##### 



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 OR
 o
    
    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.
  Pennsylvania
    
    23-2576479(State or other jurisdiction 
of incorporation or organization)
    
    (I.R.S. Employer
Identification Number)22 West State StreetMedia, Pennsylvania
    
    19063(Address of principal executive office)
    
    (Zip Code)
  þ o
  o o þ
 o þ




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##### 



FIRST KEYSTONE FINANCIAL, INC.
 Contents
 PagePART I            CONDENSED FINANCIAL INFORMATION:Item 1. Financial StatementsUnaudited Consolidated Statements of Financial Condition as of
June 30, 2007 and September 30, 2006
    
    
    1Unaudited Consolidated Statements of Income for the Three and Nine
Months Ended June 30, 2007 and 2006
    
    
    2Unaudited Consolidated Statement of Changes in Stockholders Equity
for the Nine Months Ended June 30, 2007 and 2006
    
    
    3Unaudited Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 2007 and 2006
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22SIGNATURES
    
    
    24Section 302 Certification of Chief Executive OfficerSection 302 Certification of Chief Financial OfficerCertification of Chief Executive Officer pursuant to Section 906Certification of Chief Financial Officer pursuant to Section 906




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##### 



June 30,
    
    
    September 30,2007
    
    
    2006ASSETSCash and amounts due from depository institutions
    
    $
    7,155
    
    
    $
    4,072Interest-bearing deposits with depository institutions
    
    
    33,738
    
    
    
    8,715Total cash and cash equivalents
    
    
    40,893
    
    
    
    12,787Investment securities available for sale
    
    
    29,299
    
    
    
    33,386Mortgage-related securities available for sale
    
    
    77,604
    
    
    
    70,030Loans held for sale
    
    
    
    
    
    
    1,334Investment securities held to maturity  at amortized cost
(approximate fair value of $3,219 at June 30, 2007
and $3,268 at September 30, 2006)
    
    
    3,257
    
    
    
    3,257Mortgage-related securities held to maturity  at amortized cost
(approximate fair value of $31,848 at June 30, 2007
and $37,163 at September 30, 2006)
    
    
    33,107
    
    
    
    38,355Loans receivable (net of allowance for loan loss of $3,234 and $3,367
at June 30, 2007 and September 30, 2006, respectively)
    
    
    304,286
    
    
    
    323,220Accrued interest receivable
    
    
    2,512
    
    
    
    2,667Real estate owned
    
    
    
    
    
    
    2,450FHLBank stock, at cost
    
    
    5,861
    
    
    
    6,233Office properties and equipment, net
    
    
    4,778
    
    
    
    4,643Deferred income taxes
    
    
    3,560
    
    
    
    2,281Cash surrender value of life insurance
    
    
    17,062
    
    
    
    16,624Prepaid expenses and other assets
    
    
    2,367
    
    
    
    5,693TOTAL ASSETS
    
    $
    524,586
    
    
    $
    522,960LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Deposits:Non-interest-bearing
    
    $
    17,264
    
    
    $
    17,232Interest-bearing
    
    
    345,667
    
    
    
    341,584Total deposits
    
    
    362,931
    
    
    
    358,816Advances from FHLBank and other borrowings
    
    
    104,398
    
    
    
    107,241Junior subordinated debentures
    
    
    15,270
    
    
    
    21,483Accrued interest payable
    
    
    2,407
    
    
    
    2,164Advances from borrowers for taxes and insurance
    
    
    3,042
    
    
    
    866Accounts payable and accrued expenses
    
    
    2,493
    
    
    
    3,731Total liabilities
    
    
    490,541
    
    
    
    494,301Commitments and contingencies
    
    
    
    
    
    
    Stockholders Equity:Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.01 par value, 20,000,000 shares authorized; issued 2,712,556
shares; outstanding at June 30, 2007 and September 30, 2006, 2,432,498
and 2,027,928 shares, respectively
    
    
    27
    
    
    
    27Additional paid-in capital
    
    
    12,590
    
    
    
    12,974Employee stock ownership plan
    
    
    (3,012
    )
    
    
    (3,089
    )Treasury stock at cost: 280,058 shares at June 30, 2007 and 684,628 shares
at September 30, 2006
    
    
    (4,251
    )
    
    
    (10,522
    )Accumulated other comprehensive loss
    
    
    (1,735
    )
    
    
    (787
    )Retained earnings  partially restricted
    
    
    30,426
    
    
    
    30,056Total stockholders equity
    
    
    34,045
    
    
    
    28,659TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    524,586
    
    
    $
    522,960




---



##### 



Three months ended
    
    
    Nine months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006INTEREST INCOME:Interest and fees on loans
    
    $
    5,109
    
    
    $
    5,106
    
    
    $
    15,723
    
    
    $
    14,626Interest and dividends on:Mortgage-related securities
    
    
    1,264
    
    
    
    1,323
    
    
    
    3,680
    
    
    
    3,799Investment securities:Taxable
    
    
    371
    
    
    
    296
    
    
    
    995
    
    
    
    889Tax-exempt
    
    
    48
    
    
    
    187
    
    
    
    344
    
    
    
    560Dividends
    
    
    77
    
    
    
    99
    
    
    
    320
    
    
    
    290Interest-bearing deposits
    
    
    176
    
    
    
    53
    
    
    
    353
    
    
    
    145Total interest income
    
    
    7,045
    
    
    
    7,064
    
    
    
    21,415
    
    
    
    20,309INTEREST EXPENSE:Interest on:Deposits
    
    
    2,864
    
    
    
    2,198
    
    
    
    8,406
    
    
    
    6,025FHLBank advances and other borrowings
    
    
    1,211
    
    
    
    1,533
    
    
    
    3,958
    
    
    
    4,387Junior subordinated debentures
    
    
    465
    
    
    
    491
    
    
    
    1,466
    
    
    
    1,447Total interest expense
    
    
    4,540
    
    
    
    4,222
    
    
    
    13,830
    
    
    
    11,859NET INTEREST INCOME
    
    
    2,505
    
    
    
    2,842
    
    
    
    7,585
    
    
    
    8,450PROVISION FOR LOAN LOSSES
    
    
    100
    
    
    
    81
    
    
    
    275
    
    
    
    651NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    2,405
    
    
    
    2,761
    
    
    
    7,310
    
    
    
    7,799NON-INTEREST INCOME:Service charges and other fees
    
    
    437
    
    
    
    402
    
    
    
    1,234
    
    
    
    1,141Net gain on sales of:Loans held for sale
    
    
    39
    
    
    
    15
    
    
    
    163
    
    
    
    157Investment and mortgage-related securities
    
    
    
    
    
    
    3
    
    
    
    120
    
    
    
    3Real estate owned
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    158Increase in cash surrender value of life insurance
    
    
    145
    
    
    
    152
    
    
    
    438
    
    
    
    448Other income
    
    
    105
    
    
    
    96
    
    
    
    310
    
    
    
    335Total non-interest income
    
    
    726
    
    
    
    668
    
    
    
    2,326
    
    
    
    2,242NON-INTEREST EXPENSE:Salaries and employee benefits
    
    
    1,481
    
    
    
    1,454
    
    
    
    4,452
    
    
    
    4,458Occupancy and equipment
    
    
    414
    
    
    
    410
    
    
    
    1,214
    
    
    
    1,193Professional fees
    
    
    262
    
    
    
    407
    
    
    
    1,132
    
    
    
    1,228Federal deposit insurance premium
    
    
    42
    
    
    
    38
    
    
    
    116
    
    
    
    87Data processing
    
    
    149
    
    
    
    138
    
    
    
    427
    
    
    
    390Advertising
    
    
    95
    
    
    
    138
    
    
    
    321
    
    
    
    346Deposit processing
    
    
    153
    
    
    
    147
    
    
    
    450
    
    
    
    457Other
    
    
    450
    
    
    
    449
    
    
    
    1,324
    
    
    
    1,241Total non-interest expense
    
    
    3,046
    
    
    
    3,181
    
    
    
    9,436
    
    
    
    9,400INCOME BEFORE INCOME TAX BENEFIT
    
    
    85
    
    
    
    248
    
    
    
    200
    
    
    
    641INCOME TAX BENEFIT
    
    
    (30
    )
    
    
    (19
    )
    
    
    (170
    )
    
    
    (89
    )NET INCOME
    
    $
    115
    
    
    $
    267
    
    
    $
    370
    
    
    $
    730BASIC EARNINGS PER COMMON SHARE
    
    $
    0.05
    
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    0.39DILUTED EARNINGS PER COMMON SHARE
    
    $
    0.05
    
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    0.38
  - 2 -




---



##### 



Employee
    
    
    
    
    
    
    Accumulated
    
    
    RetainedAdditional
    
    
    stock
    
    
    
    
    
    
    other
    
    
    earnings-
    
    
    TotalCommon
    
    
    paid-in
    
    
    ownership
    
    
    Treasury
    
    
    comprehensive
    
    
    partially
    
    
    stockholdersstock
    
    
    capital
    
    
    plan
    
    
    stock
    
    
    loss
    
    
    restricted
    
    
    equityBALANCE AT OCTOBER 1, 2005
    
    $
    27
    
    
    $
    12,920
    
    
    $
    (3,185
    )
    
    $
    (10,590
    )
    
    $
    (209
    )
    
    $
    29,230
    
    
    $
    28,193Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    730
    
    
    
    730Other comprehensive income, net of tax:Net unrealized loss on securities 

net of reclassification adjustment 

net of tax benefit of $822 (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,595
    )
    
    
    
    
    
    
    (1,595
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (865
    )ESOP shares committed to be released
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71Share-based compensation
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19Excess of fair value above cost of
ESOP shares committed to be released
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41Exercise of stock options
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    6Dividends paid  $0.11 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (208
    )
    
    
    (208
    )BALANCE AT JUNE 30, 2006
    
    $
    27
    
    
    $
    12,977
    
    
    $
    (3,114
    )
    
    $
    (10,581
    )
    
    $
    (1,804
    )
    
    $
    29,752
    
    
    $
    27,257BALANCE AT OCTOBER 1, 2006
    
    $
    27
    
    
    $
    12,974
    
    
    $
    (3,089
    )
    
    $
    (10,522
    )
    
    $
    (787
    )
    
    $
    30,056
    
    
    $
    28,659Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    370Other comprehensive income, net of tax:Net unrealized loss on securities
net of reclassification adjustment
net of tax benefit of 488 (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (948
    )
    
    
    
    
    
    
    (948
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (578
    )ESOP shares committed to be released
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77Share-based compensation
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26Excess of fair value above cost of
ESOP shares committed to be released
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34Exercise of stock options
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    57Release of treasury shares for
equity offering
    
    
    
    
    
    
    (430
    )
    
    
    
    
    
    
    6,200
    
    
    
    
    
    
    
    
    
    
    
    5,770BALANCE AT JUNE 30, 2007
    
    $
    27
    
    
    $
    12,590
    
    
    $
    (3,012
    )
    
    $
    (4,251
    )
    
    $
    (1,735
    )
    
    $
    30,426
    
    
    $
    34,045
 
 (1)
    
    Disclosure of reclassification amount, net of tax: June 30,2007
    
    
    2006Net unrealized depreciation arising during the period
    
    $
    (1,027
    )
    
    $
    (1,597
    )Less: reclassification adjustment for net gains included in net income
(net of tax of $41 and $1, respectively)
    
    
    79
    
    
    
    2Net unrealized loss on securities
    
    $
    (948
    )
    
    $
    (1,595
    )
  - 3 -




---



##### 



Nine months endedJune 30,2007
    
    
    2006OPERATING ACTIVITIES:Net income
    
    $
    370
    
    
    $
    730Adjustments to reconcile net income to net cash provided by operating activities:Provision for depreciation and amortization
    
    
    416
    
    
    
    400Amortization of premiums and discounts
    
    
    123
    
    
    
    245Increase in cash surrender value of life insurance
    
    
    (438
    )
    
    
    (448
    )Gain on sales of:Loans held for sale
    
    
    (163
    )
    
    
    (157
    )Investment securities available for sale
    
    
    (120
    )
    
    
    (46
    )Mortgage-related securities available for sale
    
    
    
    
    
    
    43Real estate owned
    
    
    (61
    )
    
    
    (158
    )Provision for loan losses
    
    
    275
    
    
    
    651Amortization of ESOP
    
    
    111
    
    
    
    112Deferred income taxes
    
    
    (791
    )
    
    
    250Share-based compensation
    
    
    26
    
    
    
    19Origination of loans held for sale
    
    
    (271
    )
    
    
    (4,857
    )Proceeds from the sale of loans
    
    
    1,605
    
    
    
    4,770Changes in assets and liabilities which provided (used) cash:Accrued interest receivable
    
    
    155
    
    
    
    27Prepaid expenses and other assets
    
    
    3,326
    
    
    
    4,510Accrued interest payable
    
    
    243
    
    
    
    206Accrued expenses
    
    
    (1,238
    )
    
    
    (368
    )Net cash provided by operating activities
    
    
    3,568
    
    
    
    5,929INVESTING ACTIVITIES:Loans originated
    
    
    (76,623
    )
    
    
    (111,166
    )Purchases of:Mortgage-related securities available for sale
    
    
    (17,974
    )
    
    
    (18,353
    )Investment securities available for sale
    
    
    (5,878
    )
    
    
    (338
    )Redemption of FHLBank stock
    
    
    372
    
    
    
    2,753Proceeds from sales of real estate owned
    
    
    2,511
    
    
    
    918Proceeds from sales of investment and mortgage-related securities available for sale
    
    
    7,912
    
    
    
    6,586Principal collected on loans
    
    
    95,446
    
    
    
    83,676Proceeds from maturities, calls, or repayments of:Investment securities available for sale
    
    
    1,220
    
    
    
    590Mortgage-related securities available for sale
    
    
    9,837
    
    
    
    10,351Mortgage-related securities held to maturity
    
    
    5,177
    
    
    
    6,266Investment securities held to maturity
    
    
    
    
    
    
    1,000Expenditures on real estate owned
    
    
    
    
    
    
    (6
    )Purchase of property and equipment
    
    
    (551
    )
    
    
    (332
    )Net cash provided by (used in) investing activities
    
    
    21,449
    
    
    
    (18,055
    )FINANCING ACTIVITIES:Net increase in deposit accounts
    
    
    4,115
    
    
    
    6,484Net decrease (increase) in FHLBank advances and other borrowings
    
    
    (2,843
    )
    
    
    3,251Net increase in advances from borrowers for taxes and insurance
    
    
    2,176
    
    
    
    2,188Exercise of stock options
    
    
    57
    
    
    
    6Net proceeds from equity offering
    
    
    5,770
    
    
    
    Retirement of junior subordinated debt
    
    
    (6,186
    )
    
    
    Cash dividend
    
    
    
    
    
    
    (208
    )Net cash provided by financing activities
    
    
    3,089
    
    
    
    11,721INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    28,106
    
    
    
    (405
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    12,787
    
    
    
    16,155CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    40,893
    
    
    $
    15,750SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:Cash payments for interest on deposits and borrowings
    
    $
    13,587
    
    
    $
    11,653Transfers of loans receivable into real estate owned
    
    
    
    
    
    
    3,337
  - 4 -




---



##### 



1.
    
    BASIS OF PRESENTATIONThe 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 month periods ended June 30, 2007 are not
necessarily indicative of the results to be expected for the fiscal year ending September
30, 2007 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, 2006.2.
    
    COMPREHENSIVE INCOME (LOSS)The Company presents as a component of comprehensive income the amounts from transactions
and other events which currently are excluded from consolidated statements of income and are
recorded directly to stockholders equity. This component consists exclusively of unrealized
gains and losses on available for sale securities. For the nine months ended June 30, 2007
and 2006, this activity is shown under the heading Other Comprehensive Income, as
presented in the Unaudited Consolidated Statement of Changes in Stockholders Equity. For
the three months ended June 30, 2007 and 2006, comprehensive income
(loss), net of tax, totaled $(759,000) and $(108,000), respectively.3.
    
    INVESTMENT SECURITIESThe amortized cost and approximate fair value, at June 30, 2007, of investment securities
available for sale and held to maturity, by contractual maturities, are as follows:
 June 30, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:U.S. Government and agency bonds:1 to 5 years
    
    $
    2,000
    
    
    $
    
    
    
    $
    (18
    )
    
    $
    1,982Over 10 years
    
    
    3,949
    
    
    
    
    
    
    
    (76
    )
    
    
    3,873Municipal obligations:5 to 10 years
    
    
    1,130
    
    
    
    
    
    
    
    (32
    )
    
    
    1,098Corporate bonds:1 to 5 years
    
    
    2,078
    
    
    
    34
    
    
    
    
    
    
    
    2,1125 to 10 years
    
    
    2,000
    
    
    
    
    
    
    
    (410
    )
    
    
    1,590Over 10 years
    
    
    7,667
    
    
    
    5
    
    
    
    (51
    )
    
    
    7,621Mutual funds
    
    
    10,076
    
    
    
    
    
    
    
    (343
    )
    
    
    9,733Other equity investments
    
    
    1,040
    
    
    
    250
    
    
    
    
    
    
    
    1,290Total
    
    $
    29,940
    
    
    $
    289
    
    
    $
    (930
    )
    
    $
    29,299Held to Maturity:Municipal obligations:5 to 10 years
    
    $
    3,257
    
    
    $
    
    
    
    $
    (38
    )
    
    $
    3,219
 - 5 -




---



##### 



Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. Government and
agency bonds
    
    $
    3,873
    
    
    $
    (76
    )
    
    $
    1,982
    
    
    $
    (18
    )
    
    $
    5,855
    
    
    $
    (94
    )Corporate bonds
    
    
    
    
    
    
    
    
    
    
    8,132
    
    
    
    (461
    )
    
    
    8,132
    
    
    
    (461
    )Municipal obligations
    
    
    3,219
    
    
    
    (38
    )
    
    
    968
    
    
    
    (32
    )
    
    
    4,187
    
    
    
    (70
    )Mutual funds
    
    
    
    
    
    
    
    
    
    
    9,230
    
    
    
    (343
    )
    
    
    9,230
    
    
    
    (343
    )Total
    
    $
    7,092
    
    
    $
    (114
    )
    
    $
    20,312
    
    
    $
    (854
    )
    
    $
    27,404
    
    
    $
    (968
    )
   September 30, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:U.S. Government bonds:5 to 10 years
    
    $
    2,000
    
    
    $
    
    
    
    $
    (24
    )
    
    $
    1,976Municipal obligations:5 to 10 years
    
    
    1,010
    
    
    
    21
    
    
    
    
    
    
    
    1,031Over 10 years
    
    
    8,910
    
    
    
    181
    
    
    
    (15
    )
    
    
    9,076Corporate bonds:1 to 5 years
    
    
    1,000
    
    
    
    39
    
    
    
    
    
    
    
    1,0395 to 10 years
    
    
    2,000
    
    
    
    
    
    
    
    (183
    )
    
    
    1,817Over 10 years
    
    
    7,941
    
    
    
    11
    
    
    
    (39
    )
    
    
    7,913Mutual funds
    
    
    9,229
    
    
    
    
    
    
    
    (276
    )
    
    
    8,953Other equity investments
    
    
    1,040
    
    
    
    547
    
    
    
    (6
    )
    
    
    1,581Total
    
    $
    33,130
    
    
    $
    799
    
    
    $
    (543
    )
    
    $
    33,386Held to Maturity:Municipal obligations:5 to 10 years
    
    $
    3,257
    
    
    $
    11
    
    
    $
    
    
    
    $
    3,268
 - 6 -




---



##### 



Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. Government and
agency bonds
    
    $
    
    
    
    $
    
    
    
    $
    1,976
    
    
    $
    (24
    )
    
    $
    1,976
    
    
    $
    (24
    )Corporate bonds
    
    
    5,201
    
    
    
    (18
    )
    
    
    3,439
    
    
    
    (204
    )
    
    
    8,640
    
    
    
    (222
    )Equity
    
    
    56
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    (6
    )Municipal bonds
    
    
    348
    
    
    
    
    
    
    
    985
    
    
    
    (15
    )
    
    
    1,333
    
    
    
    (15
    )Mutual funds
    
    
    
    
    
    
    
    
    
    
    8,952
    
    
    
    (276
    )
    
    
    8,592
    
    
    
    (276
    )Total
    
    $
    5,605
    
    
    $
    (24
    )
    
    $
    15,352
    
    
    $
    (519
    )
    
    $
    20,957
    
    
    $
    (543
    )
 4.
    
    MORTGAGE-RELATED SECURITIESMortgage-related securities available for sale and mortgage-related securities held to maturity, at
June 30, 2007, are summarized as follows:
 June 30, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:FHLMC pass-through certificates
    
    $
    14,188
    
    
    $
    1
    
    
    $
    (323
    )
    
    $
    13,866FNMA pass-through certificates
    
    
    31,037
    
    
    
    30
    
    
    
    (628
    )
    
    
    30,439GNMA pass-through certificates
    
    
    2,407
    
    
    
    4
    
    
    
    (29
    )
    
    
    2,382Collateralized mortgage obligations
    
    
    31,960
    
    
    
    22
    
    
    
    (1,065
    )
    
    
    30,917Total
    
    $
    79,592
    
    
    $
    57
    
    
    $
    (2,045
    )
    
    $
    77,604Held to Maturity:FHLMC pass-through certificates
    
    $
    12,657
    
    
    $
    2
    
    
    $
    (485
    )
    
    $
    12,174FNMA pass-through certificates
    
    
    20,379
    
    
    
    2
    
    
    
    (777
    )
    
    
    19,604Collateralized mortgage obligations
    
    
    71
    
    
    
    
    
    
    
    (1
    )
    
    
    70Total
    
    $
    33,107
    
    
    $
    4
    
    
    $
    (1,263
    )
    
    $
    31,848
  Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesPass-through
certificates
    
    $
    20,984
    
    
    $
    (446
    )
    
    $
    52,078
    
    
    $
    (1,796
    )
    
    $
    73,062
    
    
    $
    (2,242
    )Collateralized
mortgage
obligations
    
    
    2,828
    
    
    
    (22
    )
    
    
    27,722
    
    
    
    (1,044
    )
    
    
    30,550
    
    
    
    (1,066
    )Total
    
    $
    23,812
    
    
    $
    (468
    )
    
    $
    79,800
    
    
    $
    (2,840
    )
    
    $
    103,612
    
    
    $
    (3,308
    )
 - 7 -




---



##### 



September 30, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:FHLMC pass-through certificates
    
    $
    7,290
    
    
    $
    1
    
    
    $
    (67
    )
    
    $
    7,224FNMA pass-through certificates
    
    
    28,037
    
    
    
    34
    
    
    
    (474
    )
    
    
    27,597GNMA pass-through certificates
    
    
    2,966
    
    
    
    4
    
    
    
    (63
    )
    
    
    2,907Collateralized mortgage obligations
    
    
    33,188
    
    
    
    24
    
    
    
    (910
    )
    
    
    32,302Total
    
    $
    71,481
    
    
    $
    63
    
    
    $
    (1,514
    )
    
    $
    70,030Held to Maturity:FHLMC pass-through certificates
    
    $
    14,376
    
    
    $
    6
    
    
    $
    (450
    )
    
    $
    13,932FNMA pass-through certificates
    
    
    23,826
    
    
    
    3
    
    
    
    (751
    )
    
    
    23,078Collateralized mortgage obligations
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    153Total
    
    $
    38,355
    
    
    $
    9
    
    
    $
    (1,201
    )
    
    $
    37,163
  Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesPass-through certificates
    
    $
    14,955
    
    
    $
    (104
    )
    
    $
    55,887
    
    
    $
    (1,701
    )
    
    $
    70,842
    
    
    $
    (1,805
    )Collateralized mortgage
obligations
    
    
    
    
    
    
    
    
    
    
    31,965
    
    
    
    (910
    )
    
    
    31,965
    
    
    
    (910
    )Total
    
    $
    14,955
    
    
    $
    (104
    )
    
    $
    87,852
    
    
    $
    (2,611
    )
    
    $
    102,807
    
    
    $
    (2,715
    )
 - 8 -




---



##### 



5.
    
    LOANS RECEIVABLELoans receivable consist of the following:
 June 30,
    
    
    September 30,2007
    
    
    2006Real estate loans:Single-family
    
    $
    140,726
    
    
    $
    144,760Construction and land
    
    
    28,197
    
    
    
    38,158Multi-family and commercial
    
    
    61,427
    
    
    
    70,439Home equity and lines of credit
    
    
    58,453
    
    
    
    59,319Consumer loans
    
    
    1,271
    
    
    
    1,375Commercial loans
    
    
    23,374
    
    
    
    24,474Total loans
    
    
    313,448
    
    
    
    338,525Loans in process
    
    
    (6,152
    )
    
    
    (12,081
    )Allowance for loan losses
    
    
    (3,234
    )
    
    
    (3,367
    )Deferred loan costs
    
    
    224
    
    
    
    143Loans receivable  net
    
    $
    304,286
    
    
    $
    323,220
    June 30,
    
    
    September 30,2007
    
    
    2006Impaired loans with related allowance for loan
losses under SFAS No. 114
    
    $
    1,141
    
    
    $
    Impaired loans with no related allowance for
loan losses under SFAS No. 114
    
    
    25
    
    
    
    25Total impaired loans
    
    $
    1,166
    
    
    $
    25Valuation allowance related to impaired loans
    
    $
    264
    
    
    $
    
  Nine Months EndedJune 30,2007
    
    
    2006Balance beginning of period
    
    $
    3,367
    
    
    $
    3,475Provisions charged to income
    
    
    275
    
    
    
    651Charge-offs
    
    
    (455
    )
    
    
    (1,206
    )Recoveries
    
    
    47
    
    
    
    11Total
    
    $
    3,234
    
    
    $
    2,931
 - 9 -




---



##### 



6.
    
    DEPOSITSDeposits consist of the following major classifications:
 June 30,2007
    
    
    September 30, 2006Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentNon-interest-bearing
    
    $
    17,264
    
    
    
    4.8
    %
    
    $
    17,232
    
    
    
    4.8
    %NOW
    
    
    77,627
    
    
    
    21.4
    
    
    
    73,356
    
    
    
    20.5Passbook
    
    
    39,204
    
    
    
    10.8
    
    
    
    41,708
    
    
    
    11.6Money market demand
    
    
    36,412
    
    
    
    10.0
    
    
    
    40,591
    
    
    
    11.3Certificates of deposit
    
    
    192,424
    
    
    
    53.0
    
    
    
    185,929
    
    
    
    51.8Total
    
    $
    362,931
    
    
    
    100.0
    %
    
    $
    358,816
    
    
    
    100.0
    %
 7.
    
    EARNINGS PER SHAREBasic earnings per share (EPS) is based upon the weighted average number of common shares
outstanding, while diluted net income per share is based upon the weighted average number of
common shares outstanding and common share equivalents that would arise from the exercise of
dilutive securities. All dilutive shares consist of options the exercise price of which is
lower than the market price of the common stock covered thereby at the dates presented. At
June 30, 2007, there were no anti-dilutive shares. At June 30, 2006, anti-dilutive shares
consisted of options covering 2,221 shares.The calculated basic and diluted EPS is as follows:
 For the Three Months Ended
    
    
    For the Nine Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator  Net income
    
    $
    115
    
    
    $
    267
    
    
    $
    370
    
    
    $
    730Denominators:Basic shares outstanding
    
    
    2,307,671
    
    
    
    1,892,876
    
    
    
    2,200,013
    
    
    
    1,890,601Effect of dilutive securities
    
    
    18,037
    
    
    
    22,688
    
    
    
    18,240
    
    
    
    22,830Diluted shares outstanding
    
    
    2,325,708
    
    
    
    1,915,564
    
    
    
    2,218,253
    
    
    
    1,913,431EPS:Basic
    
    $
    0.05
    
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    0.39Diluted
    
    $
    0.05
    
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    0.38
 8.
    
    SHARE-BASED COMPENSATIONEffective October 1, 2005, the Company adopted Statement of Financial Accounting Standard
(SFAS) No. 123 (Revised 2004), Share-Based Payment(SFAS No. 123(R)) using the modified
prospective application transition method. The adoption of SFAS No. 123(R) resulted in
approximately $6 and $26 compensation expense for the three and nine month periods ended
June 30, 2007, respectively. Compensation expense for the three and nine month periods ended
June 30, 2006 was $6 and $19, respectively. There were no new grants of stock options or
other share-based payments during the nine months ended June 30, 2007 and, therefore,
additional disclosures for share-based compensation were omitted due to immateriality.
 - 10 -




---



##### 



A summary of award activity under the stock option plans as of June 30, 2007 and changes
during the nine month period is presented below:
 Number
    
    
    
    
    
    
    Weighted Averageof Option
    
    
    Exercise
    
    
    Exercise Price perShares
    
    
    Price Range
    
    
    shareOutstanding at October 1, 2006
    
    
    61,447
    
    
    $
    10.1321.89
    
    
    $
    13.17Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (4,570
    )
    
    
    10.13  14.25
    
    
    
    12.49Forfeited
    
    
    (527
    )
    
    
    19.75  21.89
    
    
    
    20.42Cancelled
    
    
    (1,694
    )
    
    
    19.75  21.89
    
    
    
    20.06Outstanding at June 30, 2007
    
    
    54,656
    
    
    $
    10.1321.89
    
    
    $
    12.94
 The weighted average remaining contractual term was approximately 2.8 years for all options
outstanding and approximately 2.6 years for 50,796 stock options exercisable as of June 30,
2007.As of June 30, 2007 there was approximately $6,400 of total unrecognized compensation
expense related to the unvested options granted under the stock option plans. This expense
is expected to be recognized over a weighted average period of 3 months.9.
    
    EQUITY OFFERINGIn December 2006, the Company conducted a private placement of 400,000 shares of common
stock resulting in gross proceeds of approximately $6.5 million. The offering was
undertaken by the Company to strengthen its capital position in accordance with a capital
plan designed to maintain the Companys capital at prudent levels as well as reduce its
debt-to-equity ratio to below 50%. In June 2007, the Company redeemed $6.0 million of its
outstanding trust preferred securities. The capital plan was adopted by the Company in April
2006 pursuant to a supervisory agreement between the Company and the OTS in February 2006.The shares sold in the private placement were offered to accredited investors in reliance on
an exemption from the registration requirements of the Securities Act of 1933, as amended
(the Securities Act). The shares have not been registered under the Securities Act or any
state securities laws and the securities may not be offered or sold absent registration or
an applicable exemption from the registration requirements of the Securities Act and
applicable state securities laws. In accordance with the terms of registration rights
agreement entered into with each of the purchasers in the private placement, the Company
filed a registration statement with the Securities and Exchange Commission to register such shares for resale, which registration statement became effective in May 2007.10.
    
    REGULATORY CAPITAL REQUIREMENTSThe 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.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, 2007, that
the Bank meets all regulatory capital adequacy requirements to which it is subject.
 - 11 -




---



##### 



The Banks actual regulatory capital amounts and ratios are presented in the following
table.
 Required for
    
    Well CapitalizedCapital Adequacy
    
    Under PromptActual
    
    Purpose
    
    Corrective ActionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAt June 30, 2007:Core Capital (to Adjusted Tangible
Assets)
    
    $
    48,880
    
    
    
    9.31
    %
    
    $
    20,994
    
    
    
    4.0
    %
    
    $
    26,243
    
    
    
    5.0
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    48,880
    
    
    
    15.08
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    19,449
    
    
    
    6.0Total Capital (to Risk-Weighted Assets)
    
    
    52,114
    
    
    
    16.08
    
    
    
    25,932
    
    
    
    8.0
    
    
    
    32,415
    
    
    
    10.0Tangible Capital (to Tangible Assets)
    
    
    48,796
    
    
    
    9.30
    
    
    
    7,872
    
    
    
    1.5
    
    
    
    N/A
    
    
    
    N/AAt September 30, 2006:Core Capital (to Adjusted Tangible
Assets)
    
    $
    47,771
    
    
    
    9.15
    %
    
    $
    20,819
    
    
    
    4.0
    %
    
    $
    26,096
    
    
    
    5.0
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    47,771
    
    
    
    13.96
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    20,539
    
    
    
    6.0Total Capital (to Risk-Weighted Assets)
    
    
    51,138
    
    
    
    14.94
    
    
    
    27,385
    
    
    
    8.0
    
    
    
    34,231
    
    
    
    10.0Tangible Capital (to Tangible Assets)
    
    
    47,771
    
    
    
    9.15
    
    
    
    7,829
    
    
    
    1.5
    
    
    
    N/A
    
    
    
    N/A
 On February 13, 2006, the Bank entered into a supervisory agreement with the 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,
2007, the Bank was in compliance with such requirement. As a result of entering into and
being subject to a supervisory agreement, the Bank is not deemed to be well-capitalized
for purposes of the prompt corrective action regulations of the OTS even though the Banks
regulatory capital is in excess of all regulatory capital requirements.11.
    
    RECENT ACCOUNTING PRONOUNCEMENTSIn February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments-an amendment of FASB Statements No. 133 and 140(SFAS No. 155.) SFAS No. 155
amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,to
permit fair value remeasurement for any hybrid financial instrument with an embedded
derivative that otherwise would require bifurcation, provided that the whole instrument is
accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140, Accounting for the
Impairment or Disposal of Long-Lived Assets, to allow a qualifying special-purpose entity
to hold a derivative financial instrument that pertains to a beneficial interest other than
another derivative financial instrument. SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of an entitys first fiscal year
beginning after September 15, 2006 (October 1, 2006 for the Company) and adoption did not
have a material impact on the Companys consolidated financial statements.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. SFAS No. 157 does not require any new fair value
measurements. The definition of fair value retains the exchange price notion in earlier
definitions of fair value. SFAS No. 157 clarifies that the exchange price is the price in an
orderly transaction between market participants to sell the asset or transfer the liability
in the market in which the reporting entity would transact for the asset or liability. The
definition focuses on the price that would be received to sell the asset or paid to transfer
the liability (an exit price), not the price that would be paid to acquire the asset or
received to assume the liability (an entry price). SFAS No. 157 emphasizes that fair value
is a market-based measurement, not an entity-specific measurement. This Statement is
effective for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. 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.
 - 12 -




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##### 



In June 2006, the FASB issued Interpretation No. 48 (FIN 48), FASB Interpretation No. 48
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109.
This Interpretation clarifies the accounting for uncertainty in income taxes recognized in
an enterprises financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes.This Interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to
be taken in a tax return. This Interpretation also provides guidance on recognition,
classification, interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 or
October 1, 2007 for the Company. The Company is currently evaluating the impact of this
pronouncement.In September 2006, the SEC Staff issued Staff Accounting Bulletin No.108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year
Financial Statements(SAB No. 108). SAB No. 108 requires the use of two alternative
approaches in quantitatively evaluating materiality of misstatements. If the misstatement as
quantified under either approach is material to the current year financial statements, the
misstatement must be corrected. If the effect of correcting the prior year misstatements, if
any, in the current year income statement is material, the prior year financial statements
should be corrected. This guidance is effective for the fiscal year ending September 30,
2007. In the year of adoption, misstatements may be corrected by treating the misstatement
as an accounting change and adjusting retained earnings rather than being included in the
current year income statement. The Company has determined that the guidance provided by SAB
No. 108 does not have a material effect on the current quarters financial statements.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities.This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. An entity shall report
unrealized gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. This statement is effective as of the beginning
of an entitys first fiscal year that begins after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of SFAS No.157. We are currently
evaluating the potential impact, if any, of the adoption of FASB Statement No. 159 on our
consolidated financial position or results of operations.
 - 13 -




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   General
  Critical Accounting Policies
   - 14 -




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##### 



Supervisory Agreements
      Comparison of Financial Condition at June 30, 2007 and September 30, 2006
  - 15 -




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##### 



Comparison of Results of Operations for the Three and Nine Months Ended June 30, 2007 and 2006
    - 16 -




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##### 



For the Three Months EndedJune 30, 2007
    
    
    June 30, 2006Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    CostInterest-earning assets:Loans receivable(1) (2)
    
    $
    308,893
    
    
    $
    5,109
    
    
    
    6.62
    %
    
    $
    315,829
    
    
    $
    5,106
    
    
    
    6.47
    %Mortgage-related securities(2)
    
    
    108,852
    
    
    
    1,264
    
    
    
    4.64
    
    
    
    117,212
    
    
    
    1,323
    
    
    
    4.51Investment securities(2)
    
    
    37,143
    
    
    
    496
    
    
    
    5.34
    
    
    
    45,289
    
    
    
    582
    
    
    
    5.14Other interest-earning assets
    
    
    18,784
    
    
    
    176
    
    
    
    3.75
    
    
    
    8,666
    
    
    
    53
    
    
    
    2.45Total interest-earning assets
    
    
    473,672
    
    
    $
    7,045
    
    
    
    5.95
    
    
    
    486,996
    
    
    $
    7,064
    
    
    
    5.80Non-interest-earning assets
    
    
    35,083
    
    
    
    
    
    
    
    
    
    
    
    36,841Total assets
    
    $
    508,755
    
    
    
    
    
    
    
    
    
    
    $
    523,837Interest-bearing liabilities:Deposits
    
    $
    359,175
    
    
    $
    2,864
    
    
    
    3.19
    
    
    $
    355,614
    
    
    $
    2,198
    
    
    
    2.47FHLB advances and other borrowings
    
    
    87,058
    
    
    
    1,211
    
    
    
    5.56
    
    
    
    112,458
    
    
    
    1,533
    
    
    
    5.45Junior subordinated debentures
    
    
    19,899
    
    
    
    465
    
    
    
    9.35
    
    
    
    21,499
    
    
    
    491
    
    
    
    9.14Total interest-bearing liabilities
    
    
    466,132
    
    
    
    4,540
    
    
    
    3.90
    
    
    
    489,571
    
    
    
    4,222
    
    
    
    3.45Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.05
    %
    
    
    
    
    
    
    
    
    
    
    2.35
    %Non-interest-bearing liabilities
    
    
    8,025
    
    
    
    
    
    
    
    
    
    
    
    6,933Total liabilities
    
    
    474,157
    
    
    
    
    
    
    
    
    
    
    
    496,504Stockholders equity
    
    
    34,598
    
    
    
    
    
    
    
    
    
    
    
    27,333Total liabilities and stockholders equity
    
    $
    508,755
    
    
    
    
    
    
    
    
    
    
    $
    523,837Net interest-earning assets (liabilities)
    
    $
    7,540
    
    
    
    
    
    
    
    
    
    
    $
    (2,575
    )Net interest income
    
    
    
    
    
    $
    2,505
    
    
    
    
    
    
    
    
    
    
    $
    2,842Net interest margin(3)
    
    
    
    
    
    
    
    
    
    
    2.12
    %
    
    
    
    
    
    
    
    
    
    
    2.33
    %Ratio of average interest-earning assets
to average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    101.62
    %
    
    
    
    
    
    
    
    
    
    
    99.47
    %
 
 (1)
    
    Includes non-accrual loans.(2)
    
    Includes assets classified as either available for sale or held for sale.(3)
    
    Net interest income divided by interest-earning assets. - 17 -




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##### 



For the Nine Months EndedJune 30, 2007
    
    
    June 30, 2006Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    CostInterest-earning assets:Loans receivable(1) (2)
    
    $
    314,937
    
    
    $
    15,723
    
    
    
    6.66
    %
    
    $
    309,472
    
    
    $
    14,626
    
    
    
    6.30
    %Mortgage-related securities(2)
    
    
    107,172
    
    
    
    3,680
    
    
    
    4.58
    
    
    
    115,142
    
    
    
    3,799
    
    
    
    4.40Investment securities(2)
    
    
    40,423
    
    
    
    1,659
    
    
    
    5.47
    
    
    
    46,138
    
    
    
    1,739
    
    
    
    5.03Other interest-earning assets
    
    
    13,698
    
    
    
    353
    
    
    
    3.44
    
    
    
    8,629
    
    
    
    145
    
    
    
    2.24Total interest-earning assets
    
    
    476,230
    
    
    $
    21,415
    
    
    
    6.00
    
    
    
    479,381
    
    
    $
    20,309
    
    
    
    5.65Non-interest-earning assets
    
    
    35,579
    
    
    
    
    
    
    
    
    
    
    
    35,339Total assets
    
    $
    511,809
    
    
    
    
    
    
    
    
    
    
    $
    514,720Interest-bearing liabilities:Deposits
    
    $
    355,711
    
    
    $
    8,406
    
    
    
    3.15
    
    
    $
    350,701
    
    
    $
    6,025
    
    
    
    2.29FHLB advances and other borrowings
    
    
    95,126
    
    
    
    3,958
    
    
    
    5.55
    
    
    
    108,389
    
    
    
    4,387
    
    
    
    5.40Junior subordinated debentures
    
    
    20,950
    
    
    
    1,466
    
    
    
    9.33
    
    
    
    21,508
    
    
    
    1,447
    
    
    
    8.97Total interest-bearing liabilities
    
    
    471,787
    
    
    
    13,830
    
    
    
    3.91
    
    
    
    480,598
    
    
    
    11,859
    
    
    
    3.29Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.09
    %
    
    
    
    
    
    
    
    
    
    
    2.36
    %Non-interest-bearing liabilities
    
    
    7,414
    
    
    
    
    
    
    
    
    
    
    
    6,352Total liabilities
    
    
    479,201
    
    
    
    
    
    
    
    
    
    
    
    486,950Stockholders equity
    
    
    32,608
    
    
    
    
    
    
    
    
    
    
    
    27,770Total liabilities and stockholders equity
    
    $
    511,809
    
    
    
    
    
    
    
    
    
    
    $
    514,720Net interest-earning assets (liabilities)
    
    $
    4,443
    
    
    
    
    
    
    
    
    
    
    $
    (1,217
    )Net interest income
    
    
    
    
    
    $
    7,585
    
    
    
    
    
    
    
    
    
    
    $
    8,450Net interest margin(3)
    
    
    
    
    
    
    
    
    
    
    2.12
    %
    
    
    
    
    
    
    
    
    
    
    2.35
    %Ratio of average interest-earning assets
to average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    100.94
    %
    
    
    
    
    
    
    
    
    
    
    99.75
    %
 
 (1)
    
    Includes non-accrual loans.(2)
    
    Includes assets classified as either available for sale or held for sale.(3)
    
    Net interest income divided by interest-earning assets. - 18 -




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##### 



Provision for Loan Losses. Form 10-Q
     Non-interest Income.
  Non-interest Expense.
  - 19 -




---



##### 



Income Tax Benefit.
 Liquidity and Capital Resources
     Impact of Inflation and Changing Prices
   - 20 -




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
    Net Portfolio Value(Dollars in thousands)Changes in
    
    
    
    
    
    
    
    
    
    
    
    
    
    NetRates in
    
    
    
    
    
    Dollar
    
    Percentage
    
    Portfolio Value AsBasis Points
    
    Amount
    
    Change
    
    Change
    
    a % of Assets
    
    Change300
    
    $
    40,466
    
    
    $
    (25,437
    )
    
    
    (39
    )%
    
    
    7.96
    %
    
    (431) bp200
    
    
    49,616
    
    
    
    (16,287
    )
    
    
    (25
    )
    
    
    9.58
    
    
    (269) bp100
    
    
    58,350
    
    
    
    (7,552
    )
    
    
    (11
    )
    
    
    11.06
    
    
    (121) bp0
    
    
    65,902
    
    
    
    
    
    
    
    
    
    
    
    12.27
    
    
    
    (100)
    
    
    71,438
    
    
    
    5,535
    
    
    
    8
    
    
    
    13.10
    
    
    83 bp(200)
    
    
    74,341
    
    
    
    8,439
    
    
    
    13
    
    
    
    13.48
    
    
    121 bp
   
 Item 4. Controls and Procedures
   - 21 -




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##### 



PART II
 
 Legal Proceedings
  
 Risk Factors
  
 Unregistered Sales of Equity Securities and Use of Proceeds
   
 Defaults Upon Senior Securities
  
 Submission of Matters to a Vote of Security Holders
  
 Other Information
   
 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. 24.1
    
    Specimen Stock Certificate of First Keystone Financial, Inc. 14.2
    
    Instrument defining the rights of security holders **10.1
    
    Employment Agreement between First Keystone Financial, Inc. and
Thomas M. Kelly dated December 1, 2004 3,*10.2
    
    Severance Agreement between First Keystone Financial, Inc. and
Carol Walsh dated December 1, 2004 3,*10.3
    
    1995 Stock Option Plan 4, *10.4
    
    1995 Recognition and Retention Plan and Trust Agreement 4,*10.5
    
    1998 Stock Option Plan 5, *10.6
    
    Employment Agreement between First Keystone Bank and Thomas M. Kelly
dated December 1, 2004 3, *10.7
    
    Severance Agreement between First Keystone Bank and Carol Walsh
dated December 1, 2004 3, *10.8
    
    Amended and Restated Bank Supplemental Executive Retirement Plan 5,*10.9
    
    Amendment No. 1 to the Employment Agreement between First Keystone
Financial, Inc. and Thomas M. Kelly 7,*10.10
    
    Amendment No. 1 to the Employment Agreement between First Keystone Bank
and Thomas M. Kelly 7,*10.11
    
    Transition, Consulting, Noncompetition and Retirement Agreement by and
between First Keystone Financial, Inc., First Keystone Bank and Donald S. Guthrie
8,*10.12
    
    Confidentiality Agreement between First Keystone Bank and Marshall Soss
and KarMar Realty Group*910.13
    
    Letter dated December 11, 2006 with respect to appointment to Board 10
 - 22 -




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##### 



ExhibitNo
    
    Description10.14
    
    Form of Registration Rights Agreement 1111
    
    Statement re: computation of per share earnings. See Note 2 to the
Consolidated Financial Statements included in Item 1 of Part 1 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 200299.1
    
    Code of Ethics 1299.2
    
    Supervisory Agreement between First Keystone Financial, Inc. and the
Office of Thrift Supervision dated February 13, 2006. 1399.3
    
    Supervisory Agreement between First Keystone Bank and the Office of
Thrift Supervision dated February 13, 2006. 13
 
 (1)
    
    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.(2)
    
    Incorporated by reference from Exhibit 3.2 in the Form 10-Q filed by the
Registrant with the SEC on May 14, 2007.(3)
    
    Incorporated by reference from Exhibits 10.1, 10.2, 10.6, and 10.8,,
respectively, in the Form 8-K filed by the Registrant with the SEC on December 7,
2004 (File No. 000-25328).(4)
    
    Incorporated by reference from Exhibit 10.9 in the Form 10-K filed by the
Registrant with SEC on December 29, 1995 (File No. 000-25328).(5)
    
    Incorporated from Appendix A of the Registrants definitive proxy
statement dated December 24, 1998 (File No. 000-25328).(6)
    
    Incorporated by reference from Exhibit 10.1 in the Form 8-K filed by the
Registrant with the SEC on July 2, 2007.(7)
    
    Incorporated by reference from Exhibits 10.19 and 10.20, respectively, in
the Form 8-K filed by the Registrant with the SEC on March 29, 2005.(8)
    
    Incorporated by reference from Exhibit 10.21 in the Form 8-K filed by the
Registrant with the SEC on March 29, 2005.(9)
    
    Incorporated by reference from Exhibit 10.15 in the Form 10-K filed by
the Registrant with the SEC on December 29, 2006.(10)
    
    Incorporated by reference from Exhibit 10.1 in the Form 8-K filed by the
Registrant with the SEC on December 20, 2006.(11)
    
    Incorporated by reference from Exhibit 10.17 in the Form 10-K filed by
the Registrant with the SEC on December 29, 2006.(12)
    
    Incorporated by reference from the Form 10-K filed by the Registrant with
the SEC on December 23, 2003.(13)
    
    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. - 23 -




---



##### 



SIGNATURES
  FIRST KEYSTONE FINANCIAL, INC.Date:      August 14, 2007
    By:
    /s/ Thomas M. KellyThomas M. KellyPresident and Chief Executive OfficerDate:      August 14, 2007
    By:
    /s/ Rose M. DiMarcoRose M. DiMarcoChief Financial Officer - 24 -