
Interest-bearing liabilities:
Deposits $ 343,860 $ 2,926 1.70 $ 348,651 $ 3,076 1.76
FHLB advances and other borrowings 167,351 3,828 4.57 149,874 3,502 4.67
Junior subordinated debentures 21,549 878 8.15 21,585 828 7.67
--------- --------- --------- ---------
Total interest-bearing liabilities 532,760 7,632 2.87 520,110 7,406 2.85
--------- --------- ------- --------- --------- -------
Interest rate spread 2.21% 2.18%
======= =======
Non-interest-bearing liabilities 5,546 8,962
--------- ---------
Total liabilities 538,306 529,072
Stockholders' equity 29,802 31,866
--------- ---------
Total liabilities and stockholders'
equity $ 568,108 $ 560,938
========= =========
Net interest-earning assets $ 2,606 $ 7,095
========= =========
Net interest income $ 5,950 $ 5,853
========= =========
Net interest margin(3) 2.22% 2.22%
======= =======
Ratio of average interest-earning
assets to average interest-bearing
liabilities 100.49% 101.36%
======= =======
- ----------
(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.
(4) Presented on a tax-equivalent basis.
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 as 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, 2005 MARCH 31, 2004
----------------------- ------------------------
AVERAGE AVERAGE
(Dollars in thousands) INTEREST YIELD/COST INTEREST YIELD/COST
-------- ---------- -------- ----------
Investment securities - nontaxable $ 779 5.18% $ 748 3.43%
Tax equivalent adjustments 84 88
--------- ---------
Investment securities - nontaxable to
a taxable equivalent yield $ 863 5.74% $ 836 3.83%
========= =========
Net interest income $ 2,961 $ 2,773
Tax equivalent adjustment 84 88
--------- ---------
Net interest income, tax equivalent $ 3,045 $ 2,861
========= =========
Net interest rate spread, no tax adjustment 2.21% 2.05%
Net interest margin, no tax adjustment 2.22% 2.09%
FOR THE SIX MONTHS ENDED
---------------------------------------------------
MARCH 31, 2005 MARCH 31, 2004
----------------------- ------------------------
AVERAGE AVERAGE
(Dollars in thousands) INTEREST YIELD/COST INTEREST YIELD/COST
-------- ---------- -------- ----------
Investment securities - nontaxable $ 1,508 4.45% $ 1,692 3.74%
Tax equivalent adjustments 169 184
--------- ---------
Investment securities - nontaxable to
a taxable equivalent yield $ 1,677 4.94% $ 1,876 4.14%
========= =========
Net interest income $ 5,781 $ 5,669
Tax equivalent adjustment 169 184
--------- ---------
Net interest income, tax equivalent $ 5,950 $ 5,853
========= =========
Net interest rate spread, no tax adjustment 2.15% 2.11%
Net interest margin, no tax adjustment 2.16% 2.15%
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 loans and loans held for sale portfolios.
For the three months ended March 31, 2005 and 2004, the provision for loan
losses amounted to $45,000 and $75,000, respectively. For the six months ended
March 31, 2005 and 2004 the provision for loan losses amounted to $90,000 and
$150,000, respectively. The decrease in provision for loan loss was based on the
Company's monthly review of the credit quality of its loan portfolio, the net
level of charge-offs during the periods and other factors.
15
At March 31, 2005, non-performing assets increased to $5.6 million, or .98%, of
total assets, from $3.3 million at September 30, 2004. The increase in
non-performing assets was the result of a $3.7 million increase in commercial
real estate loans, including commercial business loans, partially offset by
construction and home equity loans aggregating $770,000 and $158,000,
respectively, returning to current status along with a $304,000 decrease in real
estate owned. Included in non-performing assets is a $3.8 million non-accrual
commercial real estate loan to one borrower secured by a restaurant in
Chesapeake City, Maryland. The Company has started foreclosure proceedings and
the borrower has placed the property on the market for sale. The coverage ratio,
which is the ratio of the allowance for loan losses to non-performing loans, was
43.8% and 100.3% at March 31, 2005 and September 30, 2004, respectively.
Included in non-performing assets is $925,000 in real estate owned consisted
primarily of one 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 lead lender collected $1.0 million from an easement
agreement of which $250,000 represented the Bank's portion and reduced the book
value of the property to $875,000. 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
approximately $75,000 and $150,000 for the three and six months ended March 31,
2004. No operating expenses were incurred during the 2005 periods. In May 2004,
the lead lender entered into an agreement of sale. Although the agreement of
sale has expired, the prospective buyer is operating and incurring the operating
costs of the facility under the expired agreement. The lead lender is currently
in the process of preparing an agreement extending the term of the original
sales agreement.
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 decreased $1.1 million to $1.1 million for the three months
ended March 31, 2005 from the same period last year. Non-interest income in the
2004 period was favorably affected by several non-recurring transactions. The
$611,000, or 57.6%, decrease in the gain on sales of investment securities was
the result of gains experienced in the 2004 period related to the gain on sale
of equity securities of a company that was acquired. In addition, the decrease
in non-interest income was due to the inclusion in the 2004 period of an income
recognition amounting to $550,000 related to a non-recurring real estate fee.
Non-interest income decreased $1.2 million to $2.0 million for the six months
ended March 31, 2005 by comparison to the same period last year. Non-interest
income was substantially higher in the 2004 period due to gains on sales of
investment and mortgage-related securities of $941,000 combined with other real
estate fees of $550,000. By comparison, gains in the 2005 period only amounted
to $524,000 and there were no real estate fees. Partially offsetting such
decreases was a $273,000 increase in service charges and other fees due to the
implementation of additional fee-based deposit services.
NON-INTEREST EXPENSE.
Non-interest expense for the quarter ended March 31, 2005 decreased $890,000, or
21.7%, from the same period last year primarily due to an $875,000, or 33.8%,
decrease in salaries and employee benefits. The decrease was primarily the
result of expenses recognized in the 2004 period in connection with the funding
of a non-qualified supplemental retirement plan for certain executive officers
and the prepayment of the outstanding balance of one of the loans to the ESOP.
However, for the second quarter of fiscal 2005, such decreases were partially
offset by a $300,000 increase in salary expense compared to the same period in
the prior year due to merit increases, the hiring of additional personnel and
retirement benefits. The decrease in salaries and employee benefits were
partially offset by increases of $63,000 and $31,000 in occupancy and equipment
expenses and professional fees, respectively. For the six months ended March 31,
2005, non-interest expense decreased by $778,000, or 11.1%, primarily due to a
decrease of $875,000, or 21.3%, in salary and employee benefits for the reasons
described above. In addition, the decrease in non-interest expense was partially
offset by a $120,000, or 19.2%, and $69,000, or 7.9%, increase in occupancy and
equipment and other non-interest expenses, respectively. The increase in
non-interest expense was due to the implementation of a training program
re-affirming the Company's commitment to maximizing customer service as well as
increased general administrative expenses.
16
INCOME TAX EXPENSE.
Income tax expense increased $29,000 to $175,000 for the three months ended
March 31, 2005 compared to the same period in 2004 while decreasing $75,000 to
$280,000 for the six months ended March 31, 2004. The increase for the second
quarter of fiscal 2005 reflected the reduction in tax-free income as well as the
increase in income before income taxes. For the six months ended March 31, 2005,
the decrease in taxes resulted primarily from the decrease in income before
income taxes.
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's
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.
The determination of the allowance for loan losses requires management to make
significant estimates with respect to the amounts and timing of losses and
market and economic conditions. Accordingly, a decline in the economy could
increase loan delinquencies, foreclosures or repossessions resulting in
increased charge-off amounts and the need for additional loan loss allowances in
future periods. The Bank will continue to monitor and adjust its allowance for
loan losses through the provision for loan losses as economic conditions and
other factors dictate. Management reviews the allowance for loan losses
generally on a monthly basis. Although the Bank maintains its allowance for loan
losses at levels considered adequate to provide for the inherent risk of loss in
its loan portfolio, there can be no assurance that future losses will not exceed
estimated amounts or that additional provisions for loan losses will not be
required in future periods. In addition, the Bank's determination as to the
amount of its allowance for loan losses is subject to review by its primary
regulator, the Office of Thrift Supervision (the "OTS"), as part of its
examination process, which may result in additional allowances based upon the
judgment and review of the OTS.
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, 2005, the Company had short-term
borrowings (due within one year or currently callable) outstanding of $163.0
million, all of which consisted of advances from the Federal Home Loan Bank of
Pittsburgh.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer term basis, the Company maintains a
strategy of investing in various lending products, mortgage-related securities
and investment securities. The Company uses its sources of funds primarily to
meet its ongoing commitments, to fund maturing certificates of deposit and
savings withdrawals, fund loan commitments and maintain a portfolio of
mortgage-related and investment securities. At March 31, 2005, total approved
loan commitments outstanding amounted to $16.7 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$37.6 million. Certificates of deposit scheduled to mature in one year or less
at March 31, 2005 totaled $81.2 million. Based upon its historical experience,
management believes that a significant portion of maturing deposits will remain
with the Company.
17
As of March 31, 2005, 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,
2005, the Bank had tangible capital and core capital equal to 8.3% of adjusted
total assets and total capital equal to 15.3% of risk-weighted assets. As of
March 31, 2005, the Bank met the requirements of a "well capitalized"
institution under OTS regulatory framework for prompt corrective action.
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.
18
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, 2004.
There are no material changes in the Company's asset-liability management policy
from those disclosed in the Form 10-K.
The Company utilizes reports prepared by the OTS to measure interest rate risk.
Using data from the Bank's quarterly thrift financial reports, the OTS models
the net portfolio value ("NPV") of the Bank over a variety of interest rate
scenarios. The NPV is defined as the present value of expected cash flows from
existing assets less the present value of expected cash flows from existing
liabilities plus the present value of net expected cash inflows from existing
off-balance sheet contracts. The model assumes instantaneous, parallel shifts in
the U.S. Treasury Securities yield curve of 100 to 300 basis points up and 200
basis points down, in 100 basis point increments.
The interest rate risk measures used by the OTS include an "Exposure Measure" or
"Post-Shock" NPV ratio and a "Sensitivity Measure." The "Post-Shock" NPV ratio
is the net present value as a percentage of assets over the various yield curve
shifts. A low "Post-Shock" NPV ratio indicates greater exposure to interest rate
risk and can result from a low initial NPV ratio or high sensitivity to changes
in interest rates. The "Sensitivity Measure" is the decline in the NPV ratio, in
basis points, caused by a 2% increase or decrease in rates, whichever produces a
larger decline. The following sets forth the Bank's NPV as of March 31, 2005.
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 $37,119 $(24,591) (40)% 6.68% (376) bp
200 46,658 (15,052) (24) 8.22 (222) bp
100 55,225 (6,485) (11) 9.53 (91) bp
0 61,710 -- -- 10.44 --
(100) 63,912 2,202 4 10.67 23 bp
(200) 60,648 (1,062) (2) 10.06 (38) bp
As of March 31, 2005, the Company's NPV was $61.7 million or 10.44% of the
market value of assets. Following a 200 basis point increase in interest rates,
the Company's "post shock" NPV was $46.7 million or 8.22% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(2.22)%.
As of December 31, 2004, the Company's NPV was $57.6 million or 9.88% of the
market value of assets. Following a 200 basis point increase in interest rates,
the Company's "post shock" NPV was $46.0 million or 8.20% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(1.68)%.
19
ITEM 4. 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) and 15d-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) or 15(d)-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.
20
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, 2004.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) - (b) Not applicable
(c) 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, 2005 -- -- -- 56,332
February 1-28, 2005 -- -- -- 56,332
March 1-31, 2005 4,900 $22.49 4,900 51,432
----- -----
Total 4,900 $22.49 4,900 51,432
===== ====== ===== ======
- ----------
(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 no expiration date.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
(a) None
(b) No changes in procedures.
Item 6. Exhibits
(a) List of Exhibits
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Articles of Incorporation of First
Keystone Financial, Inc. 1
3.2 Amended and Restated Bylaws of First Keystone
Financial, Inc. 1
4 Specimen Stock Certificate of First Keystone Financial,
Inc. 1
10.1 Employee Stock Ownership Plan and Trust of First
Keystone Financial, Inc. 1, *
10.2 401(K)/ Profit-sharing Plan of First Keystone Federal
Savings Bank 1, *
10.3 Employment Agreement between First Keystone Financial,
Inc. and Thomas M. Kelly dated December 1, 2004. 2,*
21
Exhibit No. Description
----------- -----------
10.4 Severance Agreement between First Keystone Financial,
Inc. and Elizabeth M. Mulcahy dated December 1, 2004.
2,*
10.5 Severance Agreement between First Keystone Financial,
Inc. and Carol Walsh dated December 1, 2004. 2,*
10.6 1995 Stock Option Plan. 3, *
10.7 1995 Recognition and Retention Plan and Trust Agreement
4,*
10.8 1998 Stock Option Plan 4, *
10.9 Employment Agreement between First Keystone Bank and
Thomas M. Kelly dated December 1, 2004 2, *
10.10 Severance Agreement between First Keystone Bank and
Elizabeth M. Mulcahy dated December 1, 2004 2, *
10.11 Severance Agreement between First Keystone Bank and
Carol Walsh dated December 1, 2004 2, *
10.12 First Keystone Bank Supplemental Executive Retirement
Plan 5,*
10.13 Consulting Agreement between First Keystone Bank and
Edmund Jones 6,*
10.14 Amendment No. 1 to the Employment Agreement between
First Keystone Financial, Inc. and Thomas M. Kelly. 7,*
10.15 Amendment No. 1 to the Employment Agreement between
First Keystone Bank and Thomas M. Kelly. 7,*
10.16 Transition, Consulting, Noncompetition and Retirement
Agreement by and between First Keystone Financial,
Inc., First Keystone Bank and Donald S. Guthrie. 8,*
11 Statement re: computation of per share earnings. See
Note 2 to the Consolidated Financial Statements
included in Item 8 hereof.
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Codes of Ethics 9
- ----------
(1) Incorporated by reference from the Registration Statement Form S-1
(Registration No. 33-84824) filed by the Registrant with the SEC on
October 6, 1994, as amended.
(2) Incorporated by reference from Exhibit 10.5, 10.6, 10.8, 10.14, 10.15 and
10.16, respectively, in the Form 8-K filed by the Registrant with the SEC
on December 7, 2004 (File No. 000-25328).
(3) Incorporated by reference from Exhibit 10.9 in the Form 10-K filed by the
Registrant with SEC on December 29, 1995 (File No. 000-25328).
(4) Incorporated from Appendix A of the Registrant's definitive proxy
statement dated December 24, 1998 (File No. 000-25328).
(5) Incorporated by reference from Exhibit 10.17 in the Form 10-Q filed by the
Registrant with the SEC on May 17, 2004.
(6) Incorporated by reference from Exhibit 10.18 in the Form 10-K filed by the
Registrant with the SEC on December 29, 2004.
(7) Incorporated by reference from Exhibit 10.19 and 10.20, respectively, in
the Form 8-K filed by the Registrant with the SEC on March 29, 2005.
(8) Incorporated by reference from Exhibit 10.21 in the Form 8-K filed by the
Registrant with the SEC on March 29, 2005.
(9) Incorporated by reference from the Form 10-K filed by the Registrant with
the SEC on December 23, 2003. . (*) Consists of a management contract or
compensatory plan
22
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 16, 2005 By: /s/ Thomas M. Kelly
--------------------------------
Thomas M. Kelly
President and Chief Executive Officer
Date: May 16, 2005 By: /s/ Rose M. DiMarco
--------------------------------
Rose M. DiMarco
Chief Financial Officer
23