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 March 31, 2010


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 April 30, 2010:  2,432,998









FIRST
KEYSTONE FINANCIAL, INC.





Contents





PagePART
      I
                          FINANCIAL
      INFORMATION:Item
      1.
                          Financial
      StatementsUnaudited
      Consolidated Statements of Financial Condition as ofMarch
      31, 2010 and September 30, 2009
                          1Unaudited
      Consolidated Statements of Income for the Threeand
      Six Months Ended March 31, 2010 and 2009
                          2Unaudited
      Consolidated Statement of Changes in Stockholders' Equityfor
      the Six Months Ended March 31, 2010 and 2009
                          3Unaudited
      Consolidated Statements of Cash Flows for the Six MonthsEnded
      March 31, 2010 and 2009
                          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
                          26Item
      4T.
                          Controls
      and Procedures
                          27PART
      II
                          OTHER
      INFORMATIONItem
      1.
                          Legal
      Proceedings
                          28Item
      1A.
                          Risk
      Factors
                          28Item
      2.
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          28Item
      3.
                          Defaults
      Upon Senior Securities
                          28Item
      4.
                          (Removed
      and Reserved)
                          28Item
      5.
                          Other
      Information
                          28Item
      6.
                          Exhibits
                          29SIGNATURES
                          31









FIRST
KEYSTONE FINANCIAL, INC.





UNAUDITED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


(dollars
in thousands)





March 31,
                                              2010
                                            
                                            
                                            September 30,
                                              2009ASSETSCash
      and amounts due from depository institutions
                                            
                                            $
                                            2,416
                                            
                                            
                                            $
                                            2,277Interest-bearing
      deposits with depository institutions
                                            
                                            
                                            58,042
                                            
                                            
                                            
                                            45,381Total
      cash and cash equivalents
                                            
                                            
                                            60,458
                                            
                                            
                                            
                                            47,658Investment
      securities available for sale
                                            
                                            
                                            36,087
                                            
                                            
                                            
                                            27,564Mortgage-related
      securities available for sale
                                            
                                            
                                            35,532
                                            
                                            
                                            
                                            86,197Investment
      securities held to maturity – at amortized cost (approximate fair value of
      $2,984 and $2,964 at March 31, 2010 and September 30, 2009,
      respectively)
                                            
                                            
                                            2,804
                                            
                                            
                                            
                                            2,805Mortgage-related
      securities held to maturity - at amortized cost (approximate fair value of
      $17,099 and $19,929  at March 31, 2010 and September 30, 2009,
      respectively)
                                            
                                            
                                            16,430
                                            
                                            
                                            
                                            19,158Loans
      receivable (net of allowance for loan losses of $6,674 and $4,657 at March
      31, 2010 and September 30, 2009, respectively)
                                            
                                            
                                            295,346
                                            
                                            
                                            
                                            306,600Accrued
      interest receivable
                                            
                                            
                                            2,054
                                            
                                            
                                            
                                            2,343FHLBank
      stock, at cost
                                            
                                            
                                            7,060
                                            
                                            
                                            
                                            7,060Office
      properties and equipment, net
                                            
                                            
                                            4,002
                                            
                                            
                                            
                                            4,200Deferred
      income taxes
                                            
                                            
                                            2,981
                                            
                                            
                                            
                                            3,660Cash
      surrender value of life insurance
                                            
                                            
                                            18,591
                                            
                                            
                                            
                                            18,381Prepaid
      FDIC assessment
                                            
                                            
                                            2,832
                                            
                                            
                                            
                                            —Prepaid
      expenses and other assets
                                            
                                            
                                            4,324
                                            
                                            
                                            
                                            2,775Total
      Assets
                                            
                                            $
                                            488,501
                                            
                                            
                                            $
                                            528,401LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:DepositsNon-interest-bearing
                                            
                                            $
                                            21,603
                                            
                                            
                                            $
                                            18,971Interest-bearing
                                            
                                            
                                            309,739
                                            
                                            
                                            
                                            328,153Total
      deposits
                                            
                                            
                                            331,342
                                            
                                            
                                            
                                            347,124Short-term
      borrowings
                                            
                                            
                                            6,072
                                            
                                            
                                            
                                            27,395Other
      borrowings
                                            
                                            
                                            102,649
                                            
                                            
                                            
                                            102,653Junior
      subordinated debentures
                                            
                                            
                                            11,649
                                            
                                            
                                            
                                            11,646Accrued
      interest payable
                                            
                                            
                                            1,680
                                            
                                            
                                            
                                            2,110Advances
      from borrowers for taxes and insurance
                                            
                                            
                                            2,026
                                            
                                            
                                            
                                            887Accounts
      payable and accrued expenses
                                            
                                            
                                            2,504
                                            
                                            
                                            
                                            2,866Total
      Liabilities
                                            
                                            
                                            457,922
                                            
                                            
                                            
                                            494,681Commitments
      and contingencies
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Stockholders’
      Equity:Preferred
      stock, $.01 par value, 10,000,000 shares authorized; none
      issued
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Common
      stock, $.01 par value, 20,000,000 shares authorized; issued 2,712,556
      shares; outstanding at March 31, 2010 and September 30, 2009, 2,432,998
      shares
                                            
                                            
                                            27
                                            
                                            
                                            
                                            27Additional
      paid-in capital
                                            
                                            
                                            12,562
                                            
                                            
                                            
                                            12,565Employee
      stock ownership plan
                                            
                                            
                                            (2,687
                                            )
                                            
                                            
                                            (2,751
                                            )Treasury
      stock at cost: 279,558 shares at March 31, 2010 and September 30,
      2009
                                            
                                            
                                            (4,244
                                            )
                                            
                                            
                                            (4,244
                                            )Accumulated
      other comprehensive income
                                            
                                            
                                            1,405
                                            
                                            
                                            
                                            87Retained
      earnings-partially restricted
                                            
                                            
                                            23,444
                                            
                                            
                                            
                                            27,932Total
      First Keystone Financial, Inc. Stockholders’ Equity
                                            
                                            
                                            30,507
                                            
                                            
                                            
                                            33,616Noncontrolling
      interest
                                            
                                            
                                            72
                                            
                                            
                                            
                                            104Total
      Stockholders’ Equity
                                            
                                            
                                            30,579
                                            
                                            
                                            
                                            33,720Total
      Liabilities and Stockholders’ Equity
                                            
                                            $
                                            488,501
                                            
                                            
                                            $
                                            528,401




See notes
to unaudited consolidated financial statements.




- 1
-




FIRST
KEYSTONE FINANCIAL, INC.





UNAUDITED
CONSOLIDATED STATEMENTS OF INCOME


(dollars
in thousands, except per share data)





Threemonthsended
                    
                    
                    SixmonthsendedMarch31,
                    
                    
                    March31,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009INTEREST
      INCOME:Interest and fees on
      loans
                    
                    $
                    4,106
                    
                    
                    $
                    4,092
                    
                    
                    $
                    8,404
                    
                    
                    $
                    8,353Interest and dividends
      on:Mortgage-related
      securities
                    
                    
                    1,020
                    
                    
                    
                    1,424
                    
                    
                    
                    2,199
                    
                    
                    
                    2,978Investment
      securities:Taxable
                    
                    
                    332
                    
                    
                    
                    316
                    
                    
                    
                    572
                    
                    
                    
                    666Tax-exempt
                    
                    
                    41
                    
                    
                    
                    46
                    
                    
                    
                    83
                    
                    
                    
                    88Dividends
                    
                    
                    3
                    
                    
                    
                    4
                    
                    
                    
                    6
                    
                    
                    
                    7Interest on interest-bearing
      deposits
                    
                    
                    13
                    
                    
                    
                    12
                    
                    
                    
                    30
                    
                    
                    
                    27Total interest
      income
                    
                    
                    5,515
                    
                    
                    
                    5,894
                    
                    
                    
                    11,294
                    
                    
                    
                    12,119INTEREST
      EXPENSE:Interest
on:Deposits
                    
                    
                    929
                    
                    
                    
                    1,492
                    
                    
                    
                    2,121
                    
                    
                    
                    3.219Short-term
      borrowings
                    
                    
                    7
                    
                    
                    
                    19
                    
                    
                    
                    17
                    
                    
                    
                    38Other
      borrowings
                    
                    
                    1,266
                    
                    
                    
                    1,267
                    
                    
                    
                    2,559
                    
                    
                    
                    2,638Junior subordinated
      debentures
                    
                    
                    286
                    
                    
                    
                    286
                    
                    
                    
                    571
                    
                    
                    
                    571Total interest
      expense
                    
                    
                    2,488
                    
                    
                    
                    3,064
                    
                    
                    
                    5,268
                    
                    
                    
                    6,466Net interest
      income
                    
                    
                    3,027
                    
                    
                    
                    2,830
                    
                    
                    
                    6,026
                    
                    
                    
                    5,653Provision for loan
      losses
                    
                    
                    1,000
                    
                    
                    
                    700
                    
                    
                    
                    2,100
                    
                    
                    
                    775Net interest income after
      provision for loan losses
                    
                    
                    2,027
                    
                    
                    
                    2,130
                    
                    
                    
                    3,926
                    
                    
                    
                    4,878NON-INTEREST INCOME(LOSS):Service charges and other
      fees
                    
                    
                    329
                    
                    
                    
                    331
                    
                    
                    
                    705
                    
                    
                    
                    743Net gain on sales of loans held
      for sale
                    
                    
                    32
                    
                    
                    
                    75
                    
                    
                    
                    46
                    
                    
                    
                    83Net gain(loss)on sale of
      investments
                    
                    
                    (2,560
                    )
                    
                    
                    (10
                    )
                    
                    
                    (2,550
                    )
                    
                    
                    180Total other-than-temporary
      impairment losses
                    
                    
                    (41
                    )
                    
                    
                    (994
                    )
                    
                    
                    (1,393
                    )
                    
                    
                    (1,417
                    )Portion of loss recognized in
      other comprehensive income (before taxes)
                    
                    
                    —
                    
                    
                    
                    245
                    
                    
                    
                    510
                    
                    
                    
                    245Net impairment loss recognized in
      earnings
                    
                    
                    (41
                    )
                    
                    
                    (749
                    )
                    
                    
                    (883
                    )
                    
                    
                    (1,172
                    )Increase in cash surrender value
      of life insurance
                    
                    
                    101
                    
                    
                    
                    90
                    
                    
                    
                    210
                    
                    
                    
                    245Other
income
                    
                    
                    67
                    
                    
                    
                    98
                    
                    
                    
                    135
                    
                    
                    
                    189Total non-interest
      income(loss)
                    
                    
                    (2,072
                    )
                    
                    
                    (165
                    )
                    
                    
                    (2,337
                    )
                    
                    
                    268NON-INTEREST
      EXPENSE:Salaries and employee
      benefits
                    
                    
                    1,367
                    
                    
                    
                    1,438
                    
                    
                    
                    2,771
                    
                    
                    
                    2,911Occupancy and
      equipment
                    
                    
                    403
                    
                    
                    
                    415
                    
                    
                    
                    797
                    
                    
                    
                    812Professional
      fees
                    
                    
                    342
                    
                    
                    
                    297
                    
                    
                    
                    659
                    
                    
                    
                    659Federal deposit insurance
      premium
                    
                    
                    202
                    
                    
                    
                    219
                    
                    
                    
                    430
                    
                    
                    
                    329Data
    processing
                    
                    
                    160
                    
                    
                    
                    140
                    
                    
                    
                    316
                    
                    
                    
                    293Advertising
                    
                    
                    44
                    
                    
                    
                    84
                    
                    
                    
                    112
                    
                    
                    
                    215Deposit
      processing
                    
                    
                    169
                    
                    
                    
                    177
                    
                    
                    
                    323
                    
                    
                    
                    323Merger-related
      costs
                    
                    
                    164
                    
                    
                    
                    —
                    
                    
                    
                    549
                    
                    
                    
                    —Other
                    
                    
                    281
                    
                    
                    
                    384
                    
                    
                    
                    629
                    
                    
                    
                    746Total non-interest
      expense
                    
                    
                    3,132
                    
                    
                    
                    3,154
                    
                    
                    
                    6,586
                    
                    
                    
                    6,288Loss before income taxbenefit
                    
                    
                    (3,177
                    )
                    
                    
                    (1,189
                    )
                    
                    
                    (4,997
                    )
                    
                    
                    (1,142
                    )Income taxbenefit
                    
                    
                    —
                    
                    
                    
                    (402
                    )
                    
                    
                    (540
                    )
                    
                    
                    (310
                    )Net loss
                    
                    
                    (3,177
                    )
                    
                    
                    (787
                    )
                    
                    
                    (4,457
                    )
                    
                    
                    (832
                    )Less: Net income attributable to
      noncontrolling interest
                    
                    
                    (17
                    )
                    
                    
                    (19
                    )
                    
                    
                    (31
                    )
                    
                    
                    (36
                    )Net loss attributable to First
      Keystone Financial, Inc.
                    
                    $
                    (3,194
                    )
                    
                    $
                    (806
                    )
                    
                    $
                    (4,488
                    )
                    
                    $
                    (868
                    )Earnings
      per common share:Basic
                    
                    $
                    (1.37
                    )
                    
                    $
                    (0.35
                    )
                    
                    $
                    (1.92
                    )
                    
                    $
                    (0.37
                    )Diluted
                    
                    $
                    (1.37
                    )
                    
                    $
                    (0.35
                    )
                    
                    $
                    (1.92
                    )
                    
                    $
                    (0.37
                    )Weighted average shares –
      basic
                    
                    
                    2,334,456
                    
                    
                    
                    2,325,768
                    
                    
                    
                    2,333,358
                    
                    
                    
                    2,324,670Weighted average shares –
      diluted
                    
                    
                    2,334,456
                    
                    
                    
                    2,325,768
                    
                    
                    
                    2,333,358
                    
                    
                    
                    2,324,670


See notes
to unaudited consolidated financial statements.




- 2
-




FIRST
KEYSTONE FINANCIAL, INC.


UNAUDITED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY


(dollars
in thousands)





Common
                            stock
                          
                          
                          Additional
                            paid-in
                            capital
                          
                          
                          Employee
                            stock
                            ownership
                            plan
                          
                          
                          Treasury
                            stock
                          
                          
                          Accumulated
                            other
                            comprehensive
                            income (loss)
                          
                          
                          Retained
                            earnings-
                            partially
                            restricted
                          
                          
                          Non-
                            controlling
                            interest
                          
                          
                          Total
                            stockholders’
                            equityBALANCE
      AT OCTOBER 1, 2008
                          
                          $
                          27
                          
                          
                          $
                          12,586
                          
                          
                          $
                          (2,872
                          )
                          
                          $
                          (4,244
                          )
                          
                          $
                          (2,714
                          )
                          
                          $
                          29,513
                          
                          
                          $
                          113
                          
                          
                          $
                          32,409Net
      income (loss)
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (868
                          )
                          
                          
                          36
                          
                          
                          
                          (832
                          )Cash
      dividends issued
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (79
                          )
                          
                          
                          (79
                          )Other
      comprehensive income (loss), net of tax:Unrealized
      loss on securities for which an other-than-temporary impairment loss hasbeen recognized in earnings, net of taxes of
    $83
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (162
                          )
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (162
                          )Net unrealized gain
      on securities, net of reclassification adjustment, net of taxes of
      $(955)(1)
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          1,854
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          1,854Comprehensive
      income
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          781Share-based
      compensation
                          
                          
                          —
                          
                          
                          
                          4
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          4ESOP
      shares committed to be released
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          59
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          59Difference
      between cost and fair value of ESOP shares committed to be
      released
                          
                          
                          —
                          
                          
                          
                          (16
                          )
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (16
                          )BALANCE
      AT MARCH 31, 2009
                          
                          $
                          27
                          
                          
                          $
                          12,574
                          
                          
                          $
                          (2,813
                          )
                          
                          $
                          (4,244
                          )
                          
                          $
                          (1,022
                          )
                          
                          $
                          28,645
                          
                          
                          $
                          70
                          
                          
                          $
                          33,237BALANCE
      AT OCTOBER 1, 2009
                          
                          $
                          27
                          
                          
                          $
                          12,565
                          
                          
                          $
                          (2,751
                          )
                          
                          $
                          (4,244
                          )
                          
                          $
                          87
                          
                          
                          $
                          27,932
                          
                          
                          $
                          104
                          
                          
                          $
                          33,720Net
      income (loss)
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (4,488
                          )
                          
                          
                          31
                          
                          
                          
                          (4,457
                          )Cash
      dividends issued
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (63
                          )
                          
                          
                          (63
                          )Other
      comprehensive income (loss), net of tax:Unrealized
      loss on securities for which an other-than-temporary impairment loss hasbeen recognized in earnings, net of taxes of
      $(173)
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          337
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          580Net unrealized gain
      on securities, net of reclassification adjustment net of taxes of
      $(505)(1)
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          981
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          738Comprehensive
      loss
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (3,202
                          )Share-based
      compensation
                          
                          
                          —
                          
                          
                          
                          6
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          6ESOP
      shares committed to be released
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          64
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          64Difference
      between cost and fair value of ESOP shares committed to be
      released
                          
                          
                          —
                          
                          
                          
                          (9
                          )
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (9
                          )BALANCE
      AT MARCH 31, 2010
                          
                          $
                          27
                          
                          
                          $
                          12,562
                          
                          
                          $
                          (2,687
                          )
                          
                          $
                          (4,244
                          )
                          
                          $
                          1,405
                          
                          
                          $
                          23,444
                          
                          
                          $
                          72
                          
                          
                          $
                          30,579







(1)
            Components
      of other comprehensive gain:


March 31,2010
                                  
                                  
                                  2009Change
      in net unrealized gain (loss) on investment securities available for sale,
      net of taxes
                                  
                                  $
                                  (948
                                  )
                                  
                                  $
                                  1,037Reclassification
      adjustment for net (gains) losses included in net loss, net of taxes of
      $(867) and $61, respectively
                                  
                                  
                                  1,683
                                  
                                  
                                  
                                  (119
                                  )Reclassification
      adjustment for other-than-temporary impairment losses on securities
      included in net loss, net of tax benefit of $300 and $398,
      respectively
                                  
                                  
                                  583
                                  
                                  
                                  
                                  774Net
      unrealized gain (loss) on securities, net of taxes
                                  
                                  $
                                  1,318
                                  
                                  
                                  $
                                  1,692




- 3
-




FIRST
KEYSTONE FINANCIAL, INC.


UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(dollars
in thousands)




Six months ended
                  March 31,2010
                
                
                2009OPERATING
      ACTIVITIES:Netloss
                
                $
                (4,488
                )
                
                $
                (868
                )Adjustments to reconcile netlossto net cash provided
      by(used
      in)operating
      activities:Provision for depreciation and
      amortization
                
                
                256
                
                
                
                288Amortization of premiums and
      discounts
                
                
                149
                
                
                
                (4
                )Increase in cash surrender value
      of life insurance
                
                
                (210
                )
                
                
                (245
                )(Gain) loss on sales
      of:Loans held for
      sale
                
                
                (46
                )
                
                
                (83
                )Investment securities available
      for sale
                
                
                3,697
                
                
                
                85Mortgage-related securities
      available for sale
                
                
                (1,147
                )
                
                
                (265
                )Impairment losses realized in
      earnings
                
                
                883
                
                
                
                1,172Provision for loan
      losses
                
                
                2,100
                
                
                
                775Amortization of
      ESOP
                
                
                55
                
                
                
                43Share-based
      compensation
                
                
                6
                
                
                
                4Change in noncontrolling
      interest
                
                
                31
                
                
                
                36Changes in assets and liabilities
      which provided (used) cash:Origination of loans held for
      sale
                
                
                (3,635
                )
                
                
                (10,035
                )Loans sold in the secondary
      market
                
                
                3,681
                
                
                
                10,118Accrued interest
      receivable
                
                
                289
                
                
                
                204Prepaid FDIC
      assessment
                
                
                (3,024
                )
                
                
                —Prepaid expenses and other
      assets
                
                
                (987
                )
                
                
                (885
                )Accrued interest
      payable
                
                
                (430
                )
                
                
                (15
                )Accrued
      expenses
                
                
                (425
                )
                
                
                (62
                )Net cash provided by(used in)operating
      activities
                
                
                (3,245
                )
                
                
                263INVESTING
      ACTIVITIES:Loans
      originated
                
                
                (34,591
                )
                
                
                (73,031
                )Purchases
    of:Mortgage-relatedsecurities available for
      sale
                
                
                (6,706
                )
                
                
                (24,187
                )Investment securitiesavailable for
      sale
                
                
                (17,693
                )
                
                
                (4,966
                )Redemption of FHLB
      stock
                
                
                —
                
                
                
                1,328Purchase of FHLB
      stock
                
                
                —
                
                
                
                (1,393
                )Proceeds from sales of investment
      and mortgage-related securities available for sale
                
                
                53,572
                
                
                
                23,532Principal collected on
      loans
                
                
                43,355
                
                
                
                68,421Proceeds from maturities, calls,
      or repayments of:Investment securities available
      for sale
                
                
                676
                
                
                
                4,421Mortgage-related securities
      available for sale
                
                
                10,748
                
                
                
                8,753Mortgage-related securities held
      to maturity
                
                
                2,712
                
                
                
                2,637Purchase of property and
      equipment
                
                
                (58
                )
                
                
                (208
                )Net cashprovided by (used in)investing
      activities
                
                
                52,015
                
                
                
                (5,307
                )FINANCING
      ACTIVITIES:Net decreasein deposit
      accounts
                
                
                (15,782
                )
                
                
                (6,860
                )FHLBank advances and other
      borrowings - repayments
                
                
                (4
                )
                
                
                (98,936
                )FHLBank advances and other
      borrowings - draws
                
                
                —
                
                
                
                88,024Net increase in advances from
      borrowers for taxes and insurance
                
                
                1,139
                
                
                
                1,078Net increase (decrease) in
      short-term borrowings
                
                
                (21,323
                )
                
                
                18,076Net cashprovided by (used in)financing
      activities
                
                
                (35,970
                )
                
                
                1,382Increase in cash and cash
      equivalents
                
                
                12,800
                
                
                
                6,952Cash and cash equivalents at
      beginning of period
                
                
                47,658
                
                
                
                39,320Cash and cash equivalents at end
      of period
                
                $
                60,458
                
                
                $
                46,272SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:Cash payments for interest on
      deposits and borrowings
                
                $
                5,698
                
                
                $
                6,481Cash payments(refunds)of income
    taxes
                
                
                (130
                )
                
                
                60


See notes
to unaudited consolidated financial statements.




- 4
-




FIRST
KEYSTONE FINANCIAL, INC.





NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(dollars
in thousands, except per share amounts)





1.
            BASIS
      OF PRESENTATION





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q.  Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements.  However, such information reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the
periods.





The
results of operations for the three and six months ended March 31, 2010 are not
necessarily indicative of the results to be expected for the fiscal year ending
September 30, 2010 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, 2009.




2.
            INVESTMENT
      SECURITIES





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


March 31, 2010Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gain
                    
                    
                    Gross
                      Unrealized
                      Loss
                    
                    
                    Approximate
                      Fair ValueAvailable
      for Sale:Municipal
      obligations1
      to 5 years
                    
                    $
                    1,837
                    
                    
                    $
                    101
                    
                    
                    $
                    —
                    
                    
                    $
                    1,9385
      to 10 years
                    
                    
                    5,033
                    
                    
                    
                    342
                    
                    
                    
                    —
                    
                    
                    
                    5,375Over
      10 years
                    
                    
                    998
                    
                    
                    
                    66
                    
                    
                    
                    —
                    
                    
                    
                    1,064Corporate
      bondsLess
      than 1 year
                    
                    
                    5,529
                    
                    
                    
                    249
                    
                    
                    
                    —
                    
                    
                    
                    5,7781
      to 5 years
                    
                    
                    1,171
                    
                    
                    
                    25
                    
                    
                    
                    —
                    
                    
                    
                    1,196Mutual
      funds
                    
                    
                    2,917
                    
                    
                    
                    124
                    
                    
                    
                    —
                    
                    
                    
                    3,041U.S.
      government agency bonds1
      to 5 years
                    
                    
                    17,062
                    
                    
                    
                    1
                    
                    
                    
                    (46
                    )
                    
                    
                    17,017Other
      equity investments
                    
                    
                    735
                    
                    
                    
                    —
                    
                    
                    
                    (57
                    )
                    
                    
                    678Total
                    
                    $
                    35,282
                    
                    
                    $
                    908
                    
                    
                    $
                    (103
                    )
                    
                    $
                    36,087Held
      to Maturity:Municipal
      obligations1
      to 5 years
                    
                    $
                    2,804
                    
                    
                    $
                    180
                    
                    
                    $
                    —
                    
                    
                    $
                    2,984




- 5
-




Provided
below is a summary of investment securities available for sale and held to
maturity which were in an unrealized loss position at March 31,
2010.







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
                      LossesU.S.
      government agency bonds
                    
                    $
                    12,516
                    
                    
                    $
                    (46
                    )
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    12,516
                    
                    
                    $
                    (46
                    )Other
      equity investments
                    
                    
                    277
                    
                    
                    
                    (57
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    277
                    
                    
                    
                    (57
                    )Total
                    
                    $
                    12,793
                    
                    
                    $
                    (103
                    )
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    12,793
                    
                    
                    $
                    (103
                    )




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




The
Company adopted a provision of generally accepted accounting principles (“GAAP”)
which provides for the bifurcation of other-than-temporary impairments (“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”). The Company recorded, during the six months ended
March 31, 2010, a $536 (before tax) impairment not related to credit losses on
its investment in three pooled trust preferred securities, through other
comprehensive income rather than through earnings and a $659 (before tax)
credit-related impairment on the same three pooled trust preferred securities,
through earnings.




The
following table details the rollforward of credit-related impairments on pooled
trust preferred securities recorded in earnings and as a component of OCI for
the six months ended March 31, 2010:


Gross OTTI
                    
                    
                    OTTI Included
                      in OCI
                    
                    
                    OTTI Included
                      in EarningsOctober
      1, 2009
                    
                    $
                    1,291
                    
                    
                    $
                    853
                    
                    
                    $
                    438Additions:
                    
                    
                    1,195
                    
                    
                    
                    536
                    
                    
                    
                    659Reductions
      for securities sold:
                    
                    
                    (2,486
                    )
                    
                    
                    (1,389
                    )
                    
                    
                    (1,097
                    )Balance,
      March 31, 2010
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —




For the
six months ended March 31, 2009, pre-tax, credit-related and non-credit-related
impairments on one pooled trust preferred security recorded in earnings and as a
component of other comprehensive income, respectively, totaled $490 and $220,
respectively.




At March
31, 2010, there were no investment securities in a gross unrealized loss
position for twelve months or longer. During the quarter ended March 31, 2010,
as a result of the continued deterioration of the Company’s pooled trust
preferred securities, the Company sold its entire portfolio of pooled trust
preferred securities with an aggregate recorded book value and an estimated
aggregate fair value of $7.7 million and $5.1 million, respectively, at December
31, 2009 (with an aggregate unrealized loss of $2.5 million (pre-tax) recorded
as a component of other comprehensive income at such date). Proceeds from the
sale totaled $3.8 million and resulted in a pre-tax loss of $3.8 million. The
Company will continue to review its investment portfolio to determine whether
any particular impairment contained therein is other than temporary. Management
does not believe that any individual unrealized loss as of March 31, 2010
represents an OTTI.




Proceeds
from the sales of available-for-sale investments securities for the six months
ended March 31, 2010 totaled $7.0 million. Gains on sales of available-for-sale
investment securities for the six months ended March 31, 2010 totaled $142.
Losses on sales of available-for-sale investment securities for the six months
ended March 31, 2010 totaled $3.8 million, resulting in a pre-tax net loss of
$3.7 million.




- 6
-




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




September 30, 2009Amortized
                    Cost
                  
                  
                  Gross
                    Unrealized
                    Gain
                  
                  
                  Gross
                    Unrealized
                    Loss
                  
                  
                  Approximate
                    Fair ValueAvailable
      for Sale:Municipal
      obligations1
      to 5 years
                  
                  $
                  941
                  
                  
                  $
                  18
                  
                  
                  $
                  —
                  
                  
                  $
                  9595
      to 10 years
                  
                  
                  7,076
                  
                  
                  
                  592
                  
                  
                  
                  —
                  
                  
                  
                  7,668Over
      10 years
                  
                  
                  998
                  
                  
                  
                  89
                  
                  
                  
                  —
                  
                  
                  
                  1,087Corporate
      bondsLess
      than 1 year
                  
                  
                  588
                  
                  
                  
                  15
                  
                  
                  
                  —
                  
                  
                  
                  6031
      to 5 years
                  
                  
                  7,401
                  
                  
                  
                  220
                  
                  
                  
                  (201
                  )
                  
                  
                  7,420Pooled
      trust preferred securities
                  
                  
                  8,521
                  
                  
                  
                  —
                  
                  
                  
                  (2,903
                  )
                  
                  
                  5,618Mutual
      funds
                  
                  
                  3,387
                  
                  
                  
                  140
                  
                  
                  
                  —
                  
                  
                  
                  3,527Other
      equity investments
                  
                  
                  734
                  
                  
                  
                  —
                  
                  
                  
                  (52
                  )
                  
                  
                  682Total
                  
                  $
                  29,646
                  
                  
                  $
                  1,074
                  
                  
                  $
                  (3,156
                  )
                  
                  $
                  27,564Held
      to Maturity:Municipal
      obligations1
      to 5 years
                  
                  $
                  2,805
                  
                  
                  $
                  159
                  
                  
                  $
                  —
                  
                  
                  $
                  2,964





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,
2009.





Loss Position
                    
                    
                    Loss PositionLess than 12 Months
                    
                    
                    12 Months or Longer
                    
                    
                    TotalApproximate
                    
                    
                    Unrealized
                    
                    
                    Approximate
                    
                    
                    Unrealized
                    
                    
                    Approximate
                    
                    
                    UnrealizedFair Value
                    
                    
                    Losses
                    
                    
                    Fair Value
                    
                    
                    Losses
                    
                    
                    Fair Value
                    
                    
                    LossesCorporate
      bonds
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    2,371
                    
                    
                    $
                    (201
                    )
                    
                    $
                    2,371
                    
                    
                    $
                    (201
                    )Pooled
      trust preferred securities
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,618
                    
                    
                    
                    (2,903
                    )
                    
                    
                    5,618
                    
                    
                    
                    (2,903
                    )Other
      equity investments
                    
                    
                    282
                    
                    
                    
                    (52
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    282
                    
                    
                    
                    (52
                    )Total
                    
                    $
                    282
                    
                    
                    $
                    (52
                    )
                    
                    $
                    7,989
                    
                    
                    $
                    (3,104
                    )
                    
                    $
                    8,271
                    
                    
                    $
                    (3,156
                    )




Proceeds
      from the sales of available-for-sale investment securities for the six
      months ending March 31, 2009 totaled $4.2 million. Losses on sales of
      available-for-sale investment securities for the six months ending March
      31, 2009 totaled $85. There were no gains on sales of available-for-sale
      investment securities for the six months ending March 31,
      2009.




- 7
-




3.
            MORTGAGE-RELATED
      SECURITIES





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





March 31, 2010Amortized Cost
                  
                  
                  Gross
                    Unrealized
                    Gain
                  
                  
                  Gross
                    Unrealized
                    Loss
                  
                  
                  Approximate
                    Fair ValueAvailable
      for Sale:FHLMC
      pass-through certificates
                  
                  $
                  4,209
                  
                  
                  $
                  229
                  
                  
                  $
                  —
                  
                  
                  $
                  4,438FNMA
      pass-through certificates
                  
                  
                  23,770
                  
                  
                  
                  911
                  
                  
                  
                  —
                  
                  
                  
                  24,681GNMA
      pass-through certificates
                  
                  
                  942
                  
                  
                  
                  22
                  
                  
                  
                  —
                  
                  
                  
                  964Collateralized
      mortgage obligations
                  
                  
                  5,287
                  
                  
                  
                  181
                  
                  
                  
                  (19
                  )
                  
                  
                  5,449Total
                  
                  $
                  34,208
                  
                  
                  $
                  1,343
                  
                  
                  $
                  (19
                  )
                  
                  $
                  35,532Held
      to Maturity:FHLMC
      pass-through certificates
                  
                  $
                  6,173
                  
                  
                  $
                  213
                  
                  
                  $
                  —
                  
                  
                  $
                  6,386FNMA
      pass-through certificates
                  
                  
                  10,257
                  
                  
                  
                  462
                  
                  
                  
                  (6
                  )
                  
                  
                  10,713Total
                  
                  $
                  16,430
                  
                  
                  $
                  675
                  
                  
                  $
                  (6
                  )
                  
                  $
                  17,099





Provided
below is a summary of mortgage-related securities available for sale and held to
maturity which were in an unrealized loss position at March 31,
2010.





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
                    LossesPass-through
      certificates
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  72
                  
                  
                  $
                  (6
                  )
                  
                  $
                  72
                  
                  
                  $
                  (6
                  )Collateralized
      mortgage obligations
                  
                  
                  205
                  
                  
                  
                  (6
                  )
                  
                  
                  89
                  
                  
                  
                  (13
                  )
                  
                  
                  294
                  
                  
                  
                  (19
                  )Total
                  
                  $
                  205
                  
                  
                  $
                  (6
                  )
                  
                  $
                  161
                  
                  
                  $
                  (19
                  )
                  
                  $
                  366
                  
                  
                  $
                  (25
                  )




The above
table represents six mortgage-related securities for which the market value at
March 31, 2010 was less than the amortized cost.




The
Company reviews mortgage-related securities on an ongoing basis for the presence
of OTTI with formal reviews performed quarterly. The Company adopted a provision
of GAAP 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. The Company recorded
through earnings, during the six months ended March 31, 2010, credit-related
impairments aggregating $225 on five private label collateralized mortgage
obligations.




The
following table details the rollforward of credit-related impairments on
collateralized mortgage obligations recorded in earnings and as a component of
OCI for the six months ended March 31, 2010:




Gross OTTI
                    
                    
                    OTTI Included
                      in OCI
                    
                    
                    OTTI Included
                      in EarningsOctober
      1, 2009
                    
                    $
                    81
                    
                    
                    $
                    26
                    
                    
                    $
                    55Additions:
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Reductions
      for credit losses _recognized in
      earnings:
                    
                    
                    (81
                    )
                    
                    
                    (26
                    )
                    
                    
                    (55
                    )Balance,
      March  31, 2010
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —




For the
six months ended March 31, 2009, pre-tax, credit-related and non-credit-related
impairments on two private label collateralized mortgage obligations recorded in
earnings and as a component of other comprehensive income, respectively, totaled
$43 and $26, respectively.




- 8
-






Proceeds
from the sales of available-for-sale mortgage-related securities for the six
months ending March 31, 2010 totaled $46.6 million. Gains on sales of
available-for-sale mortgage-related securities for the six months ending March
31, 2010 totaled $1.2 million. Losses on sales of available-for-sale
mortgage-related securities for the six months ending March 31, 2010 totaled
$47, resulting in a net pre-tax gain of $1.1 million.





At March
31, 2010, mortgage-related securities in a gross unrealized loss position for
twelve months or longer consisted of two securities having an aggregate
depreciation of 10.3% from the Company's amortized cost basis. Management does
not believe any individual unrealized loss as of March 31, 2010 represents an
other-than-temporary impairment. The unrealized losses reported for
mortgage-related securities relate primarily to securities issued by the FMNA
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.




Mortgage-related
securities available for sale and held to maturity as of September 30, 2009 are
summarized as follows:




September 30, 2009Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gain
                    
                    
                    Gross
                      Unrealized
                      Loss
                    
                    
                    Approximate
                      Fair ValueAvailable
      for Sale:FHLMC
      pass-through certificates
                    
                    $
                    17,757
                    
                    
                    $
                    663
                    
                    
                    $
                    (4
                    )
                    
                    $
                    18,416FNMA
      pass-through certificates
                    
                    
                    41,930
                    
                    
                    
                    1,662
                    
                    
                    
                    (3
                    )
                    
                    
                    43,589GNMA
      pass-through certificates
                    
                    
                    4,019
                    
                    
                    
                    24
                    
                    
                    
                    (14
                    )
                    
                    
                    4,029Collateralized
      mortgage obligations
                    
                    
                    20,277
                    
                    
                    
                    243
                    
                    
                    
                    (357
                    )
                    
                    
                    20,163Total
                    
                    $
                    83,983
                    
                    
                    $
                    2,592
                    
                    
                    $
                    (378
                    )
                    
                    $
                    86,197Held
      to Maturity:FHLMC
      pass-through certificates
                    
                    $
                    7,258
                    
                    
                    $
                    280
                    
                    
                    $
                    —
                    
                    
                    $
                    7,538FNMA
      pass-through certificates
                    
                    
                    11,900
                    
                    
                    
                    496
                    
                    
                    
                    (5
                    )
                    
                    
                    12,391Total
                    
                    $
                    19,158
                    
                    
                    $
                    776
                    
                    
                    $
                    (5
                    )
                    
                    $
                    19,929




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,
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
                      LossesPass-through
      certificates
                    
                    $
                    5,867
                    
                    
                    $
                    (20
                    )
                    
                    $
                    82
                    
                    
                    $
                    (6
                    )
                    
                    $
                    5,949
                    
                    
                    $
                    (26
                    )Collateralized
      mortgage obligations
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    8,385
                    
                    
                    
                    (357
                    )
                    
                    
                    8,385
                    
                    
                    
                    (357
                    )Total
                    
                    $
                    5,867
                    
                    
                    $
                    (20
                    )
                    
                    $
                    8,467
                    
                    
                    $
                    (363
                    )
                    
                    $
                    14,334
                    
                    
                    $
                    (383
                    )




- 9
-




The
collateralized mortgage obligations contain both fixed and adjustable-rate
classes of securities which are repaid in accordance with a predetermined
priority.  The underlying collateral of the securities consisted of
loans which are primarily guaranteed by FHLMC, FNMA and GNMA.




Proceeds
from the sales of available-for-sale mortgage-related securities for the six
months ending March 31, 2009 totaled $19.3 million. Gains on sales of
available-for-sale mortgage-related securities for the six months ending March
31, 2009 totaled $289. Losses on sales of available-for-sale mortgage-related
securities for the six months ending March 31, 2009 totaled $24, resulting in a
net pre-tax gain of $265.





4.
            FAIR
      VALUE MEASUREMENT





The
Company adopted new, generally accepted accounting principles related to fair
value measurements on October 1, 2008, which are designed to provide consistency
and comparability in determining fair value measurements and provide for
expanded disclosures about fair value measurements. The definition of fair value
maintains the exchange price notion in earlier definitions of fair value but
focuses on the exit price of the asset or liability. The exit price is the price
that would be received to sell the asset or paid to transfer the liability
adjusted for certain inherent risks and restrictions. Expanded disclosures are
also required about the use of fair value to measure assets and
liabilities.





The
following table presents information about the Company’s available for sale
securities, mortgage servicing rights and impaired loans measured at fair value
as of March 31, 2010, and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine such fair value:





Fair Value Measurement at March 31, 2010 Using:Total
                    
                    
                    Quoted Prices in
                      Active Markets for
                      Identical Assets
                      (Level 1)
                    
                    
                    Significant Other
                      Observable Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)Assets measured at fair value
      on a recurring basis:Pass-through
      certificates
                    
                    $
                    30,083
                    
                    
                    $
                    —
                    
                    
                    $
                    30,083
                    
                    
                    $
                    —Collateralized
      mortgage obligations
                    
                    
                    5,449
                    
                    
                    
                    —
                    
                    
                    
                    5,449
                    
                    
                    
                    —U.S.
      government agency bonds
                    
                    
                    17,017
                    
                    
                    
                    
                    
                    
                    
                    17,017
                    
                    
                    
                    —Municipal
      obligations
                    
                    
                    8,377
                    
                    
                    
                    —
                    
                    
                    
                    8,377
                    
                    
                    
                    —Corporate
      bonds
                    
                    
                    5,944
                    
                    
                    
                    —
                    
                    
                    
                    5,944
                    
                    
                    
                    —Mutual
      funds
                    
                    
                    3,041
                    
                    
                    
                    3,041
                    
                    
                    
                    —
                    
                    
                    
                    —Other
      equity investments
                    
                    
                    277
                    
                    
                    
                    277
                    
                    
                    
                    —
                    
                    
                    
                    —Assets measured at fair value
      on a non-recurring basis:Mortgage
      servicing rights
                    
                    
                    319
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    319Impaired
      loans
                    
                    
                    6,659
                    
                    
                    
                    —
                    
                    
                    
                    6,659
                    
                    
                    
                    —Other
      real estate owned
                    
                    
                    370
                    
                    
                    
                    —
                    
                    
                    
                    370
                    
                    
                    
                    —




- 10
-




The
following table presents information about the Company’s available for sale
securities, mortgage servicing rights and impaired loans measured at fair value
as of September 30, 2009, and indicates the fair value hierarchy of the
valuation techniques utilized by the Company to determine such fair
value:





Fair Value Measurement at September 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)Assets measured at fair value
      on a recurring basis:Pass-through
      certificates
                    
                    $
                    66,034
                    
                    
                    $
                    —
                    
                    
                    $
                    66,034
                    
                    
                    $
                    —Collateralized
      mortgage obligations
                    
                    
                    20,163
                    
                    
                    
                    —
                    
                    
                    
                    20,163
                    
                    
                    
                    —Municipal
      obligations
                    
                    
                    9,714
                    
                    
                    
                    —
                    
                    
                    
                    9,714
                    
                    
                    
                    —Corporate
      bonds
                    
                    
                    8,023
                    
                    
                    
                    —
                    
                    
                    
                    8,023
                    
                    
                    
                    —Pooled
      trust preferred securities
                    
                    
                    5,618
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,618Mutual
      funds
                    
                    
                    3,527
                    
                    
                    
                    3,527
                    
                    
                    
                    —
                    
                    
                    
                    —Other
      equity investments
                    
                    
                    282
                    
                    
                    
                    282
                    
                    
                    
                    —
                    
                    
                    
                    —Assets measured at fair value
      on a non-recurring basis:Mortgage
      servicing rights
                    
                    
                    314
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    314Impaired
      loans
                    
                    
                    6,667
                    
                    
                    
                    —
                    
                    
                    
                    6,667
                    
                    
                    
                    —





The
following table presents the changes in the Level 3 fair-value category for the
six months ended March 31, 2010. The Company classifies financial instruments in
Level 3 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 3 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
                  
                  $
                  5,618Total
      gains or losses (realized/unrealized)Included
      in earnings
                  
                  
                  (659
                  )Included
      in other comprehensive income
                  
                  
                  2,903Purchases,
      sales, issuances and settlements, net
                  
                  
                  (7,862
                  )Transfers
      in and/or out of Level 3
                  
                  
                  —Ending
      balance
                  
                  $
                  —The
      amount of total losses for the period included in earnings attributable to
      the change in unrealized losses relating to assets still held at the
      reporting date
                  
                  $
                  —




- 11
-




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
securities’ terms and conditions, among other things.


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.





Mortgage
servicing rights (“MSRs”) are carried at the lower of cost or estimated fair
value. The estimated fair values of MSRs are obtained through independent
third-party valuations through an analysis of future cash flows, incorporating
estimates of assumptions market participants would use in determining fair
value, including market discount rates, prepayment speeds, servicing income,
servicing costs, default rates and other market-driven data, including the
market’s perception of future interest rate movements and, as such, are
classified as Level III.





Other
real estate owned is carried at estimated fair value based on independent
third-party valuations, less selling costs.





The
Company has measured impairment on impaired loans generally based on the fair
value of the loan’s collateral. Fair value is generally determined based upon
independent third-party appraisals of the properties. These assets are included
above as Level 2 fair values. The fair value consists of the loan balances of
$9.7 million and $7.9 million less their valuation allowances of $3.0 million
and $1.3 million at March 31, 2010 and September 30, 2009,
respectively.





5.
            LOANS
      RECEIVABLE





Loans receivable consist of the
following:


March 31,
                  
                  
                  September 30,2010
                  
                  
                  2009Single-family
                  
                  $
                  142,137
                  
                  
                  $
                  146,258Construction
      and land
                  
                  
                  27,206
                  
                  
                  
                  28,984Multi-family
      and commercial
                  
                  
                  67,066
                  
                  
                  
                  67,241Home
      equity and lines of credit
                  
                  
                  51,518
                  
                  
                  
                  54,612Consumer
      loans
                  
                  
                  1,340
                  
                  
                  
                  2,030Commercial
      loans
                  
                  
                  20,747
                  
                  
                  
                  22,180Total
      loans
                  
                  
                  310,014
                  
                  
                  
                  321,305Loans
      in process
                  
                  
                  (8,195
                  )
                  
                  
                  (10,228
                  )Allowance
      for loan losses
                  
                  
                  (6,674
                  )
                  
                  
                  (4,657
                  )Deferred
      loan costs
                  
                  
                  201
                  
                  
                  
                  180Loans
      receivable, net
                  
                  $
                  295,346
                  
                  
                  $
                  306,600




At March
31, 2010 and September 30, 2009, non-performing loans (which include loans in
excess of 90 days delinquent) amounted to approximately $7,244 and $5,417,
respectively.  At March 31, 2010, non-performing loans consisted of
eight single-family residential mortgage loans aggregating $703, three
non-residential mortgage loans aggregating $2,800, one commercial business loan
of $85, five construction loans aggregating $3,557, one home equity loan of $93,
and one consumer loan of $5.




At March
31, 2010 and September 30, 2009 the Company had impaired loans with a total
recorded investment of $9,688 and $7,934, respectively.  Interest
income of $234 was recognized on these impaired loans during the six months
ended March 31, 2010.  Interest income of approximately $117 was not
recognized as interest income due to the non-accrual status of such loans for
the six months ended March 31, 2010.




- 12
-




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





March 31,
                    2010
                  
                  
                  September 30,
                    2009Impaired
      loans with related allowance for loan losses under ASC
      310-10-35-13
                  
                  $
                  8,119
                  
                  
                  $
                  4,536Impaired
      loans with no related allowance for loan losses under ASC
      310-10-35-13
                  
                  
                  1,569
                  
                  
                  
                  3,398Total
      impaired loans
                  
                  $
                  9,688
                  
                  
                  $
                  7,934Valuation
      allowance related to impaired loans
                  
                  $
                  3,029
                  
                  
                  $
                  1,267




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


Six Months EndedMarch 31,2010
                  
                  
                  2009Balance
      beginning of period
                  
                  $
                  4,657
                  
                  
                  $
                  3,453Provisions
      charged to income
                  
                  
                  2,100
                  
                  
                  
                  775Charge-offs
                  
                  
                  (171
                  )
                  
                  
                  (250
                  )Recoveries
                  
                  
                  88
                  
                  
                  
                  20Total
                  
                  $
                  6,674
                  
                  
                  $
                  3,998





6.
            DEPOSITS





Deposits consist of the following major
classifications:


March
      31,
                  
                  
                  September
      30,2010
                  
                  
                  2009Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  PercentNon-interest
      bearing
                  
                  $
                  21,603
                  
                  
                  
                  6.5
                  %
                  
                  $
                  18,971
                  
                  
                  
                  5.5
                  %NOW
                  
                  
                  75,407
                  
                  
                  
                  22.8
                  
                  
                  
                  73,620
                  
                  
                  
                  21.2Passbook
                  
                  
                  42,818
                  
                  
                  
                  12.9
                  
                  
                  
                  39,361
                  
                  
                  
                  11.3Money
      market demand
                  
                  
                  50,063
                  
                  
                  
                  15.1
                  
                  
                  
                  46,604
                  
                  
                  
                  13.4Certificates
      of deposit
                  
                  
                  141,451
                  
                  
                  
                  42.7
                  
                  
                  
                  168,568
                  
                  
                  
                  48.6Total
                  
                  $
                  331,342
                  
                  
                  
                  100.0
                  %
                  
                  $
                  347,124
                  
                  
                  
                  100.0
                  %




- 13
-




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 dates presented. At March 31, 2010 and 2009, anti-dilutive shares consisted
of options covering 26,198 and 58,566 shares, respectively.




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




Three Months Ended
                    March 31,
                  
                  
                  Six Months Ended
                    March 31,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Numerator
                  
                  $
                  (3,194
                  )
                  
                  $
                  (806
                  )
                  
                  $
                  (4,488
                  )
                  
                  $
                  (868
                  )Denominators:Basic
      shares outstanding
                  
                  
                  2,334,456
                  
                  
                  
                  2,325,768
                  
                  
                  
                  2,333,358
                  
                  
                  
                  2,324,670Effect
      of dilutive securities
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Dilutive
      shares outstanding
                  
                  
                  2,334,456
                  
                  
                  
                  2,325,768
                  
                  
                  
                  2,333,358
                  
                  
                  
                  2,324,670Earnings
      per share:Basic
                  
                  $
                  (1.37
                  )
                  
                  $
                  (0.35
                  )
                  
                  $
                  (1.92
                  )
                  
                  $
                  (0.37
                  )Diluted
                  
                  $
                  (1.37
                  )
                  
                  $
                  (0.35
                  )
                  
                  $
                  (1.92
                  )
                  
                  $
                  (0.37
                  )




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.




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 March 31, 2010, that the Bank met all regulatory capital
adequacy requirements to which it was subject.




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




- 14
-




Actual
                  
                  
                  Required for
                    Capital Adequacy
                    Purpose
                  
                  
                  Well Capitalized
                    Under Prompt
                    Corrective ActionAmount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  RatioAt
      March 31, 2010:Core
      Capital (to Adjusted Tangible Assets)
                  
                  $
                  39,299
                  
                  
                  
                  8.11
                  %
                  
                  $
                  19,388
                  
                  
                  
                  4.0
                  %
                  
                  $
                  24,235
                  
                  
                  
                  5.0
                  %Tier
      I Capital (to Risk-Weighted Assets)
                  
                  
                  39,299
                  
                  
                  
                  12.84
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  18,366
                  
                  
                  
                  6.0Total
      Capital (to Risk-Weighted Assets)
                  
                  
                  43,000
                  
                  
                  
                  14.05
                  
                  
                  
                  24,488
                  
                  
                  
                  8.0
                  
                  
                  
                  30,609
                  
                  
                  
                  10.0Tangible
      Capital (to Tangible Assets)
                  
                  
                  39,265
                  
                  
                  
                  8.10
                  
                  
                  
                  7,270
                  
                  
                  
                  1.5
                  
                  
                  
                  N/A
                  
                  
                  
                  N/AAt
      September 30, 2009:Core
      Capital (to Adjusted Tangible Assets)
                  
                  $
                  43,308
                  
                  
                  
                  8.23
                  %
                  
                  $
                  21,049
                  
                  
                  
                  4.0
                  %
                  
                  $
                  26,312
                  
                  
                  
                  5.0
                  %Tier
      I Capital (to Risk-Weighted Assets)
                  
                  
                  43,308
                  
                  
                  
                  12.75
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  20,380
                  
                  
                  
                  6.0Total
      Capital (to Risk-Weighted Assets)
                  
                  
                  46,761
                  
                  
                  
                  13.77
                  
                  
                  
                  27,174
                  
                  
                  
                  8.0
                  
                  
                  
                  33,967
                  
                  
                  
                  10.0Tangible
      Capital (to Tangible Assets)
                  
                  
                  43,270
                  
                  
                  
                  8.22
                  
                  
                  
                  7,893
                  
                  
                  
                  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 March 31, 2010,
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 to be in
“troubled condition.”




9.
            RECENT
      ACCOUNTING PRONOUNCEMENTS




In September 2009, the FASB issued new
guidance impacting Topic 820. This creates a practical expedient to measure the
fair value of an alternative investment that does not have a readily
determinable fair value. This guidance also requires certain additional
disclosures. This guidance is effective for interim and annual periods ending
after December 15, 2009. The adoption of this guidance did not have a material
impact on the Company’s financial position or results of
operation.




In August
2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair
Value.  This ASU provides amendments for fair value
measurements of liabilities.  It provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more techniques.  ASU 2009-05 also clarifies that when
estimating a fair value of a liability, a reporting entity is not required to
include a separate input or adjustment to other inputs relating to the existence
of a restriction that prevents the transfer of the liability.  ASU
2009-05 is effective for the first reporting period (including interim periods)
beginning after issuance or the quarter ending December 31, 2009. The adoption
of this guidance did not have a significant impact on the Company’s financial
statements




In
October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other
Financing. ASU 2009-15 amends Subtopic 470-20 to expand accounting and
reporting guidance for own-share lending arrangements issued in contemplation of
convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning
on or after December 15, 2009 and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The adoption
of this guidance is not expected to have a significant impact on the Company’s
financial statements.




- 15
-




In
December 2009, the FASB issued ASU 2009-16, Accounting for Transfer of Financial
Assets.  ASU 2009-16 provides guidance to improve the
relevance, representational faithfulness, and comparability of the information
that an entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets.  ASU 2009-16 is effective for fiscal
years beginning after November 15, 2009 and for interim periods within those
fiscal years.  The adoption of this standard is not expected to have a
material effect on the Company’s results of operations or financial
position.




In December 2009, the FASB issued ASU
2009-17, Improvements toFinancial Reporting
by Enterprises Involved with Variable Interest Entities. The objective of ASU 2009-17 is to
improve financial reporting by enterprises involved with variable interest
entities and to provide more relevant and reliable information to users of
financial statements. ASU 2009-17 is effective forfiscal yearsbeginning after November 15, 2009 and
for interim periods within those fiscal years. The adoption of this standardis not expected to have a
material effect on the Company’s results of operations or financial
position.




In
June 2009, the FASB issued an accounting standard related to the accounting
for transfers of financial assets, which is effective for fiscal years beginning
after November 15, 2009, and interim periods within those fiscal
years.  This standard enhances reporting about transfers of financial
assets, including securitizations, and where companies have continuing exposure
to the risks related to transferred financial assets. This standard eliminates
the concept of a “qualifying special-purpose entity” and changes the
requirements for derecognizing financial assets. This standard also requires
additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from
transfers during the period.  This accounting standard was
subsequently codified into ASC Topic 860.  The adoption of this
standard is not expected to have a material effect on the Company’s results of
operations or financial position.




In
December 2007, the FASB issued an accounting standard related to
noncontrolling interests in consolidated financial statements, which is
effective for fiscal years beginning on or after December 15,
2008.  This standard establishes 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.   This accounting standard was subsequently
codified into ASC 810-10, Consolidation.  The
adoption of this standard is reflected in the Company’s financial
statements.




In June 2009, the FASB issued new
authoritative accounting guidance under ASC Topic 810,Consolidation, which amends prior guidance to change
how a company determines when an entity that is insufficiently capitalized or is
not controlled through voting (or similar rights) should be consolidated. The
determination of whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the
entity’s economic performance. The new authoritative accounting guidance
requires additional disclosures about the reporting entity’s involvement with
variable-interest entities and any significant changes in risk exposure due to
that involvement as well as its affect on the entity’s financial statements. The
new authoritative accounting guidance under ASC Topic 810 became effective
January 1, 2010 and is not expected to have a significant impact on the
Company’s financial position or results of operations.




On December 30, 2008, the FASB issued
new authoritative accounting guidance under ASC Topic 715,Compensation—Retirement
Benefits, which provides
guidance related to an employer’s disclosures about plan assets of defined
benefit pension or other post-retirement benefit plans. Under ASC Topic 715,
disclosures should provide users of financial statements with an understanding
of how investment allocation decisions are made, the factors that are pertinent
to an understanding of investment policies and strategies, the major categories
of plan assets, the inputs and valuation techniques used to measure the fair
value of plan assets, the effect of fair value measurements using significant
unobservable inputs on changes in plan assets for the period and significant
concentrations of risk within plan assets. This guidance is effective for fiscal
years ending after December 15, 2009.  The new authoritative
accounting guidance under ASC Topic 715 is not expected to have a significant
impact on the Company’s financial position or results of
operations.




- 16
-




In
January 2010, the FASB issued ASU 2010-01, Equity (Topic 505): Accounting for Distributions to
Shareholders with Components of Stock and Cash – a consensus of the FASB
Emerging Issues Task Force. ASU 2010-01 clarifies that the stock portion of a
distribution to shareholders that allows them to elect to receive cash or stock
with a potential limitation on the total amount of cash that all shareholders
can elect to receive in the aggregate is considered a share issuance that is
reflected in EPS prospectively and is not a stock dividend.  ASU
2010-01 is effective for interim and annual periods ending on or after December
15, 2009 and should be applied on a retrospective basis.  The adoption
of this guidance did not have a material impact on the Company’s financial
position or results of operation.




In
January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810):
Accounting and reporting for Decreases in Ownership of a Subsidiary – a Scope
Clarification. ASU 2010-02 amends Subtopic 810-10 to address
implementation issues related to changes in ownership provisions including
clarifying the scope of the decrease in ownership and additional
disclosures.  ASU 2010-02 is effective beginning in the period that an
entity adopts Statement 160.  If an entity has previously adopted
Statement 160, ASU 2010-02 is effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009 and should be applied
retrospectively to the first period Statement 160 was
adopted.   The adoption of this guidance did not have a material
impact on the Company’s financial position or results of operation.




In
January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics –
Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical
corrections to existing SEC guidance including the following topics: accounting
for subsequent investments, termination of an interest rate swap, issuance of
financial statements - subsequent events, use of residential method to value
acquired assets other than goodwill, adjustments in assets and liabilities for
holding gains and losses, and selections of discount rate used for measuring
defined benefit obligation.  ASU 2010-04 is effective January 15,
2010.  The adoption of this guidance did not have a material impact on
the Company’s financial position or results of operation.




In
January 2010, the FASB issued ASU 2010-05, Compensation – Stock Compensation
(Topic 718): Escrowed Share Arrangements and the Presumption of
Compensation. ASU 2010-05 updates existing guidance to address the SEC
staff’s views on overcoming the presumption that for certain shareholders
escrowed share arrangements represent compensation.  ASU 2010-05 is
effective January 15, 2010.  The adoption of this guidance did not
have a material impact on the Company’s financial position or results of
operation.




In
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing
disclosures, require new disclosures, and includes conforming amendments to
guidance on employers’ disclosures about postretirement benefit plan assets. ASU
2010-06 is effective for interim and annual periods beginning after December 15,
2009, except for disclosures about purchases, sales, issuances, and settlements
in the roll forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15, 2010 and
for interim periods within those fiscal years.  The adoption of this
guidance is not expected to have a significant impact on the Company’s financial
statements.




In
February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various
Topics. ASU 2010-08 clarifies guidance on embedded derivatives and
hedging. ASU 2010-08 is effective for interim and annual periods beginning after
December 15, 2009. The adoption of this guidance did not have a material impact
on the Company’s financial position or results of operation.




In March
2010, the FASB issued ASU 2010-11, Derivatives and
Hedging.  ASU 2010-11 provides clarification and related
additional examples to improve financial reporting by resolving potential
ambiguity about the breadth of the embedded credit derivative scope exception in
ASC 815-15-15-8.  ASU 2010-11 is effective at the beginning of the
first fiscal quarter beginning after June 15, 2010. The adoption of this
guidance is not expected to have a significant impact on the Company’s financial
statements.




- 17
-




In April
2010, the FASB issued ASU 2010-13, Compensation – Stock Compensation
(Topic 718):  Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades.  ASU 2010-13 provides guidance on the
classification of a share-based payment award as either equity or a
liability.  A share-based payment that contains a condition that is
not a market, performance, or service condition is required to be classified as
a liability.  ASU 2010-13 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2010 and
is not expected to have a significant impact on the Company’s financial
statements.





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.


March 31, 2010
                  
                  
                  September 30, 2009Carrying/
                    Notional
                    Amount
                  
                  
                  Estimated
                    Fair
                    Value
                  
                  
                  Carrying/
                    Notional
                    Amount
                  
                  
                  Estimated
                    Fair
                    ValueAssets:Cash
      and cash equivalents
                  
                  $
                  60,458
                  
                  
                  $
                  60,458
                  
                  
                  $
                  47,658
                  
                  
                  $
                  47,658Investment
      securities
                  
                  
                  38,891
                  
                  
                  
                  39,071
                  
                  
                  
                  30,369
                  
                  
                  
                  30,528Loans,
      net
                  
                  
                  295,346
                  
                  
                  
                  304,422
                  
                  
                  
                  306,600
                  
                  
                  
                  316,975Mortgage-related
      securities
                  
                  
                  51,962
                  
                  
                  
                  52,631
                  
                  
                  
                  105,355
                  
                  
                  
                  106,126FHLBank
      stock
                  
                  
                  7,060
                  
                  
                  
                  7,060
                  
                  
                  
                  7,060
                  
                  
                  
                  7,060Mortgage
      servicing rights
                  
                  
                  319
                  
                  
                  
                  319
                  
                  
                  
                  314
                  
                  
                  
                  314Accrued
      interest receivable
                  
                  
                  2,054
                  
                  
                  
                  2,054
                  
                  
                  
                  2,343
                  
                  
                  
                  2,343Liabilities:Passbook
      deposits
                  
                  
                  42,818
                  
                  
                  
                  42,818
                  
                  
                  
                  39,361
                  
                  
                  
                  39,361NOW
      and money market deposits
                  
                  
                  125,470
                  
                  
                  
                  125,470
                  
                  
                  
                  120,224
                  
                  
                  
                  120,224Certificates
      of deposit
                  
                  
                  141,451
                  
                  
                  
                  143,703
                  
                  
                  
                  168,568
                  
                  
                  
                  171,759Short-term
      borrowings
                  
                  
                  6,072
                  
                  
                  
                  6,072
                  
                  
                  
                  27,395
                  
                  
                  
                  27,395Other
      borrowings
                  
                  
                  102,649
                  
                  
                  
                  107,039
                  
                  
                  
                  102,653
                  
                  
                  
                  107,749Junior
      subordinated debentures
                  
                  
                  11,649
                  
                  
                  
                  9,650
                  
                  
                  
                  11,646
                  
                  
                  
                  9,650Accrued
      interest payable
                  
                  
                  1,680
                  
                  
                  
                  1,680
                  
                  
                  
                  2,110
                  
                  
                  
                  2,110




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. Prices on trust preferred securities were
calculated based on credit and prepayment assumptions. The present value of the
projected cash flows was calculated using a discount rate equal to the current
yield used to accrete the beneficial interest plus a liquidity and credit
premium to reflect higher credit spreads due to economic stresses in the
marketplace and lower credit ratings. The fair value of loans and mortgage
servicing rights are estimated, based on present values using approximate
current entry value interest rates, applicable to each category of such
financial instruments. The fair value of FHLB stock approximates its carrying
amount.




The fair
value of NOW deposits, money market deposits and passbook deposits is the amount
reported in the financial statements. The fair value of certificates of deposit,
junior subordinated debentures and borrowings is based on a present value
estimate, using rates currently offered for deposits and borrowings of similar
remaining maturity.  The fair value for accrued interest receivable
and payable and short-term borrowings 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.


- 18
-




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 recorded book values of approximately $5,392 and $3,876 as of March
31, 2010 and September 30, 2009, 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 March 31, 2010 and
September 30, 2009. 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
March 31, 2010 and September 30, 2009 and, therefore, current estimates of fair
value may differ significantly from the amounts presented herein.





11.
            PENDING
      MERGER





On
November 3, 2009, the Company announced that it had signed a definitive
agreement (the “Merger Agreement”) to merge with and into Bryn Mawr Bank
Corporation (“BMBC”) (the “Merger”). Concurrent with the Merger, the Bank will
merge with and into The Bryn Mawr Trust Company (“BMT”), which is a wholly owned
subsidiary of BMBC (the “Bank Merger”).





Under the
terms of the Merger Agreement, shareholders of the Company will receive 0.6973
shares (the “Exchange Ratio”) of BMBC common stock for each share of Company
common stock they own plus $2.06 per share cash consideration (“Per Share Cash
Consideration”), each subject to adjustment as described below. The Exchange
Ratio and Per Share Cash Consideration are subject to downward adjustment in the
event that the Company’s delinquencies, as defined in the Merger Agreement, are
equal to or greater than $10.5 million as of the month end immediately prior to
the closing. As of March 31, 2010 the amount of the Company's delinquencies was
$13.1 million and, if March 31, 2010 were the month-end immediately preceding
the closing of themerger, based on such amount of delinquencies at such date,
the merger consideration to be received for each share of the Company'scommon
stock would be 0.6718 of a share of BMBC common stock and $1.98 in
cash.





Consummation
of the Merger, which received shareholder approval at a special meeting of the
Company's shareholders on March 2, 2010, and which is expected to occur in July
2010, is subject to certain conditions, including, among others, receipt of all
required regulatory approvals and expiration of applicable waiting periods,
accuracy of specified representations and warranties of the other party,
effectiveness of the registration statement to be filed with the SEC to register
shares of BMBC common stock to be offered to Company shareholders, absence of a
material adverse effect, receipt of tax opinions, and obtaining material permits
and authorizations for the lawful consummation of the Merger and the Bank
Merger.





The
foregoing summary of the Merger and the Merger Agreement are qualified in their
entirety by the complete text of the Merger Agreement which was attached as
Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on
November 4, 2009.


- 19
-




Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations




Certain
information in this Quarterly Report on Form 10-Q may constitute forward-looking
statements as that term is defined in the Private Securities Litigation Reform
Act of 1995.  Such forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
estimated due to a number of factors.  Persons are cautioned that such
forward-looking statements are not guarantees of future performance and are
subject to various factors, which could cause actual results to differ
materially from those estimated.  These factors include, but are not
limited to, changes in general economic and market conditions, the continuation
of an interest rate environment that adversely affects the interest rate spread
or other income from the Company's and the Bank's investments and operations,
the amount of the Company’s delinquent and non-accrual loans, troubled debt
restructurings, other real estate owned and loan charge-offs; the effects of
competition, and of changes in laws and regulations on competition, including
industry consolidation and development of competing financial products and
services; interest rate movements; the proposed merger with Bryn Mawr Bank
Corporation fails to be completed, or if completed, the anticipated benefits
from the merger may not be fully realized due to, among other factors, the
failure to combine First Keystone Financial’s business with Bryn Mawr Bank
Corporation, the anticipated synergies not being achieved or the integration
proves to be more difficult, time consuming or costly than expected;
difficulties in integrating distinct business operations, including information
technology difficulties; disruption from the transaction making it more
difficult to maintain relationships with customers and employees, and challenges
in establishing and maintaining operations in new markets; volatilities in the
securities markets; and deteriorating economic conditions. The Company does not
undertake and specifically disclaims any obligation to publicly release the
result of any revisions which may be made to any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or circumstances
after the date of such statements.




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.




As
previously noted, the Company entered into an agreement and plan of merger (the
"Merger Agreement") with Bryn Mawr Bank Corporation, pursuant to which the
Company will merge with and into Bryn Mawr Bank Corporation (the “Merger”). For
additional information regarding the proposed Merger, please refer to Note 11 of
the unaudited consolidated financial statements set forth herein.




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 most critical accounting policy affecting the
Company’s financial statements is the evaluation of the allowance for loan
losses. 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.


- 20
-




The
determination of the allowance for loan losses requires management to make
significant estimates with respect to the amounts and timing of losses and
market and economic conditions. Accordingly, a decline in the economy could
increase loan delinquencies, foreclosures or repossessions resulting in
increased charge-off amounts and the need for additional loan loss allowances in
future periods. The Bank will continue to monitor and adjust its allowance for
loan losses through the provision for loan losses as economic conditions and
other factors dictate.  Management reviews the allowance for loan
losses generally on a monthly basis, 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.




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 detailing findings with regard to the 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 below 50%.  As part of its capital plan, the Company conducted 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 reduce the amount of the Company's outstanding debt through
the redemption of $6.2 million of its junior subordinated debentures. In June
2008, the Company utilized a portion of the proceeds from a $4.9 million
dividend from the Bank to purchase $1.5 million of fixed-rate trust preferred
securities issued by the Company’s wholly owned statutory trust and to redeem
the remaining $2.1 million of floating-rate subordinated debentures that were
still outstanding at September 30, 2007. As a result of such redemptions and
purchases, the Company’s outstanding junior subordinated debt, as of March 31,
2010, was $11.6 million and its debt-to-equity ratio was less than
50%.  Although the Company’s debt-to-equity ratio was below 50%, it
does not anticipate resuming the payment of dividends until such time as the
Company’s operating results improve and it is not permitted to pay dividends
under the Merger Agreement without BMBC's prior consent.




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.




As a
result of the supervisory agreement, the Bank hired a Chief Credit Officer
(“CCO”) and, under the direction of the Board and the CCO, enhanced its credit
review analysis, developed administrative procedures and adopted an asset
classification system. The CCO was appointed Chief Lending Officer (“CLO”)
during fiscal 2008 and has continued the process of enhancing the Bank’s loan
department operations and structure, in particular its commercial lending
operations. The Bank continues to address these areas and to make every effort
to reduce the level of classified assets in order to be in full compliance with
the terms of the supervisory agreements.  At March 31, 2010, the
Company believes it and the Bank are in full compliance with all the provisions
of the supervisory agreements.


- 21
-




Under the
terms of the Merger Agreement, we have agreed to use our best efforts to obtain
confirmation from the OTS that the supervisory agreements will be terminated as
of the effective time of the Merger.





Comparison
of Financial Condition at March 31, 2010 and September 30, 2009




Total
assets of the Company decreased by $39.9 million, from $528.4 million at
September 30, 2009 to $488.5 million at March 31, 2010. Gross loans receivable
decreased by $9.2 million, from $311.3 million at September 30, 2009 to $302.0
million at March 31, 2010 with the majority of the decrease accounted for by
declines in the residential mortgage and home equity loan portfolios. Cash and
cash equivalents increased by $12.8 million to $60.5 million at March 31, 2010
from $47.7 million at September 30, 2009 primarily due to the receipt of
proceeds from sales of mortgage-related and investment securities available for
sale. The inflows of cash from investment sales were partially offset by
outflows of cash as deposits decreased $15.8 million, or 4.5%, from $347.1
million at September 30, 2009 to $331.3 million at March 31, 2010. The decrease
in deposits was attributable to a $27.1 million decrease in time deposits from
$168.6 million at September 30, 2009 to $141.5 million at March 31, 2010
reflecting the Company’s determination to not aggressively price its time
deposit products, partially offset by an $11.3 million increase in core
deposits. Other outflows of cash for the six months ended March 31, 2010
included a $3.0 million prepayment of FDIC assessments and the repayment of
$20.0 million in short term borrowings.




Stockholders'
equity decreased $3.1 million from $33.7 million at September 30, 2009 to $30.6
million at March 31, 2010, primarily due to the net loss of $4.5 million for the
six months ended March 31, 2010, partially offset by the $1.3 million increase
in accumulated other comprehensive income related to the unrealized gains on
available for sale investment and mortgage related securities.




Comparison
of Results of Operations for the Three and Six Months Ended March 31, 2010 and
2009




Net Loss.  Net loss
for the three and six months ended March 31, 2010 was $3.2 million, or $(1.37)
per diluted share, and $4.5 million, or $(1.92) per share, respectively, as
compared to net loss of $806,000, or $(0.35) per diluted share, and $868,000, or
$(0.37) per share for the same periods in 2009.




Net Interest
Income.  Net interest income increased $197,000, or 7.0%, to
$3.0 million and $373,000, or 6.6% to $6.0 million for the three and six months
ended March 31, 2010, respectively, as compared to the same periods in 2009. The
increases in net interest income for the three and six months ended March 31,
2010 were primarily due to decreases in interest expense of $576,000, or 18.8%
and $1.2 million, or 18.5%, respectively, as compared to the same periods in
2009. The decreases in interest expense for the three and six months ended March
31, 2010 were partially offset by decreases in interest income of $379,000, or
6.4%, and $825,000, or 6.8%, respectively, as compared to the same periods in
2009. The weighted average yield earned on interest-earning assets for the three
and six months ended March 31, 2010 decreased 39 basis points to 4.82% and 53
basis points to 4.79%, respectively, compared to the same periods in 2009. The
decline in the weighted average rate earned on interest-earning assets was
attributable to declines in the market rates of interest charged on newly
originated loans. In addition, management's decision to sell, at a gain, a
portion of its longer term mortgage-related securities portfolio resulted in a
decrease in the weighted average yield earned on mortgage-related securities.
However, for the three and six months ended March 31, 2010, the weighted average
rate paid on interest-bearing liabilities decreased to an even greater degree,
decreasing 56 basis points to 2.19% and 61 basis points to 2.26%, respectively,
for the same periods in the prior fiscal year. The decline in the weighted
average rate paid on interest-bearing liabilities was primarily attributable to
management's decision not to aggressively price its time deposit
products.




The
interest rate spread and net interest margin were 2.63% and 2.64%, respectively,
for the three months ended March 31, 2010 as compared to 2.46% and 2.50%,
respectively, for the same period in 2009. The interest rate spread and net
interest margin were 2.53% and 2.55%, respectively, for the six months ended
March 31, 2010 as compared to 2.45% and 2.48%, respectively, for the same period
in 2009. The slightly smaller increase in the net interest margin, as
compared to the increase in spread for the three- and six-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 interest-bearing liabilities.


- 22
-




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 months ended March 31, 2010 and 2009.




For the three months endedMarch 31, 2010
                  
                  
                  March 31, 2009(Dollars
      in thousands)
                  
                  Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    Yield/
                    Cost
                  
                  
                  Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    Yield/
                    CostInterest-earning
      assets:Loans
      receivable(1)
                  
                  $
                  298,027
                  
                  
                  $
                  4,106
                  
                  
                  
                  5.51
                  %
                  
                  $
                  285,271
                  
                  
                  $
                  4,092
                  
                  
                  
                  5.74
                  %Mortgage-related
      securities(2)
                  
                  
                  93,827
                  
                  
                  
                  1,020
                  
                  
                  
                  4.35
                  
                  
                  
                  116,307
                  
                  
                  
                  1,424
                  
                  
                  
                  4.90Investment
      securities(2)
                  
                  
                  34,646
                  
                  
                  
                  376
                  
                  
                  
                  4.34
                  
                  
                  
                  31,624
                  
                  
                  
                  366
                  
                  
                  
                  4.63Other
      interest-earning assets
                  
                  
                  31,483
                  
                  
                  
                  13
                  
                  
                  
                  0.17
                  
                  
                  
                  19,390
                  
                  
                  
                  12
                  
                  
                  
                  0.25Total
      interest-earning assets
                  
                  
                  457,983
                  
                  
                  
                  5,515
                  
                  
                  
                  4.82
                  
                  
                  
                  452,592
                  
                  
                  
                  5,894
                  
                  
                  
                  5.21Non-interest-earning
      assets
                  
                  
                  36,692
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  33,603Total
      assets
                  
                  $
                  494,675
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  486,195Interest-bearing
      liabilities:Deposits
                  
                  $
                  335,564
                  
                  
                  
                  929
                  
                  
                  
                  1.11
                  
                  
                  $
                  324,838
                  
                  
                  
                  1,492
                  
                  
                  
                  1.84FHLB
      advances and other borrowings
                  
                  
                  108,138
                  
                  
                  
                  1,273
                  
                  
                  
                  4.71
                  
                  
                  
                  108,644
                  
                  
                  
                  1,286
                  
                  
                  
                  4.73Junior
      subordinated debentures
                  
                  
                  11,648
                  
                  
                  
                  286
                  
                  
                  
                  9.82
                  
                  
                  
                  11,641
                  
                  
                  
                  286
                  
                  
                  
                  9.83Total
      interest-bearing liabilities
                  
                  
                  455,350
                  
                  
                  
                  2,488
                  
                  
                  
                  2.19
                  
                  
                  
                  445,123
                  
                  
                  
                  3,064
                  
                  
                  
                  2.75Interest
      rate spread(3)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.63
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.46
                  %Non-interest-bearing
      liabilities
                  
                  
                  6,769
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  7,915Total
      liabilities
                  
                  
                  462,119
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  453,038Stockholders’
      equity
                  
                  
                  32,556
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  33,157Total
      liabilities and stockholders’ equity
                  
                  $
                  494,675
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  486,195Net
      interest-earning assets
                  
                  $
                  2,633
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  7,469Net
      interest income
                  
                  
                  
                  
                  
                  $
                  3,027
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  2,830Net
      interest margin(4)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.64
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.50
                  %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  100.58
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  101.68
                  %





(1)
Includes non-accrual loans.


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


(3)
Average yield on interest-earning assets minus average yield on interest-bearing
liabilities


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


- 23
-




For
      the six months endedMarch
      31, 2010
                    
                    
                    March
      31, 2009(Dollars
      in thousands)
                    
                    Average
                      Balance
                    
                    
                    Interest
                    
                    
                    Average
                      Yield/
                      Cost
                    
                    
                    Average
                      Balance
                    
                    
                    Interest
                    
                    
                    Average
                      Yield/
                      CostInterest-earning
      assets:Loans
      receivable(1)
                    
                    $
                    301,708
                    
                    
                    $
                    8,404
                    
                    
                    
                    5.57
                    %
                    
                    $
                    285,661
                    
                    
                    $
                    8,353
                    
                    
                    
                    5.85
                    %Mortgage-related
      securities(2)
                    
                    
                    100,897
                    
                    
                    
                    2,199
                    
                    
                    
                    4.36
                    
                    
                    
                    119,806
                    
                    
                    
                    2,978
                    
                    
                    
                    4.97Investment
      securities(2)
                    
                    
                    36,198
                    
                    
                    
                    661
                    
                    
                    
                    3.65
                    
                    
                    
                    32,783
                    
                    
                    
                    761
                    
                    
                    
                    4.64Other
      interest-earning assets
                    
                    
                    33,076
                    
                    
                    
                    30
                    
                    
                    
                    0.18
                    
                    
                    
                    17,768
                    
                    
                    
                    27
                    
                    
                    
                    0.32Total
      interest-earning assets
                    
                    
                    471,879
                    
                    
                    
                    11,294
                    
                    
                    
                    4.79
                    
                    
                    
                    456,018
                    
                    
                    
                    12,119
                    
                    
                    
                    5.32Non-interest-earning
      assets
                    
                    
                    34,590
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    34,124Total
      assets
                    
                    $
                    506,469
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    490,142Interest-bearing
      liabilities:Deposits
                    
                    $
                    346,303
                    
                    
                    
                    2,121
                    
                    
                    
                    1.22
                    
                    
                    $
                    323,622
                    
                    
                    
                    3,219
                    
                    
                    
                    1.99FHLB
      advances and other borrowings
                    
                    
                    108,720
                    
                    
                    
                    2,576
                    
                    
                    
                    4.74
                    
                    
                    
                    114,875
                    
                    
                    
                    2,676
                    
                    
                    
                    4.66Junior
      subordinated debentures
                    
                    
                    11,647
                    
                    
                    
                    571
                    
                    
                    
                    9.81
                    
                    
                    
                    11,640
                    
                    
                    
                    571
                    
                    
                    
                    9.81Total
      interest-bearing liabilities
                    
                    
                    466,670
                    
                    
                    
                    5,268
                    
                    
                    
                    2.26
                    
                    
                    
                    450,137
                    
                    
                    
                    6,466
                    
                    
                    
                    2.87Interest
      rate spread(3)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.53
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.45
                    %Non-interest-bearing
      liabilities
                    
                    
                    6,566
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,464Total
      liabilities
                    
                    
                    473,236
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    457,601Stockholders’
      equity
                    
                    
                    33,233
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    32,541Total
      liabilities and stockholders’ equity
                    
                    $
                    506,469
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    490,142Net
      interest-earning assets
                    
                    $
                    5,209
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    5,881Net
      interest income
                    
                    
                    
                    
                    
                    $
                    6,026
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    5,653Net
      interest margin(4)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.55
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.48
                    %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    101.12
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    101.31
                    %





(1)
Includes non-accrual loans.


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


(3)
Average yield on interest-earning assets minus average yield on interest-bearing
liabilities


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





Provision for Loan
Losses.For the three and six months ended March 31, 2010, as
compared to the same periods in the prior fiscal year, the provision for loan
losses increased $300,000 to $1.0 million and increased $1.3 million to $2.1
million, respectively.For the three
and six months ended March 31, 2010, the provision 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.
The increase in the level of the provision reflected the increase in
non-performing assets. At March 31, 2010 classified and criticized loans totaled
$22.0 million, as compared to $23.3 million at September 30, 2009. The Company's
coverage ratio, which is the ratio of the allowance for loan losses to
non-performing loans, was 68.8% and 86.0% at March 31, 2010 and September 30,
2009, respectively.


- 24
-




At March
31, 2010, non-performing assets increased $4.7 million to $10.1 million, or
2.1%, of total assets, from $5.4 million at September 30,
2009.  Non-performing assets at March 31, 2010 consisted of
non-accrual loans aggregating $5.4 million comprised of eight single-family
residential mortgage loans aggregating $703,000, two commercial real estate
loans aggregating $2.0 million, one land acquisition and development loan of
$795,000 and two residential construction loans aggregating $1.7 million. Also
included in non-performing assets at March 31, 2010 were two construction loans
aggregating $996,000 and an $850,000 commercial real estate loan which had
exceeded their contractual maturity but which continue to pay interest in
accordance with the original terms of the loans. Troubled debt restructurings,
also considered non-performing loans, as of March 31, 2010 totaled $2.5 million
and included four commercial real estate and commercial business loans to the
same borrower aggregating $1.7 million and nine residential mortgage loans
aggregating $800,000 which had been modified in accordance with the federal
government’s Home Affordable Modification Program. In addition to non-performing
loans, non-performing assets at March 31, 2010 included a real estate owned
property consisting of a $370,000 condominium located in Philadelphia. This
property became real estate owned during the first quarter of fiscal
2010.




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 March 31, 2010, non-interest income decreased $1.9 million from a
loss of $165,000 for the same period last year to a loss of $2.1 million in the
current period. The decrease was primarily due to losses incurred by the sale of
the Bank's $5.1 million available for sale pooled trust preferred securities
portfolio which resulted in a pre-tax loss of $3.8 million as discussed in Note
2 of the Consolidated Financial Statements. Partially offsetting the loss was a
$1.1 million pre-tax gain recognized on the sale of $46.6 million of longer term
available for sale mortgage-backed securities. For the six months ended March
31, 2010, non-interest income decreased $2.6 million from $268,000 for the same
period last year to a loss of $2.4 million in the current period. The decrease
in non-interest income was primarily the result of the aforementioned net loss
on the sale of available for sale securities.




Non-interest
Expense.Non-interest expense for the three months ended March
31, 2010 decreased $22,000 to $3.1 million as compared to the same period last
year. The slight decrease was the result of a $71,000 decrease in salaries and
employee benefits, a $50,000 recovery of stolen branch cash and a $47,000
decrease in other operating expense related to the Bank's insurance subsidiary,
as compared to the same period last year, substantially offset by merger-related
costs of $164,000. Non-interest expense for the six months ended March 31, 2010
increased $298,000 to $6.6 million as compared to the same period last year. The
increase was primarily the result of $549,000 in merger-related costs and a
$101,000 increase in FDIC premiums, partially offset by a decrease of $140,000
in salaries and employee benefits and a $103,000 decrease in advertising expense
as compared to the same period last year.




Income Tax Expense.The Company recognized
an income tax benefit for the three months ended December 31, 2009 of $540,000.
No additional income tax benefit was recognized for the quarter ended March 31,
2010 as management has determined that it is unlikely that sufficient
near-future taxable income will be generated to fully utilize all of the
Company’s net operating loss carryforward.




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 FHLB. At March 31, 2010, the Company had $102.6 million of
outstanding advances and no overnight borrowings from the FHLBank
Pittsburgh.  The Bank currently has the ability to obtain up to $72.2
million of additional advances from the FHLBank Pittsburgh.


- 25
-




Liquidity management is both a daily
and long-term function of business management.  Excess liquidity is
generally invested in short-term investments such as overnight
deposits.  On a longer term basis, the Company maintains a strategy of
investing in various lending products, mortgage-related securities and
investment securities.  The Company uses its sources of funds
primarily to meet its ongoing commitments, to fund maturing certificates of
deposit and savings withdrawals, fund loan commitments and maintain a portfolio
of mortgage-related and investment securities.  At March 31, 2010,
total approved loan commitments outstanding amounted to $1.4 million, not
including $8.0 million in loans in process.  At the same date,
commitments under unused lines of credit amounted to $40.4
million.  Certificates of deposit scheduled to mature in one year or
less at March 31, 2010 totaled $98.0 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 March 31, 2010, the Bank had tangible
capital and core capital equal to 8.1% of adjusted total assets and total
capital equal to 14.1% 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 requirements
imposed by the supervisory agreement.





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, 2009.




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 March 31, 2010.


- 26
-




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
                    
                    $
                    44,007
                    
                    
                    $
                    (12,158
                    )
                    
                    
                    (22
                    )%
                    
                    
                    8.98
                    %
                    
                    
                    (206
                    )
      bp200
                    
                    
                    49,109
                    
                    
                    
                    (7,056
                    )
                    
                    
                    (13
                    )
                    
                    
                    9.88
                    
                    
                    
                    (116
                    )
      bp100
                    
                    
                    53,427
                    
                    
                    
                    (2,738
                    )
                    
                    
                    (
      5
                    )
                    
                    
                    10.61
                    
                    
                    
                    (43
                    )
      bp0
                    
                    
                    56,165
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    11.04
                    
                    
                    
                    —
                    bp(100)
                    
                    
                    57,482
                    
                    
                    
                    1,317
                    
                    
                    
                    2
                    
                    
                    
                    11.23
                    
                    
                    
                    19
                    bp





As of March 31, 2010, the Company’s NPV
was $56.2 million or 11.04% of the market value of assets.  Following
a 200 basis point increase in interest rates, the Company’s “post shock” NPV
would be $49.1 million or 9.88% of the market value of assets.  The
change in the NPV ratio or the Company’s sensitivity measure was a decline of
116 basis points.





As of September 30, 2009, the Company’s
NPV was $58.0 million or 10.56% of the market value of
assets.  Following a 200 basis point increase in interest rates, the
Company’s “post shock” NPV would be $49.3 million or 9.20% of the market value
of assets.  The change in the NPV ratio or the Company’s sensitivity
measure was a decline of 136 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 Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Based on such evaluation, our Chief
Executive Officer has 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, 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 Rules 13a-15(f) and 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.


- 27
-





PART
II





Item
      1.
            Legal
      Proceedings




No
material changes have occurred in the legal proceedings previously disclosed in
Item 3 of the Company’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2009.





Item
      1A.
            Risk
      Factors




There
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,
2009.





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
      Securities





Not
applicable.





Item
      4.
            (Removed
      and Reserved)








Item
      5.
            Other
      Information




(a) Not
applicable




(b) No
changes in procedures.


- 28
-


Item
      6.
            Exhibits




List of Exhibits




Exhibit


No
            Description


2.1
            Agreement
      and Plan of Merger By and Between Bryn Mawr Bank Corporation and First
      Keystone Financial, Inc. dated November 3, 2009
  1


3.1
            Amended
      and Restated Articles of Incorporation of First Keystone Financial, Inc.
      2


3.2
            Amended
      and Restated Bylaws of First Keystone Financial, Inc.
  2


4.1
            Specimen
      Stock Certificate of First Keystone Financial, Inc.
  3


4.2
            Instrument
      defining the rights of security holders
**


10.1
            Amended
      and Restated Severance Agreement between First Keystone Financial, Inc.
      and Carol Walsh*


10.2
            Amended
      and Restated 1995 Stock Option Plan 4,
*


10.3
            Amended
      and Restated 1995 Recognition and Retention Plan and Trust Agreement
      4,*


10.4
            Amended
      and Restated 1998 Stock Option Plan 4,
*


10.5
            Amended
      and Restated Severance Agreement between First Keystone Bank and Carol
      Walsh  *


10.6
            Amended
      and Restated First Keystone Bank Supplemental Executive Retirement Plan
      5,*


10.7
            Form
      of Amended and Restated Transition, Consulting, Noncompetition and
      Retirement Agreement by and between First Keystone Financial, Inc., First
      Keystone Bank and Donald S. Guthrie
4,*


10.8
            Severance
      and Release Agreement by and among First Keystone Financial, Inc., First
      Keystone Bank and Thomas M. Kelly
6,*


10.9
            Letter
      dated December 11, 2006 with respect to appointment to Board
    7


10.10
            Form
      of Registration Rights Agreement 8


11
            Statement
      re: computation of per share earnings.  See Note 7 to the
      Unaudited Consolidated Financial Statements included in Part I
      hereof.


31.1
            Section
      302 Certification of Chief Executive
Officer


31.2
            Section
      302 Certification of Chief Financial
Officer


32.1
            Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002


32.2
            Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002


99.1
            Supervisory
      Agreement between First Keystone Financial, Inc. and the Office of Thrift
      Supervision dated February 13, 2006.
9


99.2
            Supervisory
      Agreement between First Keystone Bank and the Office of Thrift Supervision
      dated February 13, 2006. 9





____________________________




(1)
            Incorporated
      by reference to the like-numbered exhibit included in the Form 8-K filed
      by the Registrant with the SEC on November 4,
  2009.




(2)
            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.




(3)
            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.




(4)
            Incorporated
      by reference from Exhibits 10.4, 10.6, 10.5, and 10.3, respectively, in
      the Form 8-K filed by the Registrant with SEC on December 1, 2008 (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 July 2, 2007.


- 29
-




(6)
            Incorporated
      by reference from Exhibit 10.1 in the Form 8-K filed by the Registrant
      with the SEC on August 19, 2008.




(7)
            Incorporated
      by reference from Exhibit 10.1 in the Form 8-K filed by the Registrant
      with the SEC on December 20, 2006.




(8)
            Incorporated
      by reference from the Form 10-K for the year ended September 30, 2006
      filed by the Registrant with the SEC on December 29,
  2006




(9)
            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.


- 30
-


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





FIRST
      KEYSTONE FINANCIAL, INC.Date:  
       May 17, 2010
              By:
              /s/ David M. TakatsDavid
      M. TakatsSenior
      Vice President and Chief Financial OfficerDate:  
       May 17, 2010
              By:
              /s/ Hugh J. GarchinskyHugh
      J. GarchinskyPresident
      and Chief Executive
Officer


- 31
-