UNITED
STATES


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 June 30, 2009


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.
      Employerof
      incorporation or organization)
                
                Identification
      Number)





22
      West State StreetMedia, 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


 ̈Yes    ̈No





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check
one):





Large
accelerated filer  ̈Accelerated
filer  ̈





Non-accelerated filer ̈(Do not check if a “smaller reporting
company”)





Smaller reporting companyx





Indicate
by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).    Yes  ̈No
x





Number of
shares of Common Stock outstanding as of July 31,
2009:  2,432,998









FIRST
KEYSTONE FINANCIAL, INC.





Contents





PagePART
      I
                            FINANCIAL
      INFORMATION:Item
      1.
                            Financial
      StatementsConsolidated
      Statements of Financial Condition as ofJune
      30, 2009 (Unaudited) and September 30, 2008
                            1Unaudited
      Consolidated Statements of Income for the Three and NineMonths
      Ended June 30, 2009 and 2008
                            2Unaudited
      Consolidated Statement of Changes in Stockholders' Equityfor
      the Nine Months Ended June 30, 2009 and 2008
                            3Unaudited
      Consolidated Statements of Cash Flows for the Nine MonthsEnded
      June 30, 2009 and 2008
                            4Notes
      to Unaudited Consolidated Financial Statements
                            5Item
      2.
                            Management's
      Discussion and Analysis of Financial Condition andResults
      of Operations
                            20Item
      3.
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            29Item
      4T.
                            Controls
      and Procedures
                            30PART
      II
                            OTHER
      INFORMATIONItem
      1.
                            Legal
      Proceedings
                            31Item
      1A.
                            Risk
      Factors
                            31Item
      2.
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            31Item
      3.
                            Defaults
      Upon Senior Securities
                            31Item
      4.
                            Submission
      of Matters to a Vote of Security Holders
                            31Item
      5.
                            Other
      Information
                            31Item
      6.
                            Exhibits
                            31SIGNATURES
                            
                            33





FIRST
KEYSTONE FINANCIAL, INC.





UNAUDITED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


(dollars
in thousands)





June
                            30,
                          
                          
                          September
                            30,2009
                          
                          
                          2008ASSETS:Cash
      and amounts due from depository institutions
                          
                          $
                          2,407
                          
                          
                          $
                          4,340Interest-bearing
      deposits with depository institutions
                          
                          
                          32,756
                          
                          
                          
                          34,980Total
      cash and cash equivalents
                          
                          
                          35,163
                          
                          
                          
                          39,320Investment
      securities available for sale
                          
                          
                          26,942
                          
                          
                          
                          26,545Mortgage-related
      securities available for sale
                          
                          
                          97,924
                          
                          
                          
                          102,977Investment securities held to
      maturity- at amortized cost(approximate
      fair value of $2,898 at June 30, 2009and
      $3,271 at September 30, 2008)
                          
                          
                          2,805
                          
                          
                          
                          3,255Mortgage-related
      securities held to maturity - at amortized cost(approximate
      fair value of $21,478 at June 30, 2009and
      $25,204 at September 30, 2008)
                          
                          
                          20,905
                          
                          
                          
                          25,359Loans
      receivable (net of allowance for loan losses of $3,491 and
      $3,453at
      June 30, 2009 and September 30, 2008, respectively)
                          
                          
                          302,607
                          
                          
                          
                          286,106Accrued
      interest receivable
                          
                          
                          2,345
                          
                          
                          
                          2,452FHLBank
      stock, at cost
                          
                          
                          7,060
                          
                          
                          
                          6,995Office
      properties and equipment, net
                          
                          
                          4,254
                          
                          
                          
                          4,386Deferred
      income taxes
                          
                          
                          3,521
                          
                          
                          
                          4,323Cash
      surrender value of life insurance
                          
                          
                          18,282
                          
                          
                          
                          17,941Prepaid
      expenses and other assets
                          
                          
                          3,568
                          
                          
                          
                          2,397TOTAL
      ASSETS
                          
                          $
                          525,376
                          
                          
                          $
                          522,056LIABILITIES
      AND STOCKHOLDERS' EQUITY:Liabilities:Deposits:Non-interest-bearing
                          
                          $
                          18,038
                          
                          
                          $
                          20,101Interest-bearing
                          
                          
                          335,711
                          
                          
                          
                          310,763Total
      deposits
                          
                          
                          353,749
                          
                          
                          
                          330,864Advances
      from FHLBank and other borrowings
                          
                          
                          110,156
                          
                          
                          
                          137,574Repurchase
      agreements
                          
                          
                          8,734
                          
                          
                          
                          3,585Junior
      subordinated debentures
                          
                          
                          11,644
                          
                          
                          
                          11,639Accrued
      interest payable
                          
                          
                          2,369
                          
                          
                          
                          1,886Advances
      from borrowers for taxes and insurance
                          
                          
                          3,097
                          
                          
                          
                          974Accounts
      payable and accrued expenses
                          
                          
                          2,925
                          
                          
                          
                          3,238Total
      liabilities
                          
                          
                          492,674
                          
                          
                          
                          489,760Commitments
      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
      2,712,556shares;
      outstanding at June 30, 2009 and September 30, 2008, 2,432,998
      shares
                          
                          
                          27
                          
                          
                          
                          27Additional
      paid-in capital
                          
                          
                          12,568
                          
                          
                          
                          12,586Employee
      stock ownership plan
                          
                          
                          (2,782
                          )
                          
                          
                          (2,872
                          )Treasury
      stock at cost: 279,558 shares at June 30, 2009 and at September 30,
      2008
                          
                          
                          (4,244
                          )
                          
                          
                          (4,244
                          )Accumulated
      other comprehensive loss
                          
                          
                          (1,158
                          )
                          
                          
                          (2,714
                          )Retained
      earnings - partially restricted
                          
                          
                          28,291
                          
                          
                          
                          29,513Total
      stockholders' equity
                          
                          
                          32,702
                          
                          
                          
                          32,296TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY:
                          
                          $
                          525,376
                          
                          
                          $
                          522,056




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
                    
                    
                    Nine
      months endedJune
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008INTEREST
      INCOME:Interest
      and fees on loans
                    
                    $
                    4,209
                    
                    
                    $
                    4,284
                    
                    
                    $
                    12,561
                    
                    
                    $
                    13,346Interest
      and dividends on:Mortgage-related
      securities
                    
                    
                    1,432
                    
                    
                    
                    1,696
                    
                    
                    
                    4,410
                    
                    
                    
                    4,659Investment
      securities:Taxable
                    
                    
                    340
                    
                    
                    
                    391
                    
                    
                    
                    1,006
                    
                    
                    
                    1,188Tax-exempt
                    
                    
                    49
                    
                    
                    
                    42
                    
                    
                    
                    137
                    
                    
                    
                    125Dividends
                    
                    
                    4
                    
                    
                    
                    46
                    
                    
                    
                    11
                    
                    
                    
                    198Interest
      on interest-bearing deposits
                    
                    
                    3
                    
                    
                    
                    70
                    
                    
                    
                    31
                    
                    
                    
                    411Total
      interest income
                    
                    
                    6,037
                    
                    
                    
                    6,529
                    
                    
                    
                    18,156
                    
                    
                    
                    19,927INTEREST
      EXPENSE:Interest
      on:Deposits
                    
                    
                    1,417
                    
                    
                    
                    2,169
                    
                    
                    
                    4,636
                    
                    
                    
                    7,270FHLBank
      and other borrowings
                    
                    
                    1,296
                    
                    
                    
                    1,409
                    
                    
                    
                    3,972
                    
                    
                    
                    4,008Junior
      subordinated debentures
                    
                    
                    286
                    
                    
                    
                    353
                    
                    
                    
                    857
                    
                    
                    
                    1,085Total
      interest expense
                    
                    
                    2,999
                    
                    
                    
                    3,931
                    
                    
                    
                    9,465
                    
                    
                    
                    12,363Net
      interest income
                    
                    
                    3,038
                    
                    
                    
                    2,598
                    
                    
                    
                    8,691
                    
                    
                    
                    7,564PROVISION
      FOR LOAN LOSSES
                    
                    
                    750
                    
                    
                    
                    —
                    
                    
                    
                    1,525
                    
                    
                    
                    56Net
      interest income after provision for loan losses
                    
                    
                    2,288
                    
                    
                    
                    2,598
                    
                    
                    
                    7,166
                    
                    
                    
                    7,508NON-INTEREST
      INCOME:Service
      charges and other fees
                    
                    
                    347
                    
                    
                    
                    401
                    
                    
                    
                    1,090
                    
                    
                    
                    1,233Net
      gain on sales of loans held for sale
                    
                    
                    39
                    
                    
                    
                    7
                    
                    
                    
                    121
                    
                    
                    
                    7Net
      gain on sale of investments
                    
                    
                    2
                    
                    
                    
                    —
                    
                    
                    
                    181
                    
                    
                    
                    69Total
      other-than-temporary impairment losses
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,417
                    )
                    
                    
                    —Portion
      of loss recognized in other comprehensive income (before
      taxes)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    245
                    
                    
                    
                    —Net
      impairment loss recognized in earnings
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,172
                    )
                    
                    
                    —Increase
      in cash surrender value of life insurance
                    
                    
                    96
                    
                    
                    
                    174
                    
                    
                    
                    341
                    
                    
                    
                    534Other
      income
                    
                    
                    78
                    
                    
                    
                    121
                    
                    
                    
                    268
                    
                    
                    
                    330Total
      non-interest income
                    
                    
                    562
                    
                    
                    
                    703
                    
                    
                    
                    829
                    
                    
                    
                    2,173NON-INTEREST
      EXPENSE:Salaries
      and employee benefits
                    
                    
                    1,406
                    
                    
                    
                    1,450
                    
                    
                    
                    4,317
                    
                    
                    
                    4,321Occupancy
      and equipment
                    
                    
                    398
                    
                    
                    
                    387
                    
                    
                    
                    1,210
                    
                    
                    
                    1,204Professional
      fees
                    
                    
                    321
                    
                    
                    
                    379
                    
                    
                    
                    980
                    
                    
                    
                    960Federal
      deposit insurance premium
                    
                    
                    409
                    
                    
                    
                    47
                    
                    
                    
                    738
                    
                    
                    
                    146Data
      processing
                    
                    
                    161
                    
                    
                    
                    144
                    
                    
                    
                    454
                    
                    
                    
                    425Advertising
                    
                    
                    75
                    
                    
                    
                    98
                    
                    
                    
                    290
                    
                    
                    
                    309Deposit
      processing
                    
                    
                    140
                    
                    
                    
                    150
                    
                    
                    
                    463
                    
                    
                    
                    440Other
                    
                    
                    533
                    
                    
                    
                    382
                    
                    
                    
                    1,315
                    
                    
                    
                    1,156Total
      non-interest expense
                    
                    
                    3,443
                    
                    
                    
                    3,037
                    
                    
                    
                    9,767
                    
                    
                    
                    8,961Income
      (loss) before income tax expense (benefit)
                    
                    
                    (593
                    )
                    
                    
                    264
                    
                    
                    
                    (1,772
                    )
                    
                    
                    720Income
      tax expense (benefit)
                    
                    
                    (240
                    )
                    
                    
                    21
                    
                    
                    
                    (550
                    )
                    
                    
                    38Net
      income (loss)
                    
                    $
                    (353
                    )
                    
                    $
                    243
                    
                    
                    $
                    (1,222
                    )
                    
                    $
                    682Earnings
      per common share:Basic
                    
                    $
                    (0.15
                    )
                    
                    $
                    0.10
                    
                    
                    $
                    (0.53
                    )
                    
                    $
                    0.29Diluted
                    
                    $
                    (0.15
                    )
                    
                    $
                    0.10
                    
                    
                    $
                    (0.53
                    )
                    
                    $
                    0.29Weighted
      average shares – basic
                    
                    
                    2,327,940
                    
                    
                    
                    2,319,244
                    
                    
                    
                    2,325,765
                    
                    
                    
                    2,317,072Weighted
      average shares – diluted
                    
                    
                    2,327,940
                    
                    
                    
                    2,319,244
                    
                    
                    
                    2,325,765
                    
                    
                    
                    2,317,266
 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
                      
                      
                      RetainedAdditional
                      
                      
                      stock
                      
                      
                      
                      
                      
                      other
                      
                      
                      earnings-
                      
                      
                      TotalCommon
                      
                      
                      paid-in
                      
                      
                      ownership
                      
                      
                      Treasury
                      
                      
                      comprehensive
                      
                      
                      partially
                      
                      
                      stockholders'stock
                      
                      
                      capital
                      
                      
                      plan
                      
                      
                      stock
                      
                      
                      loss
                      
                      
                      restricted
                      
                      
                      equityBALANCE
      AT OCTOBER 1, 2007
                      
                      $
                      27
                      
                      
                      $
                      12,598
                      
                      
                      $
                      (2,985
                      )
                      
                      $
                      (4,244
                      )
                      
                      $
                      (1,223
                      )
                      
                      $
                      30,521
                      
                      
                      $
                      34,694Net
      income
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      682
                      
                      
                      
                      682Other
      comprehensive loss, net of taxes:Net
      unrealized loss on securities,net of reclassification
      adjustment(1)
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (1,600
                      )
                      
                      
                      —
                      
                      
                      
                      (1,600
                      )Comprehensive
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (918
                      )ESOP
      shares committed to be released
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      84
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      84Difference
      between cost and fair value of ESOP shares committed to be
      released
                      
                      
                      —
                      
                      
                      
                      (7
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (7
                      )BALANCE
      AT JUNE 30, 2008
                      
                      $
                      27
                      
                      
                      $
                      12,591
                      
                      
                      $
                      (2,901
                      )
                      
                      $
                      (4,244
                      )
                      
                      $
                      (2,823
                      )
                      
                      $
                      31,203
                      
                      
                      $
                      33,853BALANCE
      AT OCTOBER 1, 2008
                      
                      $
                      27
                      
                      
                      $
                      12,586
                      
                      
                      $
                      (2,872
                      )
                      
                      $
                      (4,244
                      )
                      
                      $
                      (2,714
                      )
                      
                      $
                      29,513
                      
                      
                      $
                      32,296Net
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (1,222
                      )
                      
                      
                      (1,222
                      )Other
      comprehensive income, net of taxes:Unrealized
      loss on securities for which  an other-than-temporary impairment
      loss has been recognized in earnings
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (162
                      )
                      
                      
                      —
                      
                      
                      
                      (162
                      )Net unrealized gain
      on securities, net of reclassification adjustment(1)
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,718
                      
                      
                      
                      —
                      
                      
                      
                      1,718Comprehensive
      income
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      334ESOP
      shares committed to be released
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      90
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      90Difference
      between cost and fair value ofESOP shares committed to be
      released
                      
                      
                      —
                      
                      
                      
                      (25
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (25
                      )Share-based
      compensation
                      
                      
                      —
                      
                      
                      
                      7
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      7BALANCE
      AT JUNE 30, 2009
                      
                      $
                      27
                      
                      
                      $
                      12,568
                      
                      
                      $
                      (2,782
                      )
                      
                      $
                      (4,244
                      )
                      
                      $
                      (1,158
                      )
                      
                      $
                      28,291
                      
                      
                      $
                      32,702





(1)
Components of other comprehensive gain:


June 30,2009
                    
                    
                    2008Change
      in net unrealized gain (loss) on investment securities available for sale,
      net of taxes
                    
                    $
                    901
                    
                    
                    $
                    (1,600
                    )Reclassification
      adjustment for net gains included in net income (loss), net of taxes of
      $62 and $0, respectively
                    
                    
                    (119
                    )
                    
                    
                    —Reclassification
      adjustment for other-than-temporary impairment losseson securities included in net
      income (loss), net of taxes of $398 and $0,
      respectively
                    
                    
                    774
                    
                    
                    
                    —Net
      unrealized gain (loss) on securities, net of taxes
                    
                    $
                    1,556
                    
                    
                    $
                    (1,600
                    )


See notes
to unaudited consolidated financial statements.


- 3
-


FIRST
KEYSTONE FINANCIAL, INC.





UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(dollars
in thousands)





Nine
      months ended
                  June 30,2009
                
                
                
                2008OPERATING
      ACTIVITIES:Net
      (loss) income
                
                $
                (1,222
                )
                
                $
                682Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Provision
      for depreciation and amortization
                
                
                433
                
                
                
                428Amortization
      of premiums and discounts
                
                
                53
                
                
                
                35Increase
      in cash surrender value of life insurance
                
                
                (341
                )
                
                
                (534
                )(Gain)
      loss on sales of:Loans
      held for sale
                
                
                (121
                )
                
                
                (7
                )Investment
      securities available for sale
                
                
                84
                
                
                
                (69
                )Mortgage-related
      securities available for sale
                
                
                (265
                )
                
                
                —Impairment
      losses realized in earnings
                
                
                1,172
                
                
                
                —Provision
      for loan losses
                
                
                1,525
                
                
                
                56Amortization
      of ESOP
                
                
                65
                
                
                
                77Share-based
      compensation
                
                
                7
                
                
                
                —Changes
      in assets and liabilities which provided (used) cash:Origination
      of loans held for sale
                
                
                (13,158
                )
                
                
                (1,235
                )Loans
      sold in the secondary market
                
                
                13,279
                
                
                
                1,242Accrued
      interest receivable
                
                
                107
                
                
                
                285Prepaid
      expenses and other assets
                
                
                (1,172
                )
                
                
                (414
                )Accrued
      interest payable
                
                
                483
                
                
                
                42Accrued
      expenses
                
                
                (313
                )
                
                
                110Net
      cash provided by operating activities
                
                
                616
                
                
                
                698INVESTING
      ACTIVITIES:Loans
      originated
                
                
                (117,254
                )
                
                
                (57,814
                )Purchases
      of:Mortgage-related
      securities available for sale
                
                
                (29,326
                )
                
                
                (41,625
                )Investment
      securities available for sale
                
                
                (9,995
                )
                
                
                (5,082
                )Redemption
      of FHLB stock
                
                
                1,328
                
                
                
                1,584Purchase
      of FHLB stock
                
                
                (1,393
                )
                
                
                (2,067
                )Proceeds
      from sales of investment and mortgage-related securities available for
      sale
                
                
                23,782
                
                
                
                69Principal
      collected on loans
                
                
                99,196
                
                
                
                65,723Proceeds
      from maturities, calls, or repayments of:Investment
      securities available for sale
                
                
                4,681
                
                
                
                3,075Investment
      securities held to maturity
                
                
                450
                
                
                
                —Mortgage-related
      securities available for sale
                
                
                16,901
                
                
                
                13,662Mortgage-related
      securities held to maturity
                
                
                4,419
                
                
                
                4,463Purchase
      of property and equipment
                
                
                (301
                )
                
                
                (165
                )Net
      cash used in investing activities
                
                
                (7,512
                )
                
                
                (18,177
                )FINANCING
      ACTIVITIES:Net
      increase (decrease) in deposit accounts
                
                
                22,885
                
                
                
                (12,210
                )FHLBank
      advances and other borrowings - repayments
                
                
                (143,942
                )
                
                
                (66,702
                )FHLBank
      advances and other borrowings - draws
                
                
                116,524
                
                
                
                75,503Net
      increase in repurchase agreements
                
                
                5,149
                
                
                
                —Purchase
      of trust preferred securities
                
                
                —
                
                
                
                (1,565
                )Retirement
      of subordinated debt
                
                
                —
                
                
                
                (2,062
                )Net
      increase in advances from borrowers for taxes and
insurance
                
                
                2,123
                
                
                
                2,302Net
      cash provided by (used in) financing activities
                
                
                2,739
                
                
                
                (4,734
                )DECREASE
      IN CASH AND CASH EQUIVALENTS
                
                
                (4,157
                )
                
                
                (22,213
                )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                39,320
                
                
                
                52,935CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                35,163
                
                
                $
                30,722SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:Cash
      payments for interest on deposits and borrowings
                
                $
                8,982
                
                
                $
                12,321Cash
      payments of income taxes
                
                
                120
                
                
                
                125


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 nine months ended June 30, 2009 are not
necessarily indicative of the results to be expected for the fiscal year ending
September 30, 2009 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
First Keystone Financial, Inc. (the “Company”) Annual Report on Form 10-K for
the year ended September 30, 2008.





2.           INVESTMENT
SECURITIES





The
amortized cost and approximate fair value of investment securities available for
sale and held to maturity, by contractual maturities, as of June 30, 2009 are as
follows:


June 30, 2009Gross
                  
                  
                  GrossAmortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  ApproximateCost
                  
                  
                  Gain
                  
                  
                  Loss
                  
                  
                  Fair ValueAvailable
      for Sale:Municipal
      obligations:1
      to 5 years
                  
                  $
                  942
                  
                  
                  $
                  1
                  
                  
                  $
                  (3
                  )
                  
                  $
                  9405
      to 10 years
                  
                  
                  6,661
                  
                  
                  
                  315
                  
                  
                  
                  (11
                  )
                  
                  
                  6,965Over
      10 years
                  
                  
                  998
                  
                  
                  
                  41
                  
                  
                  
                  —
                  
                  
                  
                  1,039Corporate
      bonds:Less
      than 1 year
                  
                  
                  250
                  
                  
                  
                  3
                  
                  
                  
                  —
                  
                  
                  
                  2531
      to 5 years
                  
                  
                  5,657
                  
                  
                  
                  158
                  
                  
                  
                  —
                  
                  
                  
                  5,8155
      to 10 years
                  
                  
                  1,532
                  
                  
                  
                  67
                  
                  
                  
                  —
                  
                  
                  
                  1,599Pooled
      trust preferred securities
                  
                  
                  8,264
                  
                  
                  
                  —
                  
                  
                  
                  (2,524
                  )
                  
                  
                  5,740Mutual
      funds
                  
                  
                  3,622
                  
                  
                  
                  37
                  
                  
                  
                  —
                  
                  
                  
                  3,659Other
      equity investments
                  
                  
                  1,040
                  
                  
                  
                  —
                  
                  
                  
                  (108
                  )
                  
                  
                  932Total
                  
                  $
                  28,966
                  
                  
                  $
                  622
                  
                  
                  $
                  (2,646
                  )
                  
                  $
                  26,942Held
      to Maturity:Municipal
      obligations:1
      to 5 years
                  
                  $
                  2,456
                  
                  
                  $
                  80
                  
                  
                  $
                  —
                  
                  
                  $
                  2,5365
      to 10 years
                  
                  
                  349
                  
                  
                  
                  13
                  
                  
                  
                  —
                  
                  
                  
                  362Total
                  
                  $
                  2,805
                  
                  
                  $
                  93
                  
                  
                  $
                  —
                  
                  
                  $
                  2,898


- 5
-





Provided
below is a summary of investment securities available for sale and held to
maturity which were in an unrealized loss position at June 30,
2009.





Loss Position
                    Less than 12 Months
                  
                  
                  Loss Position
                    12 Months or Longer
                  
                  
                  TotalApproximate
                    Fair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Approximate
                    Fair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Approximate
                    Fair Value
                  
                  
                  Unrealized
                    LossesMunicipal
      obligations
                  
                  $
                  1,998
                  
                  
                  $
                  (14
                  )
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  1,998
                  
                  
                  $
                  (14
                  )Pooled
      trust preferred securities
                  
                  
                  280
                  
                  
                  
                  (10
                  )
                  
                  
                  5,460
                  
                  
                  
                  (2,514
                  )
                  
                  
                  5,740
                  
                  
                  
                  (2,524
                  )Other
      equity investments
                  
                  
                  532
                  
                  
                  
                  (108
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  532
                  
                  
                  
                  (108
                  )Total
                  
                  $
                  2,810
                  
                  
                  $
                  (132
                  )
                  
                  $
                  5,460
                  
                  
                  $
                  (2,514
                  )
                  
                  $
                  8,270
                  
                  
                  $
                  (2,646
                  )




The above
table represents 11 investment securities where the current value is less than
the related amortized cost.




Included
in the first table above are pooled trust preferred securities. Trust preferred
securities are very long-term (usually 30-year maturity) instruments with
characteristics of both debt and equity, mainly issued by banks or their holding
companies. All of the Company’s investments in trust preferred securities are of
pooled issues, each consisting of 30 or more companies with geographic and size
diversification. As of June 30, 2009, the Company had investments in five pooled
trust preferred securities with an aggregate balance of $5.7 million. Although
permitted by the debt instruments, as of June 30, 2009, none of the pooled trust
preferred securities had begun to defer payments. However, as a result of the
overall deterioration of the credit markets and the number of underlying issuers
deferring interest payments, as well as issuers defaulting, the rating agencies
have downgraded three of the Company’s investments in pooled trust preferred
securities aggregating $2.1 million. Management believes that trust-preferred
valuations have been negatively affected by an inactive market and by concerns
that the underlying banks and other companies may have significant exposure to
losses from sub-prime mortgages, defaulted collateralized debt obligations or
other concerns.




The
Company reviews investment debt securities on an ongoing basis for the presence
of other than temporary impairment (“OTTI”) with formal reviews performed
quarterly. Effective March 31, 2009, the Company adopted Financial Accounting
Standards Board (“FASB”) Staff Position (“FSP”) FAS 115-2, “Recognition and Presentation of
Other-Than-Temporary Impairments”, which provides for the bifurcation of
OTTI into two categories: (a) the amount of the total OTTI related to a decrease
in cash flows expected to be collected from the debt security (the credit loss)
which is recognized in earnings and (b) the amount of total OTTI related to all
other factors, which is recognized, net of income taxes, as a component of other
comprehensive income (“OCI”). As a result of adopting FSP FAS 115-2, the
Company recorded, during the quarter ended March 31, 2009, a $220,000 impairment
not related to credit losses on its investment in a pooled trust preferred
security, through other comprehensive income rather than through earnings and a
$490,000 credit-related impairment on the same pooled trust preferred security,
through earnings. No OTTI was determined to exist with respect to any of the
Company’s investment debt securities during the third quarter of fiscal
2009.





The
following table details the rollforward of credit-related losses on pooled trust
preferred securities recorded in earnings and as a component of OCI for the nine
months ended June 30, 2009:





Gross OTTI
                  
                  
                  OTTI Included
                    in OCI
                  
                  
                  OTTI Included
                    in EarningsOctober
      1, 2008
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Additions:
                  
                  
                  710
                  
                  
                  
                  220
                  
                  
                  
                  490Balance,
      June 30, 2009
                  
                  $
                  710
                  
                  
                  $
                  220
                  
                  
                  $
                  490


- 6
-




Also, for
the three and nine months ending June 30, 2009, the Company recorded an OTTI
charge of $0 and $556,000, respectively, on its investment in a mutual
fund.




At June
30, 2009, investment securities in a gross unrealized loss position for twelve
months or longer consisted of four securities having an aggregate depreciation
of 31.5% from the Company’s amortized cost basis. Management believes the
declines in market value are the result of the current volatility in interest
rates and turmoil in the capital and debt markets. Fair values for certain
pooled trust preferred securities were determined utilizing discounted cash flow
models due to the absence of a current market to provide reliable market quotes
for the instruments. The Company’s analysis for each pooled trust preferred
securities performed at the CUSIP level shows that the credit quality of the
individual bonds ranges from good to deteriorating. Credit risk does exist and
the default of an individual issuer in a particular pool could affect the
ultimate collectability of contractual amounts. The Company does not have the
intent to sell these securities and it is more likely than not that it will not
have to sell the securities before recovery of their cost bases. However, the
Company will continue to review its investment portfolio to determine whether
any particular impairment is other than temporary. Management does not believe
that any individual unrealized loss as of June 30, 2009 represents an
other-than-temporary impairment.




Proceeds
from the sales of available-for-sale securities for the three- and nine- months
ending June 30, 2009 totaled $250,000 and $4.4 million, respectively. Losses on
sales of available-for-sale investment securities for the three- and nine-
months ending June 30, 2009 totaled $0 and $86,000, respectively. Gains on sales
of available-for-sale investment securities for the three- and nine- months
ending June 30, 2009 totaled $2,000 and $2,000.




The
amortized cost and approximate fair value of investment securities available for
sale and held to maturity, by contractual maturities, as of September 30, 2008
are as follows:





September 30, 2008Gross
                    
                    
                    GrossAmortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    ApproximateCost
                    
                    
                    Gain
                    
                    
                    Loss
                    
                    
                    Fair ValueAvailable
      for Sale:U.S.
      Government bonds:Over
      10 years
                    
                    $
                    2,965
                    
                    
                    $
                    7
                    
                    
                    $
                    —
                    
                    
                    $
                    2,972Municipal
      obligations:5
      to 10 years
                    
                    
                    2,901
                    
                    
                    
                    55
                    
                    
                    
                    (22
                    )
                    
                    
                    2,934Over
      10 years
                    
                    
                    997
                    
                    
                    
                    52
                    
                    
                    
                    —
                    
                    
                    
                    1,049Corporate
      bonds:Less
      than 1 year
                    
                    
                    1,000
                    
                    
                    
                    4
                    
                    
                    
                    —
                    
                    
                    
                    1,0041
      to 5 years
                    
                    
                    1,057
                    
                    
                    
                    —
                    
                    
                    
                    (107
                    )
                    
                    
                    9505
      to 10 years
                    
                    
                    1,532
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,532Pooled
      trust preferred securities
                    
                    
                    9,415
                    
                    
                    
                    —
                    
                    
                    
                    (2,835
                    )
                    
                    
                    6,580Mutual
      funds
                    
                    
                    8,563
                    
                    
                    
                    8
                    
                    
                    
                    —
                    
                    
                    
                    8,571Other
      equity investments
                    
                    
                    1,040
                    
                    
                    
                    —
                    
                    
                    
                    (87
                    )
                    
                    
                    953Total
                    
                    $
                    29,470
                    
                    
                    $
                    126
                    
                    
                    $
                    (3,051
                    )
                    
                    $
                    26,545Held
      to Maturity:Municipal
      obligations:1
      to 5 years
                    
                    $
                    1,537
                    
                    
                    $
                    5
                    
                    
                    $
                    (9
                    )
                    
                    $
                    1,5335
      to 10 years
                    
                    
                    1,718
                    
                    
                    
                    21
                    
                    
                    
                    (1
                    )
                    
                    
                    1,738Total
                    
                    $
                    3,255
                    
                    
                    $
                    26
                    
                    
                    $
                    (10
                    )
                    
                    $
                    3,271


- 7
-





Provided
below is a summary of investment securities available for sale and held to
maturity which were in an unrealized loss position at September 30,
2008.





Loss Position
                        Less than 12 Months
                      
                      
                      Loss Position
                        12 Months or Longer
                      
                      
                      TotallApproximate
                        Fair Value
                      
                      
                      Unrealized
                        Losses
                      
                      
                      Approximate
                        Fair Value
                      
                      
                      Unrealized
                        Losses
                      
                      
                      Approximate
                        Fair Value
                      
                      
                      Unrealized
                        LossesCorporate
      bonds
                      
                      $
                      950
                      
                      
                      $
                      (107
                      )
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      950
                      
                      
                      $
                      (107
                      )Pooled
      trust preferredsecurities
                      
                      
                      5,118
                      
                      
                      
                      (2,285
                      )
                      
                      
                      1,462
                      
                      
                      
                      (550
                      )
                      
                      
                      6,580
                      
                      
                      
                      (2,835
                      )Municipal
      obligations
                      
                      
                      2,062
                      
                      
                      
                      (32
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      2,062
                      
                      
                      
                      (32
                      )Other
      equity investments
                      
                      
                      553
                      
                      
                      
                      (87
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      553
                      
                      
                      
                      (87
                      )Total
                      
                      $
                      8,683
                      
                      
                      $
                      (2,511
                      )
                      
                      $
                      1,462
                      
                      
                      $
                      (550
                      )
                      
                      $
                      10,145
                      
                      
                      $
                      (3,061
                      )





The above
table represents 13 investment securities where the current value is less than
the related amortized cost.




Proceeds
from the sales of available-for-sale securities for the three- and nine- months
ending June 30, 2008 totaled $0 and $69,000, respectively. Gains on sales of
available-for-sale investment securities for the three- and nine- months ending
June 30, 2008 totaled $0 and $69,000, respectively. There were no losses on
sales of available-for-sale investment securities for the three- and nine-
months ending June 30, 2008.





3.           MORTGAGE-RELATED
SECURITIES




Mortgage-related
securities available for sale and mortgage-related securities held to maturity
are summarized as follows:








June 30, 2009Gross
                  
                  
                  GrossAmortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  ApproximateCost
                  
                  
                  Gain
                  
                  
                  Loss
                  
                  
                  Fair ValueAvailable
      for Sale:FHLMC
      pass-through certificates
                  
                  $
                  24,566
                  
                  
                  $
                  668
                  
                  
                  $
                  (98
                  )
                  
                  $
                  25,136FNMA
      pass-through certificates
                  
                  
                  46,168
                  
                  
                  
                  1,235
                  
                  
                  
                  (34
                  )
                  
                  
                  47,369GNMA
      pass-through certificates
                  
                  
                  4,216
                  
                  
                  
                  13
                  
                  
                  
                  (67
                  )
                  
                  
                  4,162Collateralized
      mortgage obligations
                  
                  
                  22,459
                  
                  
                  
                  212
                  
                  
                  
                  (1,414
                  )
                  
                  
                  21,257Total
                  
                  $
                  97,409
                  
                  
                  $
                  2,128
                  
                  
                  $
                  (1,613
                  )
                  
                  $
                  97,924Held
      to Maturity:FHLMC
      pass-through certificates
                  
                  $
                  7,946
                  
                  
                  $
                  198
                  
                  
                  $
                  —
                  
                  
                  $
                  8,144FNMA
      pass-through certificates
                  
                  
                  12,959
                  
                  
                  
                  379
                  
                  
                  
                  (4
                  )
                  
                  
                  13,334Total
                  
                  $
                  20,905
                  
                  
                  $
                  577
                  
                  
                  $
                  (4
                  )
                  
                  $
                  21,478


- 8
-





Provided
below is a summary of mortgage-related securities available for sale and held to
maturity which were in an unrealized loss position at June 30,
2009.





Loss
      Position
                    Less than 12 Months
                  
                  
                  Loss
      Position
                    12 Months or Longer
                  
                  
                  TotalFair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Fair Value
                  
                  
                  Unrealized
                    LossesPass-through
      certificates
                  
                  $
                  12,827
                  
                  
                  $
                  (198
                  )
                  
                  $
                  100
                  
                  
                  $
                  (5
                  )
                  
                  $
                  12,927
                  
                  
                  $
                  (203
                  )Collateralized
      mortgage obligations
                  
                  
                  356
                  
                  
                  
                  (72
                  )
                  
                  
                  14,218
                  
                  
                  
                  (1,342
                  )
                  
                  
                  14,574
                  
                  
                  
                  (1,414
                  )Total
                  
                  $
                  13,183
                  
                  
                  $
                  (270
                  )
                  
                  $
                  14,318
                  
                  
                  $
                  (1,347
                  )
                  
                  $
                  27,501
                  
                  
                  $
                  (1,617
                  )





The above
table represents 31 mortgage-related securities where the current value is less
than the related amortized cost.





At June
30, 2009, mortgage-related securities in a gross unrealized loss position for
twelve months or longer consisted of 17 securities that at such date had an
aggregate depreciation of 8.6% from the Company's amortized cost basis.
Management does not believe any individual unrealized loss as of June 30, 2009
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. Management believes that the substantial
majority of the unrealized losses associated with mortgage-related securities
are attributable to changes in interest rates and conditions in the financial
and credit markets not due to the deterioration of the creditworthiness of the
issuer. The Company does not have the intent to sell these securities and it is
more likely than not that it will not have to sell the securities before
recovery of their cost bases. However, the Company will continue to review its
investment portfolio to determine whether any particular impairment is other
than temporary. Management does not believe that any individual unrealized loss
as of June 30, 2009 represents an other-than-temporary impairment.




The
Company reviews mortgage-related securities on an ongoing basis for the presence
of OTTI with formal reviews performed quarterly. Effective March 31, 2009, the
Company adopted FSP FAS 115-2, “Recognition and Presentation of
Other-Than-Temporary Impairments”, which provides for the bifurcation of
OTTI into two categories: (a) the amount of the total OTTI related to a decrease
in cash flows expected to be collected from the debt security (the credit loss)
which is recognized in earnings and (b) the amount of total OTTI related to all
other factors, which is recognized, net of income taxes, as a component of OCI.
As a result of adopting FSP FAS 115-2, the Company recorded, during the quarter
ended March 31, 2009 impairments aggregating $25,000 not related to credit
losses on two of its private label collateralized mortgage obligations, through
other comprehensive income rather than through earnings and credit-related
impairments aggregating $126,000 on the same two private label collateralized
mortgage obligations as well as the Company’s investment in another private
label collateralized mortgage obligation, through earnings. No OTTI was
determined to exist with respect to any of the Company’s mortgage-related
securities during the third quarter of fiscal 2009.





The
following table details the rollforward of credit-related losses on
collateralized mortgage obligations recorded in earnings and as a component of
OCI for the nine months ended June 30, 2009:


- 9
-





Gross OTTI
                  
                  
                  OTTI Included
                    in OCI
                  
                  
                  OTTI Included
                    in EarningsOctober
      1, 2008
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Additions:
                  
                  
                  68
                  
                  
                  
                  25
                  
                  
                  
                  43Balance,
      June 30, 2009
                  
                  $
                  68
                  
                  
                  $
                  25
                  
                  
                  $
                  43





Proceeds
from the sales of available-for-sale mortgage-related securities for the three-
and nine- months ending June 30, 2009 totaled $0 and $19.3 million,
respectively. Gains on sales of available-for-sale mortgage-related securities
for the three- and nine- months ending June 30, 2009 totaled $0 and $289,000,
respectively. Losses on sales of available-for-sale mortgage-related securities
for the three- and nine- months ending June 30, 2009 totaled $0 and $24,000,
respectively.





The
      amortized cost and approximate fair value of mortgage-related securities
      available for sale and held to maturity, by contractual maturities, as of
      September 30, 2008 are as follows:





September 30, 2008Gross
                  
                  
                  GrossAmortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  ApproximateCost
                  
                  
                  Gain
                  
                  
                  Loss
                  
                  
                  Fair ValueAvailable
      for Sale:FHLMC
      pass-through certificates
                  
                  $
                  34,860
                  
                  
                  $
                  117
                  
                  
                  $
                  (175
                  )
                  
                  $
                  34,802FNMA
      pass-through certificates
                  
                  
                  41,982
                  
                  
                  
                  235
                  
                  
                  
                  (216
                  )
                  
                  
                  42,001GNMA
      pass-through certificates
                  
                  
                  1,669
                  
                  
                  
                  10
                  
                  
                  
                  —
                  
                  
                  
                  1,679Collateralized
      mortgage obligations
                  
                  
                  25,653
                  
                  
                  
                  3
                  
                  
                  
                  (1,161
                  )
                  
                  
                  24,495Total
                  
                  $
                  104,164
                  
                  
                  $
                  365
                  
                  
                  $
                  (1,552
                  )
                  
                  $
                  102,977Held
      to Maturity:FHLMC
      pass-through certificates
                  
                  $
                  9,776
                  
                  
                  $
                  42
                  
                  
                  $
                  (84
                  )
                  
                  $
                  9,734FNMA
      pass-through certificates
                  
                  
                  15,582
                  
                  
                  
                  3
                  
                  
                  
                  (116
                  )
                  
                  
                  15,469Collateralized
      mortgage obligations
                  
                  
                  1
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1Total
                  
                  $
                  25,359
                  
                  
                  $
                  45
                  
                  
                  $
                  (200
                  )
                  
                  $
                  25,204





Provided
below is a summary of mortgage-related securities available for sale and held to
maturity which were in an unrealized loss position at September 30,
2008.





Loss Position
                    Less than 12 Months
                  
                  
                  Loss Position
                    12 Months or Longer
                  
                  
                  TotalFairValue
                  
                  
                  Unrealized
                    Losses
                  
                  
                  FairValue
                  
                  
                  Unrealized
                    Losses
                  
                  
                  FairValue
                  
                  
                  Unrealized
                    LossesPass-through
      certificates
                  
                  $
                  54,080
                  
                  
                  $
                  (561
                  )
                  
                  $
                  1,401
                  
                  
                  $
                  (30
                  )
                  
                  $
                  55,481
                  
                  
                  $
                  (591
                  )Collateralized
      mortgage obligations
                  
                  
                  17,914
                  
                  
                  
                  (678
                  )
                  
                  
                  6,385
                  
                  
                  
                  (483
                  )
                  
                  
                  24,299
                  
                  
                  
                  (1,161
                  )Total
                  
                  $
                  71,994
                  
                  
                  $
                  (1,239
                  )
                  
                  $
                  7,786
                  
                  
                  $
                  (513
                  )
                  
                  $
                  79,780
                  
                  
                  $
                  (1,752
                  )




The above
table represents 66 mortgage-related securities where the current value is less
than the related amortized cost.




There
were no sales of mortgage-related securities for the nine months ended June 30,
2008.


- 10
-





4.           FAIR
VALUE MEASUREMENT





In the
first quarter of 2009, the Company adopted the provisions of FAS No. 157, Fair Value Measurements,for
financial assets and financial liabilities. FAS No. 157 provides enhanced
guidance for using fair value to measure assets and liabilities. The standard
applies whenever other standards require or permit assets or liabilities to be
measured at fair value. The standard does not expand the use of fair value in
any new circumstances. The FASB issued Staff Position No. 157-1, “Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
Under Statement 13”,which removed leasing transactions accounted for
under FAS No. 13 and related guidance from the scope of FAS No. 157. On April 9,
2009, the FASB issued FSP No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly”.The Company
elected to early adopt this FSP and the results have been applied on the
financial statements and disclosures herein, without a material impact on the
consolidated financial statements. FSP 157-4 provides guidance for determining
fair value if there has been a significant decrease in the volume and level of
activity for an asset or liability in relation to normal market activity. In
that circumstance, transactions or quoted prices may not be determinative of
fair value. Significant adjustments may be necessary to quoted prices or
alternative valuation techniques may be required in order to determine the fair
value of the asset or liability under current market conditions.





Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement
date.





Level 2:
Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.





Level 3:
Significant unobservable that inputs reflect a reporting entity’s own
assumptions about the parameters that market participants would use in pricing
an asset or liability.





Most of
the securities classified as available for sale are reported at fair value
utilizing Level 2 inputs. For these securities, the Company obtains fair value
measurements from an independent pricing service.  The fair value
measurements consider observable data that may include dealer quoted market
spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade
execution data, market consensus prepayment speeds, credit information and the
bond’s terms and conditions, among other things. Impaired loans are reported at
fair value utilizing level 2 inputs. For these loans, a review of the collateral
is conducted and an appropriate allowance for loan loss is allocated to the
loan.





Securities
reported at fair value utilizing Level 1 inputs are limited to actively traded
equity securities whose market price is readily available from the New York
Stock Exchange or the NASDAQ stock market.





Securities
reported at fair value utilizing Level 3 inputs consist predominantly of
corporate debt securities for which there is no active market. Fair values for
these securities are determined utilizing discounted cash flow models which
incorporate various assumptions including average historical spreads, credit
ratings, and liquidity of the underlying securities.





- 11
-





Assets
measured at fair value on a recurring and nonrecurring basis are summarized as
follows:





Fair Value Measurement at June 30, 2009 Using:Total
                    
                    
                    Quoted Prices in
                      Active Markets for
                      Identical Assets
                      (Level 1)
                    
                    
                    Significant Other
                      Observable Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)Pass-through
      certificates
                    
                    $
                    76,667
                    
                    
                    $
                    —
                    
                    
                    $
                    76,667
                    
                    
                    $
                    —Collateralized
      mortgage obligations
                    
                    
                    21,257
                    
                    
                    
                    —
                    
                    
                    
                    21,257
                    
                    
                    
                    —Municipal
      obligations
                    
                    
                    8,944
                    
                    
                    
                    —
                    
                    
                    
                    8,944
                    
                    
                    
                    —Corporate
      bonds
                    
                    
                    6,624
                    
                    
                    
                    —
                    
                    
                    
                    5,024
                    
                    
                    
                    1,600Pooled
      trust preferred securities
                    
                    
                    5,740
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,740Mutual
      funds
                    
                    
                    3,659
                    
                    
                    
                    3,659
                    
                    
                    
                    —
                    
                    
                    
                    —Other
      equity investments
                    
                    
                    532
                    
                    
                    
                    532
                    
                    
                    
                    —
                    
                    
                    
                    —Impaired
      loans measured on a nonrecurring basis
                    
                    
                    1,597
                    
                    
                    
                    —
                    
                    
                    
                    1,597
                    
                    
                    
                    —Total
                    
                    $
                    125,020
                    
                    
                    $
                    4,191
                    
                    
                    $
                    113,489
                    
                    
                    $
                    7,340





The
following table presents the changes in the Level III fair-value category for
the nine months ended June 30, 2009. The Company classifies financial
instruments in Level III of the fair-value hierarchy when there is reliance on
at least one significant unobservable input to the valuation model. In addition
to these unobservable inputs, the valuation models for Level III financial
instruments typically also rely on a number of inputs that are readily
observable either directly or indirectly.





Fair Value Measurements Using
                    Significant Unobservable Inputs
                    (Level 3)Available for Sale
    SecuritiesBeginning
      balance
                  
                  $
                  8,112Total
      gains or losses (realized/unrealized)Included
      in earnings
                  
                  
                  (490
                  )Included
      in other comprehensive income
                  
                  
                  (138
                  )Purchases,
      issuances and settlements
                  
                  
                  (144
                  )Transfers
      in and/or out of Level 3
                  
                  
                  —Ending
      balance
                  
                  $
                  7,340The
      amount of total losses for the period included in
      earnings   attributable to the change in unrealized gains
      or losses relating to assets still held at the reporting
    date
                  
                  $
                  490


- 12
-





5.           LOANS
RECEIVABLE





Loans receivable consist of the
following:


June
      30,
                  
                  
                  September
      30,2009
                  
                  
                  2008Single-family
                  
                  $
                  146,083
                  
                  
                  $
                  145,626Construction
      and land
                  
                  
                  30,268
                  
                  
                  
                  27,493Multi-family
      and commercial
                  
                  
                  61,365
                  
                  
                  
                  54,419Home
      equity and lines of credit
                  
                  
                  55,322
                  
                  
                  
                  55,246Consumer
      loans
                  
                  
                  1,607
                  
                  
                  
                  1,330Commercial
      loans
                  
                  
                  22,270
                  
                  
                  
                  15,955Total
      loans
                  
                  
                  316,915
                  
                  
                  
                  300,069Loans
      in process
                  
                  
                  (11,020
                  )
                  
                  
                  (10,802
                  )Allowance
      for loan losses
                  
                  
                  (3,491
                  )
                  
                  
                  (3,453
                  )Deferred
      loan costs
                  
                  
                  203
                  
                  
                  
                  292Loans
      receivable – net
                  
                  $
                  302,607
                  
                  
                  $
                  286,106




At June
30, 2009 and September 30, 2008, non-performing loans (which include loans in
excess of 90 days delinquent) amounted to approximately $3,208 and $2,420,
respectively.  At June 30, 2009, non-performing loans consisted of
five single-family residential mortgage loans aggregating $775, one
non-residential mortgage loan of $1,368, three commercial business loans
aggregating $576, one construction loan of $195, four home equity loans
aggregating $273, and three consumer loans aggregating $20.




At June
30, 2009 and September 30, 2008, the Company had impaired loans with a total
recorded investment of $1,967 and $817, respectively.  Interest income
of $0 and $16 was recognized on these impaired loans during the three and nine
months ended June 30, 2009, respectively.  Interest income of
approximately $48 and $107 was not recognized as interest income due to the
non-accrual status of such loans for the three and nine months ended June 30,
2009, respectively.




Loans
collectively evaluated for impairment include residential real estate, home
equity (including lines of credit) and consumer loans and are not included in
the data that follow:





June 30,
                        2009
                      
                      
                      September 30,
                        2008Impaired
      loans with related allowance for loan losses under SFAS No.
      114
                      
                      $
                      1,967
                      
                      
                      $
                      817Impaired
      loans with no related allowance for loan losses under SFAS No.
      114
                      
                      
                      —
                      
                      
                      
                      —Total
      impaired loans
                      
                      $
                      1,967
                      
                      
                      $
                      817Valuation
      allowance related to impaired loans
                      
                      $
                      370
                      
                      
                      $
                      370




The
following is an analysis of the allowance for loan losses:


Nine
      Months EndedJune 30,2009
                  
                  
                  2008Balance
      beginning of period
                  
                  $
                  3,453
                  
                  
                  $
                  3,322Provisions
      charged to income
                  
                  
                  1,525
                  
                  
                  
                  56Charge-offs
                  
                  
                  (1,535
                  )
                  
                  
                  (23
                  )Recoveries
                  
                  
                  48
                  
                  
                  
                  21Total
                  
                  $
                  3,491
                  
                  
                  $
                  3,376


- 13
-





6.           DEPOSITS





Deposits consist of the following major
classifications:


June
      30,
                  
                  
                  September
      30,2009
                  
                  
                  2008Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  PercentNon-interest
      bearing
                  
                  $
                  18,038
                  
                  
                  
                  5.1
                  %
                  
                  $
                  20,101
                  
                  
                  
                  6.0
                  %NOW
                  
                  
                  80,350
                  
                  
                  
                  22.7
                  
                  
                  
                  70,344
                  
                  
                  
                  21.3Passbook
                  
                  
                  39,682
                  
                  
                  
                  11.2
                  
                  
                  
                  34,796
                  
                  
                  
                  10.5Money
      market demand
                  
                  
                  46,805
                  
                  
                  
                  13.2
                  
                  
                  
                  43,572
                  
                  
                  
                  13.2Certificates
      of deposit
                  
                  
                  168,874
                  
                  
                  
                  47.8
                  
                  
                  
                  162,051
                  
                  
                  
                  49.0Total
                  
                  $
                  353,749
                  
                  
                  
                  100.0
                  %
                  
                  $
                  330,864
                  
                  
                  
                  100.0
                  %





7.           EARNINGS
PER SHARE




Basic net
income (loss) per share is based upon the weighted average number of common
shares outstanding, while diluted net income (loss) 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 date presented. At June 30, 2009 and 2008, anti-dilutive shares consisted of
options covering 54,160 and 43,079 shares, respectively.




The calculation of basic and diluted
earnings per share (“EPS”) is as follows:




For
      the Three Months Ended
                    
                    
                    For
      the Nine Months EndedJune 30,
                    
                    
                    June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Numerator
                    
                    $
                    (353
                    )
                    
                    $
                    243
                    
                    
                    $
                    (1,222
                    )
                    
                    $
                    682Denominators:Basic
      shares outstanding
                    
                    
                    2,327,940
                    
                    
                    
                    2,319,244
                    
                    
                    
                    2,325,765
                    
                    
                    
                    2,317,072Effect
      of dilutive securities
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    194Diluted
      shares outstanding
                    
                    
                    2,327,940
                    
                    
                    
                    2,319,244
                    
                    
                    
                    2,325,765
                    
                    
                    
                    2,317,266EPS:Basic
                    
                    $
                    (0.15
                    )
                    
                    $
                    0.10
                    
                    
                    $
                    (0.53
                    )
                    
                    $
                    0.29Diluted
                    
                    $
                    (0.15
                    )
                    
                    $
                    0.10
                    
                    
                    $
                    (0.53
                    )
                    
                    $
                    0.29




8.           REGULATORY
CAPITAL REQUIREMENTS




The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum regulatory capital
requirements can result in certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank’s assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank’s capital amounts and
classification are also subject to qualitative judgments by regulators about
components, risk weightings, and other factors.


- 14
-




Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth below) of tangible and core
capital (as defined in the regulations) to adjusted assets (as defined), and of
Tier I and total capital (as defined) to average assets (as defined). Management
believes, as of June 30, 2009, that the Bank met all regulatory capital adequacy
requirements to which it was subject, including individualized capital
requirements discussed below.




The
Bank’s actual capital amounts and ratios are presented in the following
table.





Actual
                  
                  
                  Required for
                    Capital Adequacy
                    Purpose
                  
                  
                  Well Capitalized
                    Under Prompt
                    Corrective ActionAmount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  RatioAt
      June 30, 2009:Core
      Capital (to Adjusted Tangible Assets)
                  
                  $
                  43,571
                  
                  
                  
                  8.31
                  %
                  
                  $
                  20,969
                  
                  
                  
                  4.0
                  %
                  
                  $
                  26,212
                  
                  
                  
                  5.0
                  %Tier
      I Capital (to Risk-Weighted Assets)
                  
                  
                  43,571
                  
                  
                  
                  12.64
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  20,683
                  
                  
                  
                  6.0Total
      Capital (to Risk-Weighted Assets)
                  
                  
                  46,728
                  
                  
                  
                  13.56
                  
                  
                  
                  27,577
                  
                  
                  
                  8.0
                  
                  
                  
                  34,471
                  
                  
                  
                  10.0Tangible
      Capital (to Tangible Assets)
                  
                  
                  43,532
                  
                  
                  
                  8.30
                  
                  
                  
                  7,863
                  
                  
                  
                  1.5
                  
                  
                  
                  N/A
                  
                  
                  
                  N/AAt
      September 30, 2008:Core
      Capital (to Adjusted Tangible Assets)
                  
                  $
                  44,234
                  
                  
                  
                  8.46
                  %
                  
                  $
                  20,911
                  
                  
                  
                  4.0
                  %
                  
                  $
                  26,139
                  
                  
                  
                  5.0
                  %Tier
      I Capital (to Risk-Weighted Assets)
                  
                  
                  44,234
                  
                  
                  
                  14.02
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  18,935
                  
                  
                  
                  6.0Total
      Capital (to Risk-Weighted Assets)
                  
                  
                  47,322
                  
                  
                  
                  14.99
                  
                  
                  
                  25,247
                  
                  
                  
                  8.0
                  
                  
                  
                  31,559
                  
                  
                  
                  10.0Tangible
      Capital (to Tangible Assets)
                  
                  
                  44,167
                  
                  
                  
                  8.45
                  
                  
                  
                  7,841
                  
                  
                  
                  1.5
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A




On
February 13, 2006, the Bank entered into a supervisory agreement with the Office
of Thrift Supervision (“OTS”).  The supervisory agreement requires the
Bank, among other things, to maintain minimum core capital and total risk-based
capital ratios of 7.5% and 12.5%, respectively.  At June 30, 2009, the
Bank was in compliance with such requirement. The Bank has been deemed to be
"well-capitalized" for purposes of the prompt corrective action regulations by
the OTS. However, due to the supervisory agreement, it is still deemed in
“troubled condition.”





9.          
RECENT ACCOUNTING PRONOUNCEMENTS




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”
(“SFAS No. 141(R)”), which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination.  SFAS No. 141(R) is effective for fiscal years
beginning on or after December 15, 2008.  Earlier adoption is
prohibited.  The Company is evaluating the impact of this
pronouncement but does not expect that the guidance will have a material effect
on the Company’s financial position or results of operations.




In
September 2006, the FASB issued FAS No. 158, “Employers' Accounting for Defined
Benefit Pension and Other Post Retirement Plans”, an amendment of FASB
Statements No. 87, 88, 106 and 132(R). This Statement requires that employers
measure plan assets and obligations as of the balance sheet
date.  This requirement is effective for fiscal years ending after
December 15, 2008.  The other provisions of the Statement were
effective for public companies as of the end of the fiscal year ending after
December 15, 2006.
The Company has determined that the guidance provided by SFAS No. 158 will not
have an impact on its stockholders' equity or on the Company's financial
position or results of operations.


- 15
-




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51”
(“SFAS No. 160”).  SFAS No. 160 amends ARB No. 51 to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary.  It clarifies
that a noncontrolling interest in a subsidiary, which is sometimes referred to
as minority interest, is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial
statements.  Among other requirements, this statement requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest.  It also
requires disclosure, on the face of the consolidated income statement, of the
amounts of consolidated net income attributable to the parent and to the
noncontrolling interest.  SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008.  Earlier adoption is
prohibited. The adoption of this standard is not expected to have a material
effect on the Company’s results of operations or financial
position.




In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that
should be considered in developing assumptions about renewal or extension used
in estimating the useful life of a recognized intangible asset under SFAS No.
142, “Goodwill and Other
Intangible Assets.” This standard is intended to improve the consistency
between the useful life of a recognized intangible asset under SFAS No. 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141R  and other GAAP. FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
The measurement provisions of this standard will apply only to intangible assets
of the Company acquired after the effective date. The Company does not expect
the adoption of FSP 142-3 to have a material effect on its results of operations
or financial position.





In
February 2007, the FASB issued FSP No. FAS 158-1, “Conforming Amendments to the
Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the Related
Staff Implementation Guides. “This FSP provides conforming amendments to
the illustrations in FAS Statements No. 87, 88, and 106 and to related staff
implementation guides as a result of the issuance of FAS Statement No.
158.  The conforming amendments made by this FSP are effective as of
the effective dates of Statement No. 158.  The unaffected guidance
that this FSP codifies into Statements No. 87, 88, and 106 does not contain new
requirements and therefore does not require a separate effective date or
transition method. The Company is currently evaluating the impact the adoption
of the FSP will have on the Company’s results of operations.




In
February 2008, the FASB issued FSP No. FAS 140-3, “Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions.”  This
FSP concludes that a transferor and transferee should not separately account for
a transfer of a financial asset and a related repurchase financing unless (a)
the two transactions have a valid and distinct business or economic purpose for
being entered into separately and (b) the repurchase financing does not result
in the initial transferor regaining control over the financial
asset.  The FSP is effective for financial statements issued for
fiscal years beginning on or after November 15, 2008, and interim periods within
those fiscal years. The Company is currently evaluating the impact the adoption
of the FSP will have on the Company’s results of operations.




In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities,” to clarify that instruments granted in share-based payment
transactions can be participating securities prior to the requisite service
having been rendered.  A basic principle of the FSP is that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
are to be included in the computation of EPS pursuant to the two-class
method.  The provisions of this FSP are effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years. All prior-period EPS data presented
(including interim financial statements, summaries of earnings, and selected
financial data) are required to be adjusted retrospectively to conform with the
provisions of the FSP. The Company is currently evaluating the impact the
adoption of the FSP will have on the Company’s results of
operations.


- 16
-




In April
2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies.”  This FSP requires companies acquiring
contingent assets or assuming contingent liabilities in business combination to
either (a) if the assets’ or liabilities’ fair value can be determined,
recognize them at fair value, at the acquisition date, or (b) if the assets’ or
liabilities’ fair value cannot be determined, but (i) it is probable that an
asset existed or that a liability had been incurred at the acquisition date and
(ii) the amount of the asset or liability can be reasonably estimated, recognize
them at their estimated amount, at the acquisition date.   If the
fair value of these contingencies cannot be determined and they are not probable
or cannot be reasonably estimated, then companies should not recognize these
contingencies as of the acquisition date and instead should account for them in
subsequent periods by following other applicable GAAP.  This FSP also
eliminates the FAS 141R requirement of disclosing in the footnotes to the
financial statements the range of expected outcomes for a recognized
contingency.  This FSP shall be effective for assets or liabilities
arising from contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008.  The adoption of this FSP is not
expected to have a material effect on the Company’s results of operations or
financial position




In April
2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not
Orderly.”  This FSP relates to determining fair values when
there is no active market or where the price inputs being used represent
distressed sales.  It reaffirms the need to use judgment to ascertain
if a formerly active market has become inactive and in determining fair values
when markets have become inactive. FSP No. FAS 157-4 is effective for interim
and annual periods ending after June 15, 2009, but entities may early adopt this
FSP for the interim and annual periods ending after March 15, 2009. The Company
adopted the provisions of FSP 157-4 during the second quarter of fiscal 2009 and
the results have been applied in the financial statements and disclosures
included herein.




In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments”, which relates to fair value disclosures for
any financial instruments that are not currently reflected on the balance sheet
of companies at fair value.  Prior to issuing this FSP, fair values
for these assets and liabilities were only disclosed once a year. The FSP now
requires these disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value.  FSP No.
FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after
June 15, 2009, but entities may early adopt this FSP for the interim and annual
periods ending after March 15, 2009. The Company adopted the provisions of FSP
No. FAS 107-1 and APB 28-1 during the third quarter of fiscal 2009 and the
results have been applied in the financial statements and disclosures included
herein (see Note 10).




In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments”, which provides additional guidance
designed to create greater clarity and consistency in accounting for and
presenting impairment losses on securities. FSP SFAS No. 115-2 and SFAS No.
124-2 amends existing guidance for determining whether an impairment is other
than temporary to debt securities and replaces the existing requirement that the
entity’s management assert it has both the intent and ability to hold an
impaired security until recovery with a requirement that management assert: (a)
it does not have the intent to sell the security; and (b) it is more likely than
not it will not have to sell the security before recovery of its cost
basis.  Under FSP SFAS No. 115-2 and SFAS No. 124-2, declines in the
fair value of held-to-maturity and available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses to the extent the impairment is related to credit
losses.  The amount of impairment related to other factors is
recognized in other comprehensive income. FSP No. FAS 115-2 and FAS 124-2 are
effective for interim and annual periods ending after June 15, 2009, but
entities may early adopt this FSP for the interim and annual periods ending
after March 15, 2009.  The Company has early adopted FAS 115-2 and FAS
124-2 during the second quarter of fiscal 2009 (see Notes 2 &
3).


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In
January 2009, the FASB issued final FSP No. EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20.” The FSP amends the impairment guidance
in EITF Issue No. 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets,” to
achieve more consistent determination of whether an other-than-temporary
impairment (OTTI) has occurred. The FSP retains and emphasizes the OTTI guidance
and required disclosures in Statement 115, FSP FAS 115-1 and FAS 124-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, SEC Staff Accounting Bulletin (“SAB”) Topic 5M, “Other Than Temporary Impairment of
Certain Investments in Debt and Equity Securities, and Other Related
Literature.”  The FSP is effective for interim and annual
reporting periods ending after December 15, 2008, and shall be applied
prospectively. Retrospective application to a prior interim or annual reporting
period is not permitted. Consistent with paragraph 15 of FSP FAS 115-1 and FAS
124-1, any other-than temporary impairment resulting from the application of
Statement 115 or Issue 99-20 shall be recognized in earnings equal to the entire
difference between the investment’s cost and its fair value at the balance sheet
date of the reporting period for which the assessment is made (for example,
December 31, 2008, for a calendar year-end entity). The adoption of the
requirements of FSB No. EITF 99-20-1 by the Company did not have a material
impact on its financial condition or results of operations.




In
February 2008, the FASB issued Staff Position No.157-2, “Partial Deferral of the Effective
Date of Statement 15”, which deferred the effective date of FAS No. 157,
“Fair Value
Measurements”, for all nonfinancial assets and nonfinancial liabilities
to fiscal years beginning after November 15, 2008. The adoption of this standard
is not expected to have a material effect on the Company’s results of operations
or financial position.




In May
2009, the FASB issued FAS No. 165, “Subsequent Events”, which
requires companies to evaluate events and transactions that occur after the
balance sheet date but before the date the financial statements are issued, or
available to be issued in the case of non-public entities.  FAS No.
165 requires entities to recognize in the financial statements the effect of all
events or transactions that provide additional evidence of conditions that
existed at the balance sheet date, including the estimates inherent in the
financial preparation process.  Entities shall not recognize the
impact of events or transactions that provide evidence about conditions that did
not exist at the balance sheet date but arose after that date.  FAS
No. 165 also requires entities to disclose the date through which subsequent
events have been evaluated.  FAS No. 165 was effective for interim and
annual reporting periods ending after June 15, 2009.  The Company
adopted the provisions of FAS No. 165 for the quarter ended June 30, 2009, as
required, and adoption did not have a material impact on the Company’s results
of operations or financial position.




In June
2009, the FASB issued FAS No. 166, “Accounting for Transfers of
Financial Assets.” FAS 166 removes the concept of a qualifying
special-purpose entity (QSPE) from FAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities,” and
removes the exception from applying FIN 46(R). This statement also clarifies the
requirements for isolation and limitations on portions of financial assets that
are eligible for sale accounting. This statement is effective for fiscal years
beginning after November 15, 2009. As such, the Company plans to adopt FAS No.
166 effective October 1, 2010. The adoption of this standard is not expected to
have a material effect on the Company’s results of operations or financial
position.




In June
2009, the FASB issued FAS No. 167, “Amendments to FASB Interpretation
No. 46(R).” FAS 167, which amends FASB Interpretation No. 46 (revised
December 2003), “Consolidation
of Variable Interest Entities,” (FIN 46(R)), prescribes a qualitative
model for identifying whether a company has a controlling financial interest in
a variable interest entity (VIE) and eliminates the quantitative model
prescribed by FIN 46(R). The new model identifies two primary characteristics of
a controlling financial interest: (1) provides a company with the power to
direct significant activities of the VIE, and (2) obligates a company to absorb
losses of and/or provides rights to receive benefits from the VIE. FAS No. 167
requires a company to reassess on an ongoing basis whether it holds a
controlling financial interest in a VIE. A company that holds a controlling
financial interest is deemed to be the primary beneficiary of the VIE and is
required to consolidate the VIE. This statement is effective for fiscal years
beginning after November 15, 2009. The adoption of this standard is not expected
to have a material effect on the Company’s results of operations or financial
position.


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-




In June
2009, the FASB issued FAS No. 168, “The ‘FASB Accounting Standards
Codification’ and the Hierarchy of Generally Accepted Accounting
Principles.” FAS No. 168 establishes the FASB Accounting Standards
Codification (Codification), which was officially launched on July 1, 2009, and
became the primary source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under the authority of Federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
subsequent issuances of new standards will be in the form of Accounting
Standards Updates that will be included in the Codification. FAS No. 168 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. As such, the Company plans to adopt FAS No.168 in
connection with its fiscal year 2009 reporting. As the Codification is neither
expected nor intended to change GAAP, the adoption of FAS No.168 will not have a
material impact on the Company’s results of operations or financial
position.





10.
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS





The
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.




June 30, 2009
            
            
            September 30, 2008Carrying/
              Notional
              Amount
            
            
            Estimated
              Fair
              Value
            
            
            Carrying/
              Notional
              Amount
            
            
            Estimated
              Fair
              ValueAssets:Cash
      and cash equivalents
            
            $
            35,163
            
            
            $
            35,163
            
            
            $
            39,320
            
            
            $
            39,320Investment
      securities
            
            
            29,747
            
            
            
            29,840
            
            
            
            29,800
            
            
            
            29,816Mortgage-related
      securities
            
            
            118,829
            
            
            
            119,402
            
            
            
            128,336
            
            
            
            128,181Loans
            
            
            302,607
            
            
            
            309,387
            
            
            
            286,106
            
            
            
            288,993FHLBank
      stock
            
            
            7,060
            
            
            
            7,060
            
            
            
            6,995
            
            
            
            6,995Liabilities:Non-interest
      bearing deposits
            
            
            18,038
            
            
            
            18,038
            
            
            
            20,101
            
            
            
            20,101Passbook
      deposits
            
            
            39,682
            
            
            
            39,682
            
            
            
            34,796
            
            
            
            34,796NOW
      and money market deposits
            
            
            127,155
            
            
            
            127,155
            
            
            
            113,916
            
            
            
            113,916Certificates
      of deposit
            
            
            168,874
            
            
            
            172,241
            
            
            
            162,051
            
            
            
            163,076Borrowings
            
            
            118,890
            
            
            
            124,038
            
            
            
            141,159
            
            
            
            144,864




The fair
value of cash and cash equivalents is their carrying value due to their
short-term nature. The fair value of investment and mortgage-related securities
is based on quoted market prices, dealer quotes, and prices obtained from
independent pricing services. The fair value of loans is estimated, based on
present values using approximate current entry value interest rates, applicable
to each category of such financial instruments. The fair value of FHLBank stock
approximates its carrying amount.




The fair
value of NOW deposits, money market deposits, non-interest bearing deposits and
passbook deposits is the amount reported in the financial statements. The fair
value of certificates of deposit and borrowings is based on a present value
estimate, using rates currently offered for deposits and borrowings with similar
remaining maturities.  The fair value for accrued interest receivable
and payable, the cash surrender value of life insurance and subordinated
debentures approximates their carrying value.




Fair
values for off-balance sheet commitments are based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties’ credit standings.


- 19
-




No
adjustment was made to the entry-value interest rates for changes in credit
performing commercial real estate and business loans, construction loans, and
land loans for which there are no known credit concerns. Management believes
that the risk factor embedded in the entry-value interest rates, along with the
general reserves applicable to the performing commercial, construction, and land
loan portfolios for which there are no known credit concerns, result in a fair
valuation of such loans on an entry-value basis. The fair value of non-accrual
loans, with a recorded book value of approximately $2,992 and $985 as of June
30, 2009 and September 30, 2008, respectively, was not estimated because it is
not practicable to reasonably assess the credit adjustment that would be applied
in the marketplace for such loans. The fair value estimates presented herein are
based on pertinent information available to management as of June 30, 2009 and
September 30, 2008. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
June 30, 2009 and September 30, 2008 and, therefore, current estimates of fair
value may differ significantly from the amounts presented herein.





11.
            SUBSEQUENT
      EVENTS





The
Company assessed events occurring subsequent to June 30, 2009 through August 13,
2009 for potential recognition and disclosure in the consolidated financial
statements, which were issued on August 14, 2009.




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 such term is 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.  Existing stockholders and potential
stockholders of the Company 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




The
Company is a Pennsylvania corporation and the sole stockholder of the Bank, a
federally chartered stock savings 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
the Bank’s loan composition towards increased investment in commercial,
construction and home equity loans and lines of credit in order to provide a
higher yielding loan portfolio with generally shorter contractual terms. In view
of the Company’s implementation of an enhanced credit review and loan
administration infrastructure, as well as underwriting standards with respect to
the origination of commercial loans, the Company has prudently renewed its
emphasis on the origination of commercial loans.  In furtherance of
such goal, the Company engaged, in 2008, an experienced commercial loan officer
and a commercial business development officer. However, in light of current
economic conditions and the Company’s overriding goal of protecting its asset
quality, it is expected that growth of the commercial loan portfolio will be
slow for the foreseeable future.


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-




Critical
Accounting Policies




Accounting
policies involving significant judgments and assumptions by management, which
have, or could have, a material impact on the carrying value of certain assets
or comprehensive income, are considered critical accounting policies. In
management’s opinion, the three most critical accounting policies affecting the
Company’s financial statements are the evaluation of the allowance for loan
losses, income taxes and fair value accounting. The Company maintains an
allowance for loan losses at a level management believes is sufficient to
provide for known and inherent losses in the loan portfolio that are both
probable and reasonable to estimate. 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, 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. Accordingly, there is a likelihood that materially
different amounts would be reported under different, but reasonably plausible
conditions or assumptions.




Allowance for Loan Losses.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, adverse conditions in the economy
and the market 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 use of provisions for loan losses as
economic conditions and other factors dictate.  Management reviews the
allowance for loan losses generally on a monthly basis, but at a minimum at
least quarterly.  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
federal banking regulator, the OTS, as part of its examination process, which
may result in additional provisions to increase the allowance based upon the
judgment and review of the OTS.




Income Taxes.Management
makes estimates and judgments to calculate some of our tax liabilities and
determine the probability of recoverability of some of our deferred tax assets,
which arise from temporary differences between the tax and financial statement
recognition of revenues and expenses. Management also estimates a reserve for
deferred tax assets if, based on the available evidence, it is more likely than
not that some portion or all of the recorded deferred tax assets will not be
realized in future periods. These estimates and judgments are inherently
subjective. Historically, our estimates and judgments to calculate our deferred
tax accounts have not required significant revision from management’s initial
estimates. In evaluating our ability to recover deferred tax assets, management
considers all available positive and negative evidence, including our past
operating results and our forecast of future taxable income. In determining
future taxable income, management makes assumptions for the amount of taxable
income, the reversal of temporary differences and the implementation of feasible
and prudent tax planning strategies. These assumptions require us to make
judgments about our future taxable income and are consistent with the plans and
estimates we use to manage our business. Any reduction in estimated future
taxable income may require us to record a valuation allowance against our
deferred tax assets. An increase in the valuation allowance would result in
additional income tax expense in the period and could have a significant impact
on our future earnings.




Fair Value Measurement.Under
SFAS No. 157, “Fair Value
Measurements,” we group our assets at fair value in three levels, based
on the markets in which the assets are traded and the reliability of the
assumptions used to determine fair value. These levels are:




• Level 1
— Valuation is based upon quoted prices for identical instruments traded in
active markets.




• Level 2
— Valuation is based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are
not active, and model-based valuation techniques for which all significant
assumptions are observable in the market.




• Level 3
— Valuation is generated from model-based techniques that use significant
assumptions not observable in the market. These unobservable assumptions reflect
the Company’s own estimates of assumptions that market participants would use in
pricing the asset.


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-




Under
SFAS No. 157, we base our fair values on the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. It is our policy to maximize the
use of observable inputs and minimize the use of unobservable inputs when
developing fair value measurements, in accordance with the fair value hierarchy
in SFAS No. 157. Fair value measurements for most of our assets are obtained
from independent pricing services that we have engaged for this purpose. When
available, we, or our independent pricing service, use quoted market prices to
measure fair value. If market prices are not available, fair value measurement
is based upon models that incorporate available trade, bid and other market
information. Substantially all of our financial instruments use either of the
foregoing methodologies to determine fair value adjustments recorded to our
financial statements. In certain cases, however, when market observable inputs
for model-based valuation techniques may not be readily available, we are
required to make judgments about assumptions market participants would use in
estimating the fair value of financial instruments. The degree of management
judgment involved in determining the fair value of a financial instrument is
dependent upon the availability of quoted market prices or observable market
parameters. For financial instruments that trade actively and have quoted market
prices or observable market parameters, there is minimal subjectivity involved
in measuring fair value. When observable market prices and parameters are not
fully available, management judgment is necessary to estimate fair value. In
addition, changes in the market conditions may reduce the availability of quoted
prices or observable data. When market data is not available, we use valuation
techniques requiring more management judgment to estimate the appropriate fair
value measurement. Therefore, the results cannot be determined with precision
and may not be realized in an actual sale or immediate settlement of the asset.
Additionally, there may be inherent weaknesses in any calculation technique, and
changes in the underlying assumptions used, including discount rates and
estimates of future cash flows, that could significantly affect the results of
current or future valuations.




At June
30, 2009 and September 30, 2008, the Company had assets, totaling $7.3 million
and $8.1 million, respectively, that were measured at fair value on a recurring
basis that use Level 3 measurements. The Company also had assets that were
measured at fair value on a nonrecurring basis that use Level 2 measurements.
See Note 4 in the Notes to the Unaudited Consolidated Financial Statements
herein for a further description of our fair value measurements.




Supervisory
Agreements




On
February 13, 2006, the Company and the Bank each entered into a supervisory
agreement with the OTS which primarily addressed issues identified in the OTS'
reports of examination of the Company's and the Bank's operations and financial
condition conducted in 2005.




Under the
terms of the supervisory agreement between the Company and the OTS, the Company
agreed to, among other things, (i) develop and implement a three-year capital
plan designed to support the Company's efforts to maintain prudent levels of
capital and to reduce its debt-to-equity ratio below 50%; (ii) not incur any
additional debt without the prior written approval of the OTS; and (iii) not
repurchase any shares of or pay any cash dividends on its common stock until the
Company complied with certain conditions.  Upon reducing its
debt-to-equity below 50%, the Company may resume the payment of quarterly cash
dividends at the lesser of the dividend rate in effect immediately prior to
entering into the supervisory agreement ($0.11 per share) or 35% of its
consolidated net income (on an annualized basis), provided that the OTS, upon
review of prior written notice from the Company of the proposed dividend, does
not object to such payment.




The
Company submitted to and received from the OTS approval of a capital plan, which
called for an equity infusion in order to reduce the Company’s debt-to-equity
ratio to below 50%.  As part of its capital plan, the Company
conducted, in December 2006, a private placement of 400,000 shares of common
stock, raising gross proceeds of approximately $6.5 million. In June 2007, the
net proceeds of approximately $5.8 million were used to fund, in large part, the
redemption of $6.2 million of the Company’s junior subordinated
debentures.  As a result of such redemption, the Company’s
debt-to-equity ratio is less than 50%.  Although the Company’s
debt-to-equity ratio is below 50%, it does not anticipate resuming the payment
of dividends until such time as the Company’s operating results materially
improve. During the quarter ended June 30, 2008, the Company redeemed the
remaining $2.1 million of its floating rate junior subordinated debentures. In
addition, the Company purchased $1.5 million of the $16.2 million of 9.7%
fixed-rate trust preferred securities issued by First Keystone Capital Trust I.
As a result, as of June 30, 2009 the Company held $5.0 million of such
securities.


- 22
-




Under the
terms of the supervisory agreement between the Bank and the OTS, the Bank agreed
to, among other things, (i) not grow in any quarter in excess of the greater of
3% of total assets (on an annualized basis) or net interest credited on deposit
liabilities during such quarter; (ii) maintain its core capital and total
risk-based capital in excess of 7.5% and 12.5%, respectively; (iii) adopt
revised policies and procedures governing commercial lending; (iv) conduct
periodic reviews of its commercial loan department; (v) conduct periodic
internal loan reviews; (vi) adopt a revised asset classification policy and
(vii) not amend, renew or enter compensatory arrangements with senior executive
officers and directors, subject to certain exceptions, without the prior
approval of the OTS.  As a result of the growth restriction imposed on
the Bank, the Company’s growth is currently and will continue to be
substantially constrained unless and until the supervisory agreements are
terminated or modified. Although the Bank initially exceeded the growth
limitation contained in the supervisory agreement, the Bank has complied with
the growth restriction since and including September 30, 2006.




As a
result of the supervisory agreement, the Bank hired a Chief Credit Officer (who
was promoted to Chief Lending Officer during the third quarter of fiscal 2008)
who, under the direction of the Board and the Chief Executive Officer, has taken
steps to enhance the Bank’s credit review analysis, develop loan administrative
procedures and adopt an asset classification system.  The Bank
continues to address these areas in order to remain in full compliance with the
terms of the supervisory agreements.




At
June 30, 2009, the Company believes it and the Bank are in compliance in all
material respects with all the operative provisions of both supervisory
agreements.





Comparison
of Financial Condition at June 30, 2009 and September 30, 2008




The
Company’s total assets increased by $3.3 million, from $522.1 million at
September 30, 2008 to $525.4 million at June 30, 2009. Loans receivable
increased by $16.5 million, from $286.1 million at September 30, 2008 to $302.6
million at June 30, 2009 with the majority of the increase accounted for by
growth in the commercial business, commercial and multi-family mortgage and
construction loan portfolios. At June 30, 2009, mortgage-related securities
available for sale and mortgage-related securities held to maturity decreased by
$5.1 million, or 4.9% to $97.9 million, and $4.5 million, or 17.6%, to $20.9
million, respectively, from $103.0 million and $25.4 million, respectively, at
September 30, 2008, as repayments have outpaced purchases of new securities.
Cash flows from repayments were used, in part, to fund loan growth. Deposits
increased $22.9 million, or 6.9%, from $330.9 million at September 30, 2008 to
$353.8 million at June 30, 2009.  The increase in deposits resulted
from a $10.0 million, or 14.2%, increase in NOW accounts, a $6.8 million, or
4.2%, increase in certificates of deposit, a $4.9 million, or 14.0% increase in
passbook accounts and a $3.2 million, or 7.4% increase in money market accounts,
partially offset by a decrease of $2.1 million, or 10.3%, in
non-interest-bearing accounts. Advances from FHLBank and other borrowings
decreased $27.4 million, or 19.9%, from $137.6 million at September 30, 2008 to
$110.2 million at June 30. 2009, as cash flows from deposit growth replaced
borrowings from FHLBank. Cash and cash equivalents decreased by $4.2 million to
$35.2 million at June 30, 2009 from $39.3 million at September 30, 2008
primarily due to the increase in loans receivable and the decrease in advances
from FHLBank, partially offset by increases in deposits and decreases in
mortgage-related securities.




Stockholders'
equity increased $406,000 from $32.3 million at September 30, 2008 to $32.7
million at June 30, 2009, primarily due to a $1.6 million decrease in
accumulated other comprehensive loss partially offset by the net loss of $1.2
million for the nine months ended June 30, 2009. The decline in accumulated
other comprehensive loss reflected primarily the improvement in fair market
values of certain of the Company’s available for sale mortgage-related
securities.




Comparison
of Results of Operations for the Three and Nine Months Ended June 30, 2009 and
2008




Net Income
(Loss).  The Company incurred a net loss of $353,000, or $0.15
per diluted share, for the quarter ended June 30, 2009 as compared to net income
of $243,000, or $0.10 per diluted share, for the same period in 2008. Net loss
for the nine months ended June 30, 2009 was $1.2 million or $0.53 per diluted
share as compared to net income of $682,000, or $0.29 per diluted share for the
same period in 2008. The loss for the three months ended June 30, 2009 was
primarily related to the increased provision for loan losses, required to adjust
the allowance for loan losses after taking into account the charge-off of $1.3
million in loans, and the one-time assessment and increased deposit insurance
premium assessed by the FDIC. The loss for the nine months ended June 30, 2009
was primarily due to impairment charges related to certain of the Company’s
investment securities as discussed below, in addition to the aforementioned FDIC
charges and a $1.5 million loan loss provision.


- 23
-




Net Interest Income. Net
interest income increased $440,000, or 16.9%, to $3.0 million and $1.1 million,
or 14.9% to $8.7 million for the three and nine months ended June 30, 2009,
respectively, as compared to the same periods in 2008. The increases in net
interest income for the three and nine months ended June 30, 2009 were primarily
due to decreases in interest expense of $932,000, or 23.7% and $2.9 million, or
23.4%, respectively, as compared to the same periods in 2008. The decreases in
interest expense for the three and nine months ended June 30, 2009 were
partially offset by decreases in interest income in such periods of $492,000, or
7.5%, and $1.8 million, or 8.9%, respectively, as compared to the same periods
in 2008. The weighted average yield earned on interest-earning assets for the
three and nine months ended June 30, 2009 decreased 39 basis points to 5.07% and
42 basis points to 5.23%, respectively, compared to the same periods in 2008.
However, for the three and nine months ended June 30, 2009, the weighted average
rate paid on interest-bearing liabilities decreased 79 basis points to 2.56% and
80 basis points to 2.77%, respectively, from the same periods in the prior
fiscal year. The declines in both interest income and interest expense were in
large part due to the declines in market rates of interest in the latter part of
2008 and in 2009, with the greater declines in the cost of interest-bearing
liabilities reflecting their greater interest rate sensitivity. The effect of
declines in interest rates on both interest income and interest expense
outweighed the effect of the increased volumes of both interest-earning assets
and interest-bearing liabilities.




The
interest rate spread and net interest margin were 2.51% and 2.55%, respectively,
for the three months ended June 30, 2009 as compared to 2.11% and 2.17%,
respectively, for the same period in 2008. The interest rate spread and net
interest margin were 2.46% and 2.50%, respectively, for the nine months ended
June 30, 2009 as compared to 2.08% and 2.15%, respectively, for the same period
in 2008. The slightly smaller increase in the net interest margin, as
compared to the increase in spread for the three- and nine-month comparisons,
was primarily due to the relative shift in net interest-earning assets. The
increase in the spread and margin reflected the more rapid repricing downward of
the Company’s cost of funds as market rates declined during the latter part of
2008 and in 2009.


- 24
-


The
following tables present the average balances for various categories of assets
and liabilities, and income and expense related to those assets and liabilities
for the three and nine months ended June 30, 2009 and 2008.





For the three months endedJune 30, 2009
                    
                    
                    June 30, 2008(Dollars in thousands)
                    
                    Average
                      Balance
                    
                    
                    Interest
                    
                    
                    Average
                      Yield/
                      Cost
                    
                    
                    Average
                      Balance
                    
                    
                    Interest
                    
                    
                    Average
                      Yield/
                      CostInterest-earning
      assets:Loans
      receivable(1)
                    
                    $
                    297,420
                    
                    
                    $
                    4,209
                    
                    
                    
                    5.66
                    %
                    
                    $
                    281,564
                    
                    
                    $
                    4,284
                    
                    
                    
                    6.09
                    %Mortgage-related
      securities(2)
                    
                    
                    124,033
                    
                    
                    
                    1,432
                    
                    
                    
                    4.62
                    
                    
                    
                    138,834
                    
                    
                    
                    1,696
                    
                    
                    
                    4.89Investment
      securities(2)
                    
                    
                    36,423
                    
                    
                    
                    393
                    
                    
                    
                    4.32
                    
                    
                    
                    40,423
                    
                    
                    
                    479
                    
                    
                    
                    4.74Other
      interest-earning assets
                    
                    
                    18,211
                    
                    
                    
                    3
                    
                    
                    
                    0.07
                    
                    
                    
                    17,579
                    
                    
                    
                    70
                    
                    
                    
                    1.59Total
      interest-earning assets
                    
                    
                    476,087
                    
                    
                    
                    6,037
                    
                    
                    
                    5.07
                    
                    
                    
                    478,400
                    
                    
                    
                    6,529
                    
                    
                    
                    5.46Non-interest-earning
      assets
                    
                    
                    33,086
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    34,807Total
      assets
                    
                    $
                    509,173
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    513,207Interest-bearing
      liabilities:Deposits
                    
                    $
                    346,058
                    
                    
                    
                    1,417
                    
                    
                    
                    1.64
                    
                    
                    $
                    342,008
                    
                    
                    
                    2,169
                    
                    
                    
                    2.54FHLB
      advances and other borrowings
                    
                    
                    110,048
                    
                    
                    
                    1,296
                    
                    
                    
                    4.71
                    
                    
                    
                    112,827
                    
                    
                    
                    1,409
                    
                    
                    
                    5.00Junior
      subordinated debentures
                    
                    
                    11,643
                    
                    
                    
                    286
                    
                    
                    
                    9.83
                    
                    
                    
                    14,645
                    
                    
                    
                    353
                    
                    
                    
                    9.64Total
      interest-bearing liabilities
                    
                    
                    467,749
                    
                    
                    
                    2,999
                    
                    
                    
                    2.56
                    
                    
                    
                    469,480
                    
                    
                    
                    3,931
                    
                    
                    
                    3.35Interest
      rate spread
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.51
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.11
                    %Non-interest-bearing
      liabilities
                    
                    
                    8,247
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8,456Total
      liabilities
                    
                    
                    475,996
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    477,936Stockholders’
      equity
                    
                    
                    33,177
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    35,271Total
      liabilities and stockholders’ equity
                    
                    $
                    509,173
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    513,207Net
      interest-earning assets
                    
                    $
                    8,338
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    8,920Net
      interest income
                    
                    
                    
                    
                    
                    $
                    3,038
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    2,598Net
      interest margin(3)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.55
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.17
                    %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    101.78
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    101.90
                    %





(1)
Includes non-accrual loans.


(2)
Includes assets classified as either available for sale or held to
maturity.


(3) Net
interest income divided by average interest-earning assets.


- 25
-





For
      the nine months endedJune
      30, 2009
                    
                    
                    June
      30, 2008(Dollars
      in thousands)
                    
                    Average
                      Balance
                    
                    
                    Interest
                    
                    
                    Average
                      Yield/
                      Cost
                    
                    
                    Average
                      Balance
                    
                    
                    Interest
                    
                    
                    Average
                      Yield/
                      CostInterest-earning
      assets:Loans
      receivable(1)
                    
                    $
                    289,581
                    
                    
                    $
                    12,561
                    
                    
                    
                    5.78
                    %
                    
                    $
                    281,892
                    
                    
                    $
                    13,346
                    
                    
                    
                    6.31
                    %Mortgage-related
      securities(2)
                    
                    
                    121,215
                    
                    
                    
                    4,410
                    
                    
                    
                    4.85
                    
                    
                    
                    128,085
                    
                    
                    
                    4,659
                    
                    
                    
                    4.85Investment
      securities(2)
                    
                    
                    33,996
                    
                    
                    
                    1,154
                    
                    
                    
                    4.53
                    
                    
                    
                    39,612
                    
                    
                    
                    1,511
                    
                    
                    
                    5.09Other
      interest-earning assets
                    
                    
                    17,916
                    
                    
                    
                    31
                    
                    
                    
                    0.23
                    
                    
                    
                    20,332
                    
                    
                    
                    411
                    
                    
                    
                    2.70Total
      interest-earning assets
                    
                    
                    462,708
                    
                    
                    
                    18,156
                    
                    
                    
                    5.23
                    
                    
                    
                    469,921
                    
                    
                    
                    19,927
                    
                    
                    
                    5.65Non-interest-earning
      assets
                    
                    
                    33,777
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    34,662Total
      assets
                    
                    $
                    496,485
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    504,583Interest-bearing
      liabilities:Deposits
                    
                    $
                    331,160
                    
                    
                    
                    4,636
                    
                    
                    
                    1.87
                    
                    
                    $
                    343,913
                    
                    
                    
                    7,270
                    
                    
                    
                    2.82FHLB
      advances and other borrowings
                    
                    
                    113,206
                    
                    
                    
                    3,972
                    
                    
                    
                    4.68
                    
                    
                    
                    102,465
                    
                    
                    
                    4,008
                    
                    
                    
                    5.22Junior
      subordinated debentures
                    
                    
                    11,641
                    
                    
                    
                    857
                    
                    
                    
                    9.82
                    
                    
                    
                    15,058
                    
                    
                    
                    1,085
                    
                    
                    
                    9.61Total
      interest-bearing liabilities
                    
                    
                    456,007
                    
                    
                    
                    9,465
                    
                    
                    
                    2.77
                    
                    
                    
                    461,436
                    
                    
                    
                    12,363
                    
                    
                    
                    3.57Interest
      rate spread
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.46
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.08
                    %Non-interest-bearing
      liabilities
                    
                    
                    7,726
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,631Total
      liabilities
                    
                    
                    463,733
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    469,067Stockholders’
      equity
                    
                    
                    32,752
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    35,516Total
      liabilities and stockholders’ equity
                    
                    $
                    496,485
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    504,583Net
      interest-earning assets
                    
                    $
                    6,701
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    8,485Net
      interest income
                    
                    
                    
                    
                    
                    $
                    8,691
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    7,564Net
      interest margin(3)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.50
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.15
                    %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    101.47
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    101.84
                    %





(1)
Includes non-accrual loans.


(2)
Includes assets classified as either available for sale or held to
maturity.


(3) Net
interest income divided by average interest-earning assets.





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
sufficient 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
and criticized assets, the status of past due principal and interest payments,
general economic conditions, particularly as they relate to the Company’s
primary market area, and other factors related to the collectability of the
Company’s loan portfolio.  For the three and nine months ended June
30, 2009, the provision for loan losses was $750,000 and $1.5 million,
respectively. The Company did not establish any provision for the three months
ended June 30, 2008 and only a small provision of $56,000 for the nine months
ended June 30, 2008. During the three and nine months ended June 30, 2009, loans
aggregating $1.3 million and $1.5 million, respectively, were charged off
against the provision for loan loss. The loans charged off during the three
months ended June 30, 2009 included four commercial mortgage loans aggregating
$662,000, a $195,000 home equity loan, and a $414,000 commercial business loan,
all of which had been non-performing at March 31, 2009. For the three and nine
months ended June 30, 2009, the level of allowance for loan loss was based on
the Company’s monthly review of the credit quality of its loan portfolio and the
continual evaluation of the classified and pass loan portfolios in order to
maintain the overall allowance for loan losses at a level deemed appropriate,
and took into account the effects of the charge-offs.


- 26
-




At June
30, 2009, non-performing assets increased $800,000 to $3.2 million, or 0.6%, of
total assets, from $2.4 million at September 30, 2008. This increase was
primarily the result of an increase in non-accrual loans of $2.0 million,
comprised of a $1.4 million commercial real estate loan secured by a shopping
center in Philadelphia, three commercial business loans aggregating $576,000,
four home equity loans aggregating $273,000 and two single-family residential
mortgages aggregating $593,000. The increase in non-accrual loans was partially
offset by returns to performing status of two home equity loans aggregating
$237,000 and one $114,000 single-family residential mortgage. In addition, a
$419,000 commercial business loan that was non-performing at September 30, 2008
was charged off during the current quarter. The Company's coverage ratio, which
is the ratio of the allowance for loan losses to non-performing loans, was
108.8% and 142.7% at June 30, 2009 and September 30, 2008, respectively. In
addition, loans 30 to 89 days delinquent increased $400,000, from $3.1 million
at September 30, 2008 to $3.5 million at June 30, 2009. The increase was
primarily the result of increases of $923,000, $523,000 and $360,000 in
commercial mortgage loans, commercial business loans, and single-family
residential mortgages, respectively, which were 30 to 89 days delinquent,
partially offset by the return to current status of $1.4 million of construction
loans that had been 30 to 89 days delinquent at September 30, 2008.




At June
30, 2009, the Bank’s classified assets increased by $6.2 million to $18.1
million compared to $11.9 million at September 30, 2008.  At June 30,
2009, classified assets were comprised of substandard commercial business and
commercial real estate loans aggregating $10.0 million, home equity loans
aggregating $273,000, single-family residential mortgage loans aggregating
$944,000, a construction loan of $195,000, private-label collateralized mortgage
obligations aggregating $1.9 million, pooled trust preferred securities
aggregating $2.1 million, a $1.6 million corporate bond and a portion of the
Company’s $3.1 million investment in a mutual fund, $722,000 of which was rated
below investment grade at June 30, 2009. In addition, a $350,000 commercial
business loan was classified as doubtful as of June 30, 2009.




Management
continues to review its loan portfolio to determine the extent, if any, to which
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.For the three
months ended June 30, 2009, non-interest income decreased $141,000 to $562,000
as compared to the same period last year.  The decrease was primarily
due to a smaller increase in the cash surrender value of bank owned life
insurance, as compared to the comparable 2008 quarter combined with a $54,000
decrease in service charges and other fees and a $29,000 decrease in the
earnings of the Bank’s insurance subsidiary as compared to the same period last
year.




Non-interest
income decreased $1.3 million to $830,000 for the nine months ending June 30,
2009 as compared to the same period last year. The decrease was primarily the
result of the $1.2 million net non-cash impairment charge, recorded in the prior
quarter, related to the determination that a portion of the decline in value of
the Company’s $3.1 million investment in a mutual fund, its $280,000 investment
in a pooled trust preferred security and its $76,000 investment in three
collateralized mortgage obligation securities were other than temporary as
discussed in Notes 2 and 3 of the Notes to Unaudited Consolidated Financial
Statements.




The
market value of the Company’s investments may be affected by factors other than
the underlying performance of the issuer or composition of the bonds themselves,
such as ratings downgrades, adverse changes in business climate and lack of
liquidity for resales of certain investment securities. The Company
periodically, but not less than quarterly, evaluates investments and other
assets for impairment indicators. The Company may be required to record
additional impairment charges if investments suffer a decline in value that is
considered other-than-temporary. If it is determined that an impairment has
occurred, the Company would be required to charge against earnings the
credit-related portion of the OTTI, which could have a material adverse effect
on results of operations in the period in which the write-off
occurs.




- 27
-




Non-interest
Expense.Non-interest expense increased $406,000 to $3.4
million for the quarter ended June 30, 2009 as compared to the same period last
year.  The increase for the quarter ended June 30, 2009 was primarily
due to a $362,000 increase in federal deposit insurance premiums (which included
a one-time assessment of $240,000) as compared to the same period last year.
These increases were partially offset by decreases of $58,000, $45,000 and
$23,000 in professional fees, compensation and advertising expense,
respectively, as compared to the same period last year.




Non-interest
expense increased $806,000 to $9.8 million for the nine months ended June 30,
2009, as compared to the same period last year. The increase was primarily due
to a $591,000 increase in federal deposit insurance premiums (which included the
one-time assessment of $240,000 noted above) as compared to the same period last
year. The large increase in federal deposit insurance premiums for both periods
was due to the Federal Deposit Insurance Coorporation’s decision to increase
rates applicable to all insured institutions in response to the increased level
of failed institutions and the costs thereof to the Deposit Insurance Fund as
well as to impose a special assessment of 5 basis points.




Income Tax Expense.The Company’s income tax
expense decreased $260,000 to a benefit of $240,000 and decreased $588,000 to a
benefit of $550,000 for the three and nine months ended June 30, 2009,
respectively, as compared to the same periods last year. The decreases were
largely the result of the OTTI charges recorded on certain investment securities
as mentioned previously combined with the significantly increased loan loss
provisions.




Liquidity
and Capital Resources




The Company’s liquidity, represented by
cash and cash equivalents, is a product of its operating, investing and
financing activities. The Company’s primary sources of funds are deposits,
amortization, prepayments and maturities of outstanding loans and
mortgage-related securities, sales of loans, maturities of investment securities
and other short-term investments, borrowings and funds provided from operations.
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 and
mortgage-related securities prepayments are greatly influenced by general
interest rates, economic conditions and competition. In addition, the Company
invests excess funds in overnight deposits and other short-term interest-earning
assets which provide liquidity to meet lending requirements. The Company has the
ability to obtain advances from the FHLBank Pittsburgh through several credit
programs with the FHLB in amounts not to exceed the Bank’s maximum borrowing
capacity and subject to certain conditions, including holding a predetermined
amount of FHLB stock as collateral. As an additional source of funds, the
Company has access to the FRB discount window, but only after it has exhausted
its access to the FHLBank. At June 30, 2009, the Company had $102.7 million of
outstanding advances and $7.5 million of overnight borrowings from the FHLBank
Pittsburgh.  The Bank currently has the ability to obtain up to $92.5
million of additional advances from the FHLBank 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.  As of June 30, 2009,
total approved loan commitments outstanding amounted to $3.6 million, not
including $10.8 million in loans in process.  At the same date,
commitments under unused lines of credit amounted to $35.8
million.  Certificates of deposit scheduled to mature in one year or
less at June 30, 2009 totaled $120.5 million. Based upon the Company’s
historical experience, management believes that a significant portion of
maturing deposits will remain with the Company.




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 (or risk-based) equal to at least 8.0%
of its risk-weighted assets.  At June 30, 2009, the Bank had tangible
capital and core capital equal to 8.31% of adjusted total assets and total
capital equal to 13.6% of risk-weighted assets.  However, as a result
of the supervisory agreement discussed in Item 2 of Part I hereof, the Bank is
required to maintain core and risk-based capital in excess of 7.5% and 12.5%,
respectively.  The Bank is in compliance with such higher capital
requirements imposed by the supervisory agreement.


- 28
-





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 Annual Report on
Form 10-K for the year ended September 30, 2008.




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 up to 300 basis points, and a decline of
100 basis points.




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 June 30, 2009.





Net Portfolio Value(Dollars in thousands)Changes in
                            Rates in
                            Basis Points
                          
                          
                          Amount
                          
                          
                          Dollar
                            Change
                          
                          
                          Percentage
                            Change
                          
                          
                          Net
                            Portfolio Value As
                            a % of Assets
                          
                          
                          Change300
                          
                          
                          $
                          40,973
                          
                          
                          $
                          (12,980
                          )
                          
                          
                          (24
                          )%
                          
                          
                          7.84
                          %
                          
                          
                          (210
                          )
                          bp200
                          
                          
                          
                          46,312
                          
                          
                          
                          (7,640
                          )
                          
                          
                          (14
                          )
                          
                          
                          8.74
                          
                          
                          
                          (120
                          )
                          bp100
                          
                          
                          
                          50,991
                          
                          
                          
                          (2,961
                          )
                          
                          
                          (5
                          )
                          
                          
                          9.49
                          
                          
                          
                          (45
                          )
                          bp50
                          
                          
                          
                          52,685
                          
                          
                          
                          (1,267
                          )
                          
                          
                          (2
                          )
                          
                          
                          9.75
                          
                          
                          
                          (19
                          )
                          bp0
                          
                          
                          
                          53,952
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          9.94
                          
                          
                          
                          —
                          
                          bp(50
                          )
                          
                          
                          54,093
                          
                          
                          
                          140
                          
                          
                          
                          —
                          
                          
                          
                          9.92
                          
                          
                          
                          (2
                          )
                          bp(100
                          )
                          
                          
                          54,317
                          
                          
                          
                          364
                          
                          
                          
                          1
                          
                          
                          
                          9.94
                          
                          
                          
                          —
                          
                          bp


- 29
-


As of June 30, 2009, the Bank’s NPV was
$54.0 million or 9.94% of the market value of assets.  Following a 200
basis point increase in interest rates, the Bank’s “post shock” NPV would be
$46.3 million or 8.74% of the market value of assets.  The change in
the NPV ratio or the Bank’s sensitivity measure was a decline of 120 basis
points.





As of March 31, 2009, the Bank’s NPV
was $51.6 million or 9.54% of the market value of assets.  Following a
200 basis point increase in interest rates, the Bank’s “post shock” NPV would be
$45.9 million or 8.68% of the market value of assets.  The change in
the NPV ratio or the Bank’s sensitivity measure was a decline of 86 basis
points.





Item
4T.                      Controls
and Procedures




Our management evaluated, with the
participation of our Chief Executive Officer and our Chief Financial Officer,
the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) or 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 (i) recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and regulations
and (ii) accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure and that such disclosure controls and procedures are operating in an
effective manner.




No change in our internal control over
financial reporting (as defined in Rule 13a-15(f) or 15d-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.


- 30
-





PART
II





Item
      1.
                              Legal ProceedingsNo
      material changes have occurred in the legal proceedings previously
      disclosed in Item 3 of the Company’s Form 10-K for the fiscal year ended
      September 30, 2008.Item
      1A.
                              Risk FactorsThere
      were no material changes from the risk factors described in the Company’s
      Annual Report onForm
      10-K for the fiscal year ended September 30, 2008.Item
      2.
                              Unregistered Sales of Equity Securities and Use of
      Proceeds(a)
      – (b) Not applicable.(c)
      Not applicable.  No shares were repurchased by the Company
      during the quarter.Item
      3.
                              Defaults Upon Senior
    SecuritiesNot
      applicable.Item
      4.
                              Submission of Matters to a Vote of Security
      HoldersNot
      applicable.Item
      5.
                              Other Information(a)
      Not applicable(b)
      No changes in procedures.Item
      6.
                              ExhibitsList
      of
Exhibits





ExhibitNo
                      
                      Description3.1
                      
                      Amended
      and Restated Articles of Incorporation of First Keystone Financial, Inc.
      13.2
                      
                      Amended
      and Restated Bylaws of First Keystone Financial, Inc. 14.1
                      
                      Specimen
      Stock Certificate of First Keystone Financial, Inc. 24.2
                      
                      Instrument
      defining the rights of security holders **10.1
                      
                      Form
      of Amended and Restated Severance Agreement between First Keystone
      Financial, Inc. and Carol Walsh 3,*10.2
                      
                      Amended
      and Restated 1995 Stock Option Plan 3, *10.3
                      
                      Amended
      and Restated 1995 Recognition and Retention Plan and Trust Agreement
      3,*10.4
                      
                      Amended
      and Restated 1998 Stock Option Plan 3, *10.5
                      
                      Form
      of Amended and Restated Severance Agreement between First Keystone Bank
      and Carol Walsh 3, *10.6
                      
                      Amended
      and Restated First Keystone Bank Supplemental Executive Retirement Plan
      4,*10.7
                      
                      Amended
      and Restated Transition, Consulting, Noncompetition and Retirement
      Agreement by and between First Keystone Financial, Inc., First Keystone
      Bank and Donald S. Guthrie 3,*10.8
                      
                      Severance
      and Release Agreement by and among First Keystone Financial, Inc., First
      Keystone Bank and Thomas M. Kelly
5,*


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10.9
                
                Letter
      dated December 11, 2006 with respect to appointment to Board
    610.10
                
                Form
      of Registration Rights Agreement 711
                
                Statement
      re: computation of per share earnings.  See Note 7 of Notes to
      Unaudited Consolidated Financial Statements included in Item 1 of Part I
      hereof.31.1
                
                Section
      302 Certification of Chief Executive Officer31.2
                
                Section
      302 Certification of Chief Financial Officer32.1
                
                Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 200232.2
                
                Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 200299.2
                
                Supervisory
      Agreement between First Keystone Financial, Inc. and the Office of Thrift
      Supervision dated February 13, 2006. 899.3
                
                Supervisory
      Agreement between First Keystone Bank and the Office of Thrift Supervision
      dated February 13, 2006.
8





____________________________




(1)
            Incorporated
      by reference from Exhibit 3.1(with respect to the Articles) and Exhibit
      3.2 (with respect to the Bylaws) on Form 8-K filed by the Registrant with
      the SEC on February 12, 2008.




(2)
            Incorporated
      by reference from the Registration Statement on Form S-1
      (Registration  No. 33-84824) filed by the Registrant with the
      SEC on October 6, 1994,
as  amended.




(3)
            Incorporated
      by reference from Exhibits 10.1, 10.4, 10.6, 10.5, 10.2 and 10.3
      respectively, in the Form 8-K filed by the Registrant with the SEC on
      December 1, 2008 (File No.
000-25328).




(4)
            Incorporated
      by reference from Exhibit 10.1 in the Form 8-K filed by the Registrant
      with SEC on July 2, 2007 (File No.
000-25328).




(5)
            Incorporated
      by reference from Exhibit 10.1 in the Form 8-K filed by the Registrant
      with the SEC on August 19, 2008.




(6)
            Incorporated
      by reference from Exhibit 10.1 in the Form 8-K filed by the Registrant
      with the SEC on December 20, 2006.




(7)
            Incorporated
      by reference from the Form 10-K filed by the Registrant with the SEC on
      December 29, 2006




(8)
            Incorporated
      by reference from the Form 10-Q for the quarter ended December 31, 2005
      filed by the Registrant with the SEC on February 14,
  2006.




(*)
            Consists
      of a management contract or compensatory
plan




(**)
            The
      Company has no instruments defining the rights of holders of long-term
      debt where the amount of securities authorized under such instrument
      exceeds 10% of the total assets of the Company and its subsidiaries on a
      consolidated basis.  The Company hereby agrees to furnish a copy
      of any such instrument to the SEC upon
request.


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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:
      August 14, 2009
                      By:
                      /s/ Hugh J. GarchinskyHugh
      J. GarchinskyPresident
      and Chief Executive OfficerDate:
      August 14, 2009
                      By:
                      /s/ David M. TakatsDavid
      M. TakatsChief
      Financial
Officer


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