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 December 31, 2009


OR


o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from .......... to ..........





Commission File Number:
000-25328





FIRST KEYSTONE FINANCIAL, INC.


(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  xNo  o





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).


oYes                          oNo





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 o                                                        Accelerated
filer o





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





Smaller
reporting company x





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





Number of
shares of Common Stock outstanding as of January 31,
2010:  2,432,998








FIRST
KEYSTONE FINANCIAL, INC.





Contents





PagePART
      I
                        FINANCIAL
      INFORMATION:Item
      1.
                        Financial
      StatementsConsolidated
      Statements of Financial Condition as ofDecember
      31, 2009 (Unaudited) and September 30, 2009
                        1Unaudited
      Consolidated Statements of Income for the ThreeMonths
      Ended December 31, 2009 and 2008
                        2Unaudited
      Consolidated Statement of Changes in Stockholders' Equityfor
      the Three Months Ended December 31, 2009 and 2008
                        3Unaudited
      Consolidated Statements of Cash Flows for the Three MonthsEnded
      December 31, 2009 and 2008
                        4Notes
      to Unaudited Consolidated Financial Statements
                        5Item
      2.
                        Management's
      Discussion and Analysis of Financial Condition andResults
      of Operations
                        20Item
      3.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        25Item
      4T.
                        Controls
      and Procedures
                        26PART
      II
                        OTHER
      INFORMATIONItem
      1.
                        Legal
      Proceedings
                        27Item
      1A.
                        Risk
      Factors
                        27Item
      2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        27Item
      3.
                        Defaults
      Upon Senior Securities
                        27Item
      4.
                        Submission
      of Matters to a Vote of Security Holders
                        27Item
      5.
                        Other
      Information
                        27Item
      6.
                        Exhibits
                        28SIGNATURES
                        30










FIRST
KEYSTONE FINANCIAL, INC.





UNAUDITED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


(dollars
in thousands)





December 31,
                  2009
                
                
                September 30,
                  2009ASSETSCash
      and amounts due from depository institutions
                
                $
                2,371
                
                
                $
                2,277Interest-bearing
      deposits with depository institutions
                
                
                26,515
                
                
                
                45,381Total
      cash and cash equivalents
                
                
                28,886
                
                
                
                47,658Investment
      securities available for sale
                
                
                27,200
                
                
                
                27,564Mortgage-related
      securities available for sale
                
                
                86,764
                
                
                
                86,197Investment
      securities held to maturity – at amortized cost (approximate fair value of
      $2,955 and $2,964 at December 31, 2009 and September 30, 2009,
      respectively)
                
                
                2,804
                
                
                
                2,805Mortgage-related
      securities held to maturity - at amortized cost (approximate fair value of
      $18,362 and $19,929  at December 31, 2009 and September 30,
      2009, respectively)
                
                
                17,740
                
                
                
                19,158Loans
      receivable (net of allowance for loan losses of $5,588 and $4,657 at
      December 31, 2009 and September 30, 2009, respectively)
                
                
                300,555
                
                
                
                306,600Accrued
      interest receivable
                
                
                2,176
                
                
                
                2,343FHLBank
      stock, at cost
                
                
                7,060
                
                
                
                7,060Office
      properties and equipment, net
                
                
                4,112
                
                
                
                4,200Deferred
      income taxes
                
                
                3,754
                
                
                
                3,660Cash
      surrender value of life insurance
                
                
                18,489
                
                
                
                18,381Prepaid
      FDIC assessment
                
                
                3,024
                
                
                
                —Prepaid
      expenses and other assets
                
                
                3,378
                
                
                
                2,775Total
      Assets
                
                $
                505,942
                
                
                $
                528,401LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:DepositsNon-interest-bearing
                
                $
                17,385
                
                
                $
                18,971Interest-bearing
                
                
                330,051
                
                
                
                328,153Total
      deposits
                
                
                347,436
                
                
                
                347,124Short-term
      borrowings
                
                
                5,431
                
                
                
                27,395Other
      borrowings
                
                
                102,651
                
                
                
                102,653Junior
      subordinated debentures
                
                
                11,648
                
                
                
                11,646Accrued
      interest payable
                
                
                2,089
                
                
                
                2,110Advances
      from borrowers for taxes and insurance
                
                
                2,009
                
                
                
                887Accounts
      payable and accrued expenses
                
                
                2,391
                
                
                
                2,866Total
      Liabilities
                
                
                473,655
                
                
                
                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 December 31, 2009 and September 30, 2009, 2,432,998
      shares
                
                
                27
                
                
                
                27Additional
      paid-in capital
                
                
                12,562
                
                
                
                12,565Employee
      stock ownership plan
                
                
                (2,719
                )
                
                
                (2,751
                )Treasury
      stock at cost: 279,558 shares at December 31, 2009 and September 30,
      2009
                
                
                (4,244
                )
                
                
                (4,244
                )Accumulated
      other comprehensive income (loss)
                
                
                (95
                )
                
                
                87Retained
      earnings-partially restricted
                
                
                26,638
                
                
                
                27,932Total
      First Keystone Financial, Inc. Stockholders’ Equity
                
                
                32,169
                
                
                
                33,616Noncontrolling
      interest
                
                
                118
                
                
                
                104Total
      Stockholders’ Equity
                
                
                32,287
                
                
                
                33,720Total
      Liabilities and Stockholders’ Equity
                
                $
                505,942
                
                
                $
                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)





Three
      months endedDecember 31,2009
                
                
                2008INTEREST
      INCOME:Interest
      and fees on loans
                
                $
                4,298
                
                
                $
                4,260Interest
      and dividends on:Mortgage-related
      securities
                
                
                1,179
                
                
                
                1,553Investment
      securities:Taxable
                
                
                240
                
                
                
                350Tax-exempt
                
                
                42
                
                
                
                42Dividends
                
                
                3
                
                
                
                3Interest
      on interest-bearing deposits
                
                
                18
                
                
                
                16Total
      interest income
                
                
                5,780
                
                
                
                6,224INTEREST
      EXPENSE:Interest
      on:Deposits
                
                
                1,192
                
                
                
                1,727Short-term
      borrowings
                
                
                10
                
                
                
                20Other
      borrowings
                
                
                1,294
                
                
                
                1,370Junior
      subordinated debentures
                
                
                286
                
                
                
                286Total
      interest expense
                
                
                2,782
                
                
                
                3,403Net
      interest income
                
                
                2,998
                
                
                
                2,821Provision
      for loan losses
                
                
                1,100
                
                
                
                75Net
      interest income after provision for loan losses
                
                
                1,898
                
                
                
                2,746NON-INTEREST
      INCOME (LOSS):Service
      charges and other fees
                
                
                376
                
                
                
                412Net
      gain on sales of loans held for sale
                
                
                15
                
                
                
                8Net
      gain on sale of investments
                
                
                10
                
                
                
                190Total
      other-than-temporary impairment losses
                
                
                (1,379
                )
                
                
                (423
                )Portion
      of loss recognized in other comprehensive income (before
      taxes)
                
                
                536
                
                
                
                —Net
      impairment loss recognized in earnings
                
                
                (843
                )
                
                
                (423
                )Increase
      in cash surrender value of life insurance
                
                
                108
                
                
                
                155Other
      income
                
                
                69
                
                
                
                91Total
      non-interest income (loss)
                
                
                (265
                )
                
                
                433NON-INTEREST
      EXPENSE:Salaries
      and employee benefits
                
                
                1,404
                
                
                
                1,472Occupancy
      and equipment
                
                
                394
                
                
                
                397Professional
      fees
                
                
                316
                
                
                
                362Federal
      deposit insurance premium
                
                
                228
                
                
                
                110Data
      processing
                
                
                156
                
                
                
                153Advertising
                
                
                68
                
                
                
                130Deposit
      processing
                
                
                154
                
                
                
                146Merger-related
      costs
                
                
                385
                
                
                
                —Other
                
                
                348
                
                
                
                361Total
      non-interest expense
                
                
                3,453
                
                
                
                3,132Income
      (loss) before income tax expense
                
                
                (1,820
                )
                
                
                47Income
      tax expense (benefit)
                
                
                (540
                )
                
                
                93Net
      loss
                
                
                (1,280
                )
                
                
                (46
                )Less:
      Net income attributable to noncontrolling interest
                
                
                (14
                )
                
                
                (17
                )Net
      loss attributable to First Keystone Financial, Inc.
                
                $
                (1,294
                )
                
                $
                (63
                )Earnings
      per common share:Basic
                
                $
                (0.55
                )
                
                $
                (0.03
                )Diluted
                
                $
                (0.55
                )
                
                $
                (0.03
                )Weighted
      average shares – basic
                
                
                2,332,284
                
                
                
                2,323,596Weighted
      average shares – diluted
                
                
                2,332,284
                
                
                
                2,323,596





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)
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (63
                        )
                        
                        
                        17
                        
                        
                        
                        (46
                        )Other
      comprehensive income, net of tax:Net unrealized loss
      on securities net of reclassification adjustment net of taxes of
      $(503)(1)
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        976
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        976Comprehensive
      income
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        930ESOP
      shares committed to be released
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        29
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        29Difference
      between cost and fair value of ESOP shares committed to be
      released
                        
                        
                        —
                        
                        
                        
                        (7
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (7
                        )BALANCE
      AT DECEMBER 31, 2008
                        
                        $
                        27
                        
                        
                        $
                        12,579
                        
                        
                        $
                        (2,843
                        )
                        
                        $
                        (4,244
                        )
                        
                        $
                        (1,738
                        )
                        
                        $
                        29,450
                        
                        
                        $
                        130
                        
                        
                        $
                        33,361BALANCE
      AT OCTOBER 1, 2009
                        
                        $
                        27
                        
                        
                        $
                        12,565
                        
                        
                        $
                        (2,751
                        )
                        
                        $
                        (4,244
                        )
                        
                        $
                        87
                        
                        
                        $
                        27,932
                        
                        
                        
                        104
                        
                        
                        $
                        33,720Net
      income (loss)
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (1,294
                        )
                        
                        
                        14
                        
                        
                        
                        (1,280
                        )Other
      comprehensive income, net of tax:Unrealized
      loss on securities for which an other-than-temporary impairment loss has
      been recognized in earnings net of taxes of
    $183
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (353
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (353
                        )Net unrealized gain
      on securities net of reclassification adjustment net of taxes of
      $(88)(1)
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        171
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        171Comprehensive
      loss
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (1,462
                        )Share
      based compensation
                        
                        
                        —
                        
                        
                        
                        3
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        3ESOP
      shares committed to be released
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        32
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        32Difference
      between cost and fair value of ESOP shares committed to be
      released
                        
                        
                        —
                        
                        
                        
                        (6
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (6
                        )BALANCE
      AT DECEMBER 31, 2009
                        
                        $
                        27
                        
                        
                        $
                        12,562
                        
                        
                        $
                        (2,719
                        )
                        
                        $
                        (4,244
                        )
                        
                        $
                        (95
                        )
                        
                        $
                        26,638
                        
                        
                        $
                        118
                        
                        
                        $
                        32,287





(1)
            Components
      of other comprehensive gain:




December 31,2009
                  
                  
                  2008Change
      in net unrealized gain (loss) on investment securities available for sale,
      net of taxes
                  
                  $
                  (731
                  )
                  
                  $
                  822Reclassification
      adjustment for net gains included in net loss, net of taxes of $3 and $65,
      respectively
                  
                  
                  (7
                  )
                  
                  
                  (125
                  )Reclassification
      adjustment for other-than-temporary impairment losses on securities
      included in net loss, net of tax benefit of $287 and $144,
      respectively
                  
                  
                  556
                  
                  
                  
                  279Net
      unrealized gain (loss) on securities, net of taxes
                  
                  $
                  (182
                  )
                  
                  $
                  976




- 3
-


FIRST
KEYSTONE FINANCIAL, INC.


UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(dollars
in thousands)




Three
      months endedDecember 312009
                  
                  
                  2008OPERATING
      ACTIVITIES:Net
      loss
                  
                  $
                  (1,294
                  )
                  
                  $
                  (63
                  )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Provision
      for depreciation and amortization
                  
                  
                  132
                  
                  
                  
                  142Amortization
      of premiums and discounts
                  
                  
                  79
                  
                  
                  
                  3Increase
      in cash surrender value of life insurance
                  
                  
                  (108
                  )
                  
                  
                  (155
                  )(Gain)
      loss on sales of:Loans
      held for sale
                  
                  
                  (15
                  )
                  
                  
                  (8
                  )Investment
      securities available for sale
                  
                  
                  (10
                  )
                  
                  
                  75Mortgage-related
      securities available for sale
                  
                  
                  —
                  
                  
                  
                  (265
                  )Impairment
      losses realized in earnings
                  
                  
                  843
                  
                  
                  
                  423Provision
      for loan losses
                  
                  
                  1,100
                  
                  
                  
                  75Amortization
      of ESOP
                  
                  
                  26
                  
                  
                  
                  22Share-based
      compensation
                  
                  
                  3
                  
                  
                  
                  —Change
      in noncontrolling interest
                  
                  
                  14
                  
                  
                  
                  17Changes
      in assets and liabilities which provided (used) cash:Origination
      of loans held for sale
                  
                  
                  (1,242
                  )
                  
                  
                  (1,284
                  )Loans
      sold in the secondary market
                  
                  
                  1,257
                  
                  
                  
                  1,292Accrued
      interest receivable
                  
                  
                  167
                  
                  
                  
                  202Prepaid
      FDIC assessment
                  
                  
                  (3,024
                  )
                  
                  
                  —Prepaid
      expenses and other assets
                  
                  
                  (233
                  )
                  
                  
                  (393
                  )Accrued
      interest payable
                  
                  
                  (21
                  )
                  
                  
                  332Accrued
      expenses
                  
                  
                  (475
                  )
                  
                  
                  (77
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  (2,801
                  )
                  
                  
                  338INVESTING
      ACTIVITIES:Loans
      originated
                  
                  
                  (16,721
                  )
                  
                  
                  (18,880
                  )Purchases
      of:Mortgage-related
      securities available for sale
                  
                  
                  (6,706
                  )
                  
                  
                  (7,039
                  )Investment
      securities available for sale
                  
                  
                  (623
                  )
                  
                  
                  (1,313
                  )Redemption
      of FHLB stock
                  
                  
                  —
                  
                  
                  
                  1,328Purchase
      of FHLB stock
                  
                  
                  —
                  
                  
                  
                  (1,393
                  )Proceeds
      from sales of investment and mortgage-related securities available for
      sale
                  
                  
                  250
                  
                  
                  
                  23,282Principal
      collected on loans
                  
                  
                  21,284
                  
                  
                  
                  21,119Proceeds
      from maturities, calls, or repayments of:Investment
      securities available for sale
                  
                  
                  426
                  
                  
                  
                  1,421Mortgage-related
      securities available for sale
                  
                  
                  5,285
                  
                  
                  
                  3,547Mortgage-related
      securities held to maturity
                  
                  
                  1,410
                  
                  
                  
                  1,173Purchase
      of property and equipment
                  
                  
                  (44
                  )
                  
                  
                  (113
                  )Net
      cash provided by  investing activities
                  
                  
                  4,561
                  
                  
                  
                  23,132FINANCING
      ACTIVITIES:Net
      increase (decrease)  in deposit accounts
                  
                  
                  312
                  
                  
                  
                  (8,702
                  )FHLBank
      advances and other borrowings - repayments
                  
                  
                  (2
                  )
                  
                  
                  (10
                  )FHLBank
      advances and other borrowings - draws
                  
                  
                  —
                  
                  
                  
                  —Net
      increase in advances from borrowers for taxes and
insurance
                  
                  
                  1,122
                  
                  
                  
                  1,025Net
      increase (decrease) in short-term borrowings
                  
                  
                  (21,964
                  )
                  
                  
                  6,245Net
      cash used in financing activities
                  
                  
                  (20,532
                  )
                  
                  
                  (1,442
                  )Increase
      (decrease) in cash and cash equivalents
                  
                  
                  (18,772
                  )
                  
                  
                  22,028Cash
      and cash equivalents at beginning of period
                  
                  
                  47,658
                  
                  
                  
                  39,320Cash
      and cash equivalents at end of period
                  
                  $
                  28,886
                  
                  
                  $
                  61,348SUPPLEMENTAL DISCLOSURE OF CASH
      FLOW AND NON-CASH INFORMATION:Cash
      payments for interest on deposits and borrowings
                  
                  $
                  2,803
                  
                  
                  $
                  3,071Cash
      payments of income taxes
                  
                  
                  —
                  
                  
                  
                  —


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 months ended December 31, 2009 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:





December 31, 2009Amortized
                    Cost
                  
                  
                  Gross
                    Unrealized
                    Gain
                  
                  
                  Gross
                    Unrealized
                    Loss
                  
                  
                  Approximate
                    Fair ValueAvailable
      for Sale:Municipal
      obligations1
      to 5 years
                  
                  $
                  1,839
                  
                  
                  $
                  72
                  
                  
                  $
                  —
                  
                  
                  $
                  1,9115
      to 10 years
                  
                  
                  6,042
                  
                  
                  
                  332
                  
                  
                  
                  —
                  
                  
                  
                  6,374Over
      10 years
                  
                  
                  998
                  
                  
                  
                  46
                  
                  
                  
                  —
                  
                  
                  
                  1,044Corporate
      bondsLess
      than 1 year
                  
                  
                  591
                  
                  
                  
                  10
                  
                  
                  
                  —
                  
                  
                  
                  6011
      to 5 years
                  
                  
                  7,906
                  
                  
                  
                  351
                  
                  
                  
                  (35
                  )
                  
                  
                  8,222Pooled
      trust preferred securities
                  
                  
                  7,652
                  
                  
                  
                  —
                  
                  
                  
                  (2,532
                  )
                  
                  
                  5,120Mutual
      funds
                  
                  
                  3,153
                  
                  
                  
                  123
                  
                  
                  
                  —
                  
                  
                  
                  3,276Other
      equity investments
                  
                  
                  735
                  
                  
                  
                  —
                  
                  
                  
                  (83
                  )
                  
                  
                  652Total
                  
                  $
                  28,916
                  
                  
                  $
                  934
                  
                  
                  $
                  (2,650
                  )
                  
                  $
                  27,200Held
      to Maturity:Municipal
      obligations1
      to 5 years
                  
                  $
                  2,804
                  
                  
                  $
                  151
                  
                  
                  $
                  —
                  
                  
                  $
                  2,955




- 5
-




Provided
below is a summary of investment securities available for sale and held to
maturity which were in an unrealized loss position at December 31,
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
                      LossesCorporate
      bonds
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    1,000
                    
                    
                    $
                    (35
                    )
                    
                    $
                    1,000
                    
                    
                    $
                    (35
                    )Pooled
      trust preferred securities
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,120
                    
                    
                    
                    (2,532
                    )
                    
                    
                    5,120
                    
                    
                    
                    (2,532
                    )Other
      equity investments
                    
                    
                    252
                    
                    
                    
                    (83
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    252
                    
                    
                    
                    (83
                    )Total
                    
                    $
                    252
                    
                    
                    $
                    (83
                    )
                    
                    $
                    6,120
                    
                    
                    $
                    (2,567
                    )
                    
                    $
                    6,372
                    
                    
                    $
                    (2,650
                    )




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




Included
in the table above are pooled trust preferred securities. Trust preferred
securities are long-term (usually 30-year maturity) instruments with
characteristics of both debt and equity, mainly issued by banks or their holding
companies. All of the Company’s investments in trust preferred securities are of
pooled issues, each consisting of 30 or more companies with geographic and size
diversification. As of December 31, 2009, the Company had investments in five
pooled trust preferred securities with an aggregate recorded book value of $7.7
million and an estimated fair value of $5.1 million. Two of the Company’s pooled
trust preferred securities, with a fair value aggregating $3.4 million, are
senior tranches and carry Moody’s ratings of A3 and Aa3 at December 31, 2009.
The remaining three pooled trust preferred securities, with fair value
aggregating $1.7 million, are mezzanine tranches and are rated Ca by Moody’s,
which is below investment grade.  As of December 31, 2009, one of the
pooled trust preferred securities had begun to defer payments. The deferred
interest payments are added to outstanding principal. The pooled trust preferred
security which had begun deferring interest payments was placed on non-accrual
status.




In order
to evaluate the pooled trust preferred securities to determine whether their
declines in market value are other than temporary, management determines whether
it is probable that an adverse change in estimated cash flows has occurred.
Determining whether there has been an adverse change in estimated cash flows
from the cash flows previously projected involves comparing the present value of
remaining cash flows previously projected against the present value of the cash
flows estimated at December 31, 2009. Factors affecting the cash flow analyses
include current deferrals and defaults within the pool, as well as estimates of
anticipated defaults. Deferrals and defaults are assumed to have no recoveries.
Discounted cash flow models incorporate various assumptions including average
historical spreads, credit ratings, and liquidity of the underlying securities.
In addition, management reviews trustee reports related to the pooled trust
preferred securities in order to identify weaknesses and trends in the
underlying issuer pool.




Based
upon the analysis performed by management as of December 31, 2009, it is
probable that three of the Bank’s pooled trust preferred securities will
experience principal and interest shortfalls. 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 three months ended December 31, 2009,
an $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.


- 6
-




The
following table details the rollforward of credit-related losses on pooled trust
preferred securities recorded in earnings and as a component of OCI for the
three months ended December 31, 2009:




Gross OTTI
                  
                  
                  OTTI Included
                    in OCI
                  
                  
                  OTTI Included
                    in EarningsOctober
      1, 2009
                  
                  $
                  1,291
                  
                  
                  $
                  853
                  
                  
                  $
                  438Additions:
                  
                  
                  1,195
                  
                  
                  
                  536
                  
                  
                  
                  659Balance,
      December 31, 2009
                  
                  $
                  2,486
                  
                  
                  $
                  1,389
                  
                  
                  $
                  1,097




There
were no credit-related losses on pooled trust preferred securities recorded in
earnings and as a component of other comprehensive income for the three months
ended December 31, 2008.




At
December 31, 2009, investment securities in a gross unrealized loss position for
twelve months or longer consist of six securities having an aggregate
depreciation of 29.6% from the Company’s amortized cost basis. Fair values for
certain pooled trust preferred securities were determined utilizing discounted
cash flow models due to the absence of a current active and liquid market to
provide reliable market quotes for the instruments. The Company’s analysis for
each pooled trust preferred securities performed at the CUSIP level shows that
the credit quality of the underlying bonds ranges from good to deteriorating.
Credit risk does exist and the default of an individual issuer in a particular
pool could affect the ultimate collectability of contractual amounts. At
December 31, 2009, the Company did not have the intent to sell these securities
and it was more likely than not that it would not have to sell the securities
before recovery of their cost bases. However, the Company will continue to
review its investment portfolio to determine whether any particular impairment
is other than temporary. Management does not believe that any individual
unrealized loss as of December 31, 2009 represents an OTTI.




Proceeds
from the sales of available-for-sale securities for the three months ended
December 31, 2009 totaled $250. Gains on sales of available-for-sale investment
securities for the three months ended December 31, 2009 totaled $10. There were
no losses recorded on sales of available-for-sale investment securities for the
three months ended December 31, 2009.




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
                  
                  
                  735
                  
                  
                  
                  —
                  
                  
                  
                  (52
                  )
                  
                  
                  682Total
                  
                  $
                  29,647
                  
                  
                  $
                  1,074
                  
                  
                  $
                  (3,156
                  )
                  
                  $
                  27,564Held
      to Maturity:Municipal
      obligations1
      to 5 years
                  
                  $
                  2,805
                  
                  
                  $
                  159
                  
                  
                  $
                  —
                  
                  
                  $
                  2,964




- 7
-




Provided
below is a summary of investment securities available for sale and held to
maturity which were in an unrealized loss position at September 30,
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
                  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 securities for the three months
      ending December 31, 2008 totaled $3.9 million. Losses on sales of
      available-for-sale investment securities for the three months ending
      December 31, 2008 totaled $80. Gains on sales of available-for-sale
      investment securities for the three months ending December 31, 2008
      totaled $5 resulting in a net loss of
$75.





3.
            MORTGAGE-RELATED
      SECURITIES





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





December 31, 2009Amortized Cost
                  
                  
                  Gross
                    Unrealized
                    Gain
                  
                  
                  Gross
                    Unrealized
                    Loss
                  
                  
                  Approximate
                    Fair ValueAvailable
      for Sale:FHLMC
      pass-through certificates
                  
                  $
                  17,394
                  
                  
                  $
                  510
                  
                  
                  $
                  (64
                  )
                  
                  $
                  17,840FNMA
      pass-through certificates
                  
                  
                  42,806
                  
                  
                  
                  1,289
                  
                  
                  
                  (58
                  )
                  
                  
                  44,037GNMA
      pass-through certificates
                  
                  
                  6,466
                  
                  
                  
                  30
                  
                  
                  
                  (102
                  )
                  
                  
                  6,394Collateralized
      mortgage obligations
                  
                  
                  18,526
                  
                  
                  
                  184
                  
                  
                  
                  (217
                  )
                  
                  
                  18,493Total
                  
                  $
                  85,192
                  
                  
                  $
                  2,013
                  
                  
                  $
                  (441
                  )
                  
                  $
                  86,764Held
      to Maturity:FHLMC
      pass-through certificates
                  
                  $
                  6,707
                  
                  
                  $
                  219
                  
                  
                  $
                  —
                  
                  
                  $
                  6,926FNMA
      pass-through certificates
                  
                  
                  11,033
                  
                  
                  
                  411
                  
                  
                  
                  (8
                  )
                  
                  
                  11,436Total
                  
                  $
                  17,740
                  
                  
                  $
                  630
                  
                  
                  $
                  (8
                  )
                  
                  $
                  18,362




- 8
-





Provided
below is a summary of mortgage-related securities available for sale and held to
maturity which were in an unrealized loss position at December 31,
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
                  
                  $
                  13,968
                  
                  
                  $
                  (224
                  )
                  
                  $
                  76
                  
                  
                  $
                  (8
                  )
                  
                  $
                  14,044
                  
                  
                  $
                  (232
                  )Collateralized
      mortgage obligations
                  
                  
                  5,769
                  
                  
                  
                  (42
                  )
                  
                  
                  2,954
                  
                  
                  
                  (175
                  )
                  
                  
                  8,723
                  
                  
                  
                  (217
                  )Total
                  
                  $
                  19,737
                  
                  
                  $
                  (266
                  )
                  
                  $
                  3,030
                  
                  
                  $
                  (183
                  )
                  
                  $
                  22,767
                  
                  
                  $
                  (449
                  )




The above
table represents 30 mortgage-related securities for which the market value at
December 31, 2009 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,
during the three months ended December 31, 2009 credit-related impairments
aggregating $184 on the five private label collateralized mortgage obligations
through earnings.




The
following table details the rollforward of credit-related losses on
collateralized mortgage obligations recorded in earnings and as a component of
OCI for the three months ended December 31, 2009:




Gross OTTI
                  
                  
                  OTTI
      Included
                    in OCI
                  
                  
                  OTTI
      Included
                    in EarningsOctober
      1, 2009
                  
                  $
                  81
                  
                  
                  $
                  26
                  
                  
                  $
                  55Additions:
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Balance,
      December 31, 2009
                  
                  $
                  81
                  
                  
                  $
                  26
                  
                  
                  $
                  55




There
were no credit-related losses on collateralized mortgage obligations recorded in
earnings and as a component of other comprehensive income for the three months
ended December 31, 2008.




There
were no sales of available-for-sale mortgage-related securities during the three
months ended December 31, 2009.





At
December 31, 2009, mortgage-related securities in a gross unrealized loss
position for twelve months or longer consisted of ten securities having an
aggregate depreciation of 5.7% from the Company's amortized cost basis.
Management does not believe any individual unrealized loss as of December 31,
2009 represents an other-than-temporary impairment. The unrealized losses
reported for mortgage-related securities relate primarily to securities issued
by the FMNA, the FHLMC 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.


- 9
-




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
                  )




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.




For the
three months ended December 31, 2008, proceeds from sales of available-for-sale
mortgage-related securities totaled $19.3 million. Losses on sales of
available-for-sale mortgage-related securities for the three months ending
December 31, 2008 totaled $24. Gains on sales of available-for-sale
mortgage-related securities for the three months ending December 31, 2008
totaled $289, resulting in a net 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 provides consistency and
comparability in determining fair value measurements and provides 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.


- 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 December 31, 2009, and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine such fair value:





Fair Value Measurement at December 31, 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
                
                $
                68,271
                
                
                $
                —
                
                
                $
                68,271
                
                
                $
                —Collateralized
      mortgage obligations
                
                
                18,493
                
                
                
                —
                
                
                
                18,493
                
                
                
                —Municipal
      obligations
                
                
                9,329
                
                
                
                —
                
                
                
                9,329
                
                
                
                —Corporate
      bonds
                
                
                8,823
                
                
                
                2,655
                
                
                
                6,168
                
                
                
                —Pooled
      trust preferred securities
                
                
                5,120
                
                
                
                —
                
                
                
                —
                
                
                
                5,120Mutual
      funds
                
                
                3,276
                
                
                
                3,276
                
                
                
                —
                
                
                
                —Other
      equity investments
                
                
                252
                
                
                
                252
                
                
                
                —
                
                
                
                —Assets measured at fair value
      on a non-recurring basis:Mortgage
      servicing rights
                
                
                313
                
                
                
                —
                
                
                
                —
                
                
                
                313Impaired
      loans
                
                
                7,452
                
                
                
                —
                
                
                
                7,452
                
                
                
                —





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
                
                
                9,713
                
                
                
                —
                
                
                
                9,713
                
                
                
                —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
                
                
                
                —




- 11
-





The
following table presents the changes in the Level III fair-value category for
the three months ended December 31, 2009. The Company classifies financial
instruments in Level III of the fair-value hierarchy when there is reliance on
at least one significant unobservable input to the valuation model. In addition
to these unobservable inputs, the valuation models for Level III financial
instruments typically also rely on a number of inputs that are readily
observable either directly or indirectly.




Fair Value Measurements Using
                    Significant Unobservable Inputs
                    (Level 3)Available for Sale
    SecuritiesBeginning
      balance
                  
                  $
                  5,618Total
      gains or losses (realized/unrealized)Included
      in earnings
                  
                  
                  (659
                  )Included
      in other comprehensive income
                  
                  
                  371Purchases,
      issuances and settlements
                  
                  
                  (210
                  )Transfers
      in and/or out of Level 3
                  
                  
                  —Ending
      balance
                  
                  $
                  5,120The
      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
                  
                  $
                  659





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




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.





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 II fair values. The fair value consists of the loan balances of
$9,848 less their valuation allowances of $2,396 at December 31,
2009.


- 12
-





5.
            LOANS
      RECEIVABLE





Loans receivable consist of the
following:


December
      31,
                  
                  
                  September
      30,2009
                  
                  
                  2009Single-family
                  
                  $
                  143,194
                  
                  
                  $
                  146,258Construction
      and land
                  
                  
                  28,301
                  
                  
                  
                  28,984Multi-family
      and commercial
                  
                  
                  66,901
                  
                  
                  
                  67,241Home
      equity and lines of credit
                  
                  
                  53,238
                  
                  
                  
                  54,612Consumer
      loans
                  
                  
                  2,184
                  
                  
                  
                  2,030Commercial
      loans
                  
                  
                  21,466
                  
                  
                  
                  22,180Total
      loans
                  
                  
                  315,284
                  
                  
                  
                  321,305Loans
      in process
                  
                  
                  (9,327
                  )
                  
                  
                  (10,228
                  )Allowance
      for loan losses
                  
                  
                  (5,588
                  )
                  
                  
                  (4,657
                  )Deferred
      loan costs
                  
                  
                  186
                  
                  
                  
                  180Loans
      receivable – net
                  
                  $
                  300,555
                  
                  
                  $
                  306,600




At
December 31, 2009 and September 30, 2009, non-performing loans (which include
loans in excess of 90 days delinquent) amounted to approximately $4,965 and
$5,417, respectively.  At December 31, 2009, non-performing loans
consisted of five single-family residential mortgage loans aggregating $591, two
non-residential mortgage loans aggregating $1,974, two commercial business loans
aggregating $297, five constructions loans aggregating $1,943, three home equity
loans aggregating $153, and two consumer loans aggregating $7.




At
December 31, 2009 and September 30, 2009 the Company had impaired loans with a
total recorded investment of $9,848 and $7,934,
respectively.  Interest income of $108 was recognized on these
impaired loans during the three months ended December 31,
2009.  Interest income of approximately $76 was not recognized as
interest income due to the non-accrual status of such loans for the three months
ended December 31, 2009.




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:




December
      31,
                    2009
                  
                  
                  September
      30,
                    2009Impaired
      loans with related allowance for loan losses under ASC
      310-10-35-13
                  
                  $
                  8,061
                  
                  
                  $
                  4,536Impaired
      loans with no related allowance for loan losses under ASC
      310-10-35-13
                  
                  
                  1,787
                  
                  
                  
                  3,398Total
      impaired loans
                  
                  $
                  9,848
                  
                  
                  $
                  7,934Valuation
      allowance related to impaired loans
                  
                  $
                  2,396
                  
                  
                  $
                  1,267




- 13
-




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




Three
      Months EndedDecember 31,2009
                  
                  
                  2008Balance
      beginning of period
                  
                  $
                  4,657
                  
                  
                  $
                  3,453Provisions
      charged to income
                  
                  
                  1,100
                  
                  
                  
                  75Charge-offs
                  
                  
                  (171
                  )
                  
                  
                  (229
                  )Recoveries
                  
                  
                  2
                  
                  
                  
                  1Total
                  
                  $
                  5,588
                  
                  
                  $
                  3,300





6.
            DEPOSITS





Deposits consist of the following major
classifications:





December
      31,
                  
                  
                  September
      30,2009
                  
                  
                  2009Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  PercentNon-interest
      bearing
                  
                  $
                  17,385
                  
                  
                  
                  5.0
                  %
                  
                  $
                  18,971
                  
                  
                  
                  5.5
                  %NOW
                  
                  
                  74,302
                  
                  
                  
                  21.4
                  
                  
                  
                  73,620
                  
                  
                  
                  21.2Passbook
                  
                  
                  41,769
                  
                  
                  
                  12.0
                  
                  
                  
                  39,361
                  
                  
                  
                  11.3Money
      market demand
                  
                  
                  50,987
                  
                  
                  
                  14.7
                  
                  
                  
                  46,604
                  
                  
                  
                  13.4Certificates
      of deposit
                  
                  
                  162,993
                  
                  
                  
                  46.9
                  
                  
                  
                  168,568
                  
                  
                  
                  48.6Total
                  
                  $
                  347,436
                  
                  
                  
                  100.0
                  %
                  
                  $
                  347,124
                  
                  
                  
                  100.0
                  %





7.
            EARNINGS
      PER SHARE




Basic net
income (loss) per share is based upon the weighted average number of common
shares outstanding, while diluted net income (loss) per share is based upon the
weighted average number of common shares outstanding and common share
equivalents that would arise from the exercise of dilutive
securities.  All dilutive shares consist of options the exercise price
of which is lower than the market price of the common stock covered thereby at
the dates presented. At December 31, 2009 and 2008, anti-dilutive shares
consisted of options covering 26,466 and 58,566 shares,
respectively.




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




Three
      Months Ended
                        December 31,2009
                      
                      
                      2008Numerator
                      
                      $
                      (1,294
                      )
                      
                      $
                      (63
                      )Denominators:Basic
      shares outstanding
                      
                      
                      2,332,284
                      
                      
                      
                      2,323,596Effect
      of dilutive securities
                      
                      
                      —
                      
                      
                      
                      —Dilutive
      shares outstanding
                      
                      
                      2,332,284
                      
                      
                      
                      2,323,596Earnings
      per share:Basic
                      
                      $
                      (0.55
                      )
                      
                      $
                      (0.03
                      )Diluted
                      
                      $
                      (0.55
                      )
                      
                      $
                      (0.03
                      )




- 14
-




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 December 31, 2009, 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.





Actual
                      
                      
                      Required for
                        Capital Adequacy
                        Purpose
                      
                      
                      Well Capitalized
                        Under Prompt
                        Corrective ActionAmount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      RatioAt
      December 31, 2009:Core
      Capital (to Adjusted Tangible Assets)
                      
                      $
                      42,369
                      
                      
                      
                      8.40
                      %
                      
                      $
                      20,171
                      
                      
                      
                      4.0
                      %
                      
                      $
                      25,214
                      
                      
                      
                      5.0
                      %Tier
      I Capital (to Risk-Weighted Assets)
                      
                      
                      42,369
                      
                      
                      
                      12.42
                      
                      
                      
                      N/A
                      
                      
                      
                      N/A
                      
                      
                      
                      20,464
                      
                      
                      
                      6.0Total
      Capital (to Risk-Weighted Assets)
                      
                      
                      45,616
                      
                      
                      
                      13.37
                      
                      
                      
                      27,286
                      
                      
                      
                      8.0
                      
                      
                      
                      34,107
                      
                      
                      
                      10.0Tangible
      Capital (to Tangible Assets)
                      
                      
                      42,333
                      
                      
                      
                      8.40
                      
                      
                      
                      7,564
                      
                      
                      
                      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 December 31, 2009,
the Bank was in compliance with such requirement. The Bank has been deemed to be
"well-capitalized" for purposes of the prompt corrective action regulations by
the OTS. However, due to the supervisory agreement, it is still deemed in
“troubled condition.”




9.
            RECENT
      ACCOUNTING PRONOUNCEMENTS




In June
2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) No. 2009-01, Topic 105 - Generally Accepted Accounting
Principles - FASB Accounting Standards CodificationTM and the Hierarchy of
Generally Accepted Accounting Principles. The Codification is the single source
of authoritative nongovernmental U.S. generally accepted accounting principles
(GAAP).  The Codification does not change current GAAP, but is
intended to simplify user access to all authoritative GAAP by providing all the
authoritative literature related to a particular topic in one
place.  Rules and interpretive releases of the SEC under federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
Company adopted this standard for the period ending September 30,
2009.


- 15
-




In June
2008, the FASB issued accounting guidance related to determining whether
instruments granted in share-based payment transactions are participating
securities, which is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those
years.  This guidance clarified that instruments granted in
share-based payment transactions can be participating securities prior to the
requisite service having been rendered.  A basic principle of this
guidance is that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and are to be included in the computation of EPS
pursuant to the two-class method.  All prior-period EPS data presented
(including interim financial statements, summaries of earnings, and selected
financial data) are required to be adjusted retrospectively to conform with this
guidance.  This accounting guidance was subsequently codified into ASC
Topic 260, Earnings Per
Share.  The adoption of this new guidance did not have a
material impact on the Company’s results of operations or financial
position.




In
September 2006, the FASB issued an accounting standard related to fair
value measurements, which was effective for the Company on October 1,
2008.  This standard defined fair value, established a framework for
measuring fair value, and expanded disclosure requirements about fair value
measurements.  On October 1, 2008, the Company adopted this accounting
standard related to fair value measurements for the Company’s financial assets
and financial liabilities.  The Company deferred adoption of this
accounting standard related to fair value measurements for the Company’s
nonfinancial assets and nonfinancial liabilities, except for those items
recognized or disclosed at fair value on an annual or more frequently recurring
basis, until October 1, 2009.  The adoption of this accounting standard
related to fair value measurements for the Company’s nonfinancial assets and
nonfinancial liabilities did not have a material impact on the Company’s
financial statements. This accounting standard was subsequently codified into
ASC Topic 820, Fair Value
Measurements and Disclosures.




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.




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.


- 16
-




On April
1, 2009, the FASB issued new authoritative accounting guidance under ASC Topic
805, Business
Combinations, which became effective for periods beginning after December
15, 2008.  ASC Topic 805 applies to all transactions and other events
in which one entity obtains control over one or more other businesses. ASC Topic
805 requires an acquirer, upon initially obtaining control of another entity, to
recognize the assets, liabilities and any non-controlling interest in the
acquiree at fair value as of the acquisition date. Contingent consideration is
required to be recognized and measured at fair value on the date of acquisition
rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the
cost-allocation process required under previous accounting guidance whereby the
cost of an acquisition was allocated to the individual assets acquired and
liabilities assumed based on their estimated fair value. ASC Topic 805 requires
acquirers to expense acquisition-related costs as incurred rather than
allocating such costs to the assets acquired and liabilities assumed, as was
previously the case under prior accounting guidance. Assets acquired and
liabilities assumed in a business combination that arise from contingencies are
to be recognized at fair value if fair value can be reasonably estimated. If
fair value of such an asset or liability cannot be reasonably estimated, the
asset or liability would generally be recognized in accordance with ASC Topic
450, Contingencies.
Under ASC Topic 805, the requirements of ASC Topic 420, Exit or Disposal Cost
Obligations, would have to be met in order to accrue for a restructuring
plan in purchase accounting. Pre-acquisition contingencies are to be recognized
at fair value, unless it is a non-contractual contingency that is not likely to
materialize, in which case, nothing should be recognized in purchase accounting
and, instead, that contingency would be subject to the probable and estimable
recognition criteria of ASC Topic 450, Contingencies.  The
adoption of this new guidance did not have a material impact on the Company’s
financial position or results of operations.




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.


- 17
-




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.





December 31, 2009
                  
                  
                  September 30, 2009Carrying/
                    Notional
                    Amount
                  
                  
                  Estimated
                    Fair
                    Value
                  
                  
                  Carrying/
                    Notional
                    Amount
                  
                  
                  Estimated
                    Fair
                    ValueAssets:Cash
      and cash equivalents
                  
                  $
                  28,886
                  
                  
                  $
                  28,886
                  
                  
                  $
                  47,658
                  
                  
                  $
                  47,658Investment
      securities
                  
                  
                  30,004
                  
                  
                  
                  30,155
                  
                  
                  
                  30,369
                  
                  
                  
                  30,528Loans,
      net
                  
                  
                  300,555
                  
                  
                  
                  309,062
                  
                  
                  
                  306,600
                  
                  
                  
                  316,975Mortgage-related
      securities
                  
                  
                  104,504
                  
                  
                  
                  105,126
                  
                  
                  
                  105,355
                  
                  
                  
                  106,126FHLBank
      stock
                  
                  
                  7,060
                  
                  
                  
                  7,060
                  
                  
                  
                  7,060
                  
                  
                  
                  7,060Mortgage
      servicing rights
                  
                  
                  313
                  
                  
                  
                  313
                  
                  
                  
                  314
                  
                  
                  
                  314Accrued
      interest receivable
                  
                  
                  2,176
                  
                  
                  
                  2,176
                  
                  
                  
                  2,343
                  
                  
                  
                  2,343Liabilities:Passbook
      deposits
                  
                  
                  41,769
                  
                  
                  
                  41,769
                  
                  
                  
                  39,361
                  
                  
                  
                  39,361NOW
      and money market deposits
                  
                  
                  125,289
                  
                  
                  
                  125,289
                  
                  
                  
                  120,224
                  
                  
                  
                  120,224Certificates
      of deposit
                  
                  
                  162,993
                  
                  
                  
                  165,467
                  
                  
                  
                  168,568
                  
                  
                  
                  171,759Short-term
      borrowings
                  
                  
                  5,431
                  
                  
                  
                  5,431
                  
                  
                  
                  27,395
                  
                  
                  
                  27,395Other
      borrowings
                  
                  
                  102,651
                  
                  
                  
                  107,801
                  
                  
                  
                  102,653
                  
                  
                  
                  107,749Junior
      subordinated debentures
                  
                  
                  11,648
                  
                  
                  
                  9,650
                  
                  
                  
                  11,646
                  
                  
                  
                  9,650Accrued
      interest payable
                  
                  
                  2,089
                  
                  
                  
                  2,089
                  
                  
                  
                  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.




No
adjustment was made to the entry-value interest rates for changes in credit
performing commercial real estate and business loans, construction loans, and
land loans for which there are no known credit concerns. Management believes
that the risk factor embedded in the entry-value interest rates, along with the
general reserves applicable to the performing commercial, construction, and land
loan portfolios for which there are no known credit concerns, result in a fair
valuation of such loans on an entry-value basis. The fair value of non-accrual
loans, with a recorded book value of approximately $3,897 and $3,876 as of
December 31, 2009 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 December 31, 2009 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 December 31, 2009 and September 30, 2009 and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.


- 18
-




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”). 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 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 $10,500,000
      as of the month end prior to the closing. As of December 31, 2009, the
      amount of the Company's delinquencies was $12.4 million and, if December
      31, 2009 were the month-end immediately preceding the closing of the
      merger, based on such amount of delinquencies at such date, the merger
      consideration to be received for each share of the Company's common stock
      would be 0.6834 of a share of BMBC common stock and $2.02 in
      cash.





Consummation
of the Merger, which is expected to occur late in the second calendar quarter or
early in the third calendar quarter of 2010, is subject to certain conditions,
including, among others, approval of the Merger by shareholders of the Company,
governmental filings and 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.




12.
            SUBSEQUENT
      EVENTS




The
Company assessed events occurring subsequent to December 31, 2009 through
February 16, 2010 for potential recognition and disclosure in the consolidated
financial statements, which were issued on February 16, 2010. In early February
2010, the Company determined to sell two of its five investments in pooled trust
preferred securities with an aggregate recorded book value and an estimated
aggregate fair value of $4.8 million and $3.3 million, respectively, at December
31, 2009 (with an aggregate unrealized loss of $1.6 million (pre-tax) recorded
as a component of other comprehensive income at such date). Subsequently, the
Company sold such securities on February 12, 2010 for an aggregate sales price
of $2.7 million, resulting in pre-tax loss of $2.1 million, which will be
recognized in the quarter ending March 31, 2010. In connection with the
recognition of the loss, the Company will eliminate the $1.6 million (pre-tax)
unrealized loss previously recorded as a component of other comprehensive income
with respect to such securities. As a result of the sale of two of the Company’s
investments in pooled trust preferred securities, the Company believes that it
also will be required to recognize losses for the quarter ended March 31, 2010
with respect to its investment in the three remaining pooled trust preferred
securities. At December 31, 2009, these three pooled trust preferred securities
that the Company continues to hold had an aggregate recorded book value and an
estimated aggregate fair value of approximately $2.8 million and $1.9 million,
respectively (with an aggregate unrealized loss of approximately $968,000
(pre-tax) recorded as a component of other comprehensive income at such
date).  The actual amount of the loss that will be required to be
recognized in the second quarter of fiscal 2010 with respect to these securities
may be more or less than the amount of unrealized losses reflected in
stockholders’ equity as of December 31, 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. In view
of the Company’s implementation of an enhanced credit review and loan
administration infrastructure, as well as underwriting standards with respect to
the origination of commercial loans, the Company has begun to prudently renew
its emphasis on the origination of commercial loans.  However, in
light of current economic conditions and the Company’s overriding goal of
protecting its asset quality, it is expected that growth of the commercial loan
portfolio will be slow for the foreseeable future.




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. 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 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
present at September 30, 2007. As a result of such redemptions and purchases,
the Company’s outstanding junior subordinated debt, as of September 30, 2009,
was $11.6 million and its debt-to-equity ratio is 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.


- 21
-




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 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 December 31, 2009, the Company believes it
and the Bank are in full compliance with all the provisions of the supervisory
agreements.




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 December 31, 2009 and September 30, 2009




Total
assets of the Company decreased by $22.5 million, from $528.4 million at
September 30, 2009 to $505.9 million at December 31, 2009. Loans receivable
decreased by $6.0 million, from $306.6 million at September 30, 2009 to $300.6
million at December 31, 2009 primarily as a result of the Company’s experiencing
repayments which outpaced originations within the single-family residential
mortgage and home equity loan portfolios. Cash and cash equivalents decreased by
$18.8 million to $28.9 million at December 31, 2009 from $47.7 million at
September 30, 2009 primarily due to management’s decision to reduce overnight
borrowings. Prepaid Federal Deposit Insurance Corporation (“FDIC”) assessments
increased by $3.0 million from $0 at September 30, 2009 to $3.0 million at
December 31, 2009 due to the three-year prepayment of FDIC premiums. Deposits
increased slightly from $347.1 million at September 30, 2009 to $347.4 million
at December 31, 2009. However, the composition of the deposit portfolio changed
slightly from September 30, 2009 to December 31, 2009, with a decrease of $5.6
million in certificates of deposit offset by an increase of $5.9 million in core
deposits. The decline in certificates of deposit was primarily due to
management’s determination to allow the runoff of certificates of deposit
bearing above-market rates that would have been renewed at lower rates had the
certificates renewed at the Bank upon their maturity.




Comparison
of Results of Operations for the Three Months Ended December 31, 2009 and
2008




Net Loss.  Net loss
was $1.3 million, or $.55 per diluted share, for the quarter ended December 31,
2009 as compared to net loss of $63,000, or $.03 per diluted share, for the same
period in 2008.




Net Interest
Income.  Net interest income increased $177,000, or 6.3%, to
$3.0 million for the three months ended December 31, 2009, as compared to the
same period in 2008. The increase in net interest income for the three months
ended December 31, 2009 was primarily due to a decrease in interest expense of
$621,000, or 18.2%, substantially offset by a decrease in interest income of
$444,000, or 7.1%, as compared to the same period in 2008. The declines in both
interest expense and interest income were primarily the result of declines in
the rates paid and yields earned reflecting the effect of declines in market
rates of interest during 2009 with interest-bearing liabilities reflecting such
declines more rapidly due to their greater interest sensitivity. The weighted
average yield earned on interest-earning assets for the three months ended
December 31, 2009 decreased 66 basis points to 4.76% from 5.42% for the same
period in the prior fiscal year. For the three months ended December 31, 2009,
the weighted average rate paid on interest-bearing liabilities decreased 66
basis points to 2.33% from 2.99% for the same period in the prior fiscal
year.




The
interest rate spread and net interest margin remained substantially unchanged at
2.43% and 2.47%, respectively, for the three months ended December 31, 2009 as
compared to 2.43% and 2.46%, respectively, for the same period in 2008. Net
average interest-earnings assets increased by $3.4 million to $7.7 million for
the three months ended December 31, 2009 from $4.3 million for the three months
ended December 31, 2008.




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 December 31, 2009 and 2008.


- 22
-





For the three months
      endedDecember 31, 2009
                  
                  
                  December 31, 2008(Dollars
      in thousands)
                  
                  Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    Yield/
                    Cost
                  
                  
                  Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    Yield/
                    CostInterest-earning
      assets:Loans
      receivable(1)
                  
                  $
                  305,310
                  
                  
                  $
                  4,298
                  
                  
                  
                  5.63
                  %
                  
                  $
                  286,042
                  
                  
                  $
                  4,260
                  
                  
                  
                  5.96
                  %Mortgage-related
      securities(2)
                  
                  
                  107,813
                  
                  
                  
                  1,179
                  
                  
                  
                  4.37
                  
                  
                  
                  123,230
                  
                  
                  
                  1,553
                  
                  
                  
                  5.04Investment
      securities(2)
                  
                  
                  37,716
                  
                  
                  
                  285
                  
                  
                  
                  3.02
                  
                  
                  
                  33,917
                  
                  
                  
                  395
                  
                  
                  
                  4.66Other
      interest-earning assets
                  
                  
                  34,635
                  
                  
                  
                  18
                  
                  
                  
                  0.21
                  
                  
                  
                  16,182
                  
                  
                  
                  16
                  
                  
                  
                  0.40Total
      interest-earning assets
                  
                  
                  485,474
                  
                  
                  
                  5,780
                  
                  
                  
                  4.76
                  
                  
                  
                  459,371
                  
                  
                  
                  6,224
                  
                  
                  
                  5.42Non-interest-earning
      assets
                  
                  
                  32,555
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  34,751Total
      assets
                  
                  $
                  518,029
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  494,122Interest-bearing
      liabilities:Deposits
                  
                  $
                  356,809
                  
                  
                  
                  1,192
                  
                  
                  
                  1.34
                  
                  
                  $
                  322,433
                  
                  
                  
                  1,727
                  
                  
                  
                  2.14FHLB
      advances and other borrowings
                  
                  
                  109,290
                  
                  
                  
                  1,304
                  
                  
                  
                  4.77
                  
                  
                  
                  120,971
                  
                  
                  
                  1,390
                  
                  
                  
                  4.60Junior
      subordinated debentures
                  
                  
                  11,646
                  
                  
                  
                  286
                  
                  
                  
                  9.82
                  
                  
                  
                  11,639
                  
                  
                  
                  286
                  
                  
                  
                  9.83Total
      interest-bearing liabilities
                  
                  
                  477,745
                  
                  
                  
                  2,782
                  
                  
                  
                  2.33
                  
                  
                  
                  455,043
                  
                  
                  
                  3,403
                  
                  
                  
                  2.99Interest
      rate spread(3)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.43
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.43
                  %Non-interest-bearing
      liabilities
                  
                  
                  6,389
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  7,026Total
      liabilities
                  
                  
                  484,134
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  462,069Stockholders’
      equity
                  
                  
                  33,895
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  32,053Total
      liabilities and stockholders’ equity
                  
                  $
                  518,029
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  494,122Net
      interest-earning assets
                  
                  $
                  7,729
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  4,328Net
      interest income
                  
                  
                  
                  
                  
                  $
                  2,998
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  2,821Net
      interest margin(3)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.47
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.46
                  %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  101.62
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  100.95
                  %


(1)
Includes non-accrual loans.


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


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


- 23
-


Provision for Loan
Losses.For the three months ended December 31, 2009, as
compared to the three months ended September 30, 2009, the provision for loan
losses decreased $375,000 to $1.1 million but increased $1.0 million from
$75,000 for the quarter ended December 31, 2008. At December 31, 2009,
classified and criticized loans totaled $22.7 million, as compared to $23.3
million at September 30, 2009. The level of the provision for loan losses in the
first quarter of fiscal 2010 as compared to the same period in fiscal 2009
primarily reflected the increase in classified and criticized loans between
December 31, 2008 and December 31, 2009 as well as the ongoing evaluation of the
Bank’s loan portfolio.  The provision for loan losses was based on the
Company’s quarterly review of the credit quality of its loan portfolio, the
level of criticized and classified loans, the amount of net charge-offs during
the first quarter of fiscal 2010 and other factors.  The Company's
coverage ratio, which is the ratio of the allowance for loan losses to
non-performing loans, was 112.6% and 86.0% at December 31, 2009 and September
30, 2009, respectively.




At
December 31, 2009, non-performing assets increased $958,000 to $6.4 million, or
1.3%, of total assets, from $5.4 million at September 30,
2009.  Non-performing assets at December 31, 2009 consisted of
non-accrual loans aggregating $3.9 million comprised of two commercial real
estate mortgage loans aggregating $2.0 million, two residential construction
loans to the same borrower aggregating $881,000, five single-family mortgage
loans aggregating $591,000, two commercial business loans aggregating $297,000
and three home equity loans aggregating $153,000. Also included in
non-performing assets at December 31, 2009 were three construction loans
aggregating $1.1 million which had exceeded their contractual maturity but which
continue to pay interest in accordance with the original terms of the loans. In
addition to non-performing loans, included in non-performing assets at December
31, 2009 was a $370,000 condominium located in Philadelphia which became real
estate owned during the first quarter of fiscal 2010 and the Company’s $1.0
million investment in one pooled trust preferred security that began deferring
interest payments during the quarter ended December 31, 2009 and was placed on
non-accrual status. In addition, loans 30 to 89 days delinquent increased
$792,000, from $4.6 million at September 30, 2009 to $5.4 million at December
31, 2009.




Management continues to review its loan
portfolio to determine the extent, if any, to which additional loss provisions
may be deemed necessary.  There can be no assurance that the allowance
for losses will be adequate to cover losses which may in fact be realized in the
future and that additional provisions for losses will not be
required.




Non-interest Income.For the
quarter ended December 31, 2009, non-interest income decreased $698,000 from
$433,000 for the same period last year to a loss of $265,000 for the three
months ended December 31, 2009. The decrease was primarily due to non-cash
impairment charges recorded for the quarter ended December 31, 2009 aggregating
$843,000 related to the determination that the decline in value of the Company’s
$1.7 million investment in three pooled trust preferred securities and its $1.7
million investment in five private label collateralized mortgage obligations was
other than temporary. Due to increasing levels of deferrals of interest payments
and/or increasing levels of deferrals and defaults by the underlying issuers,
the Company determined to record a pre-tax impairment charge with respect to
pooled trust securities totaling approximately $659,000.  In addition,
it recorded a $536,000 non-credit-related impairment charge with respect to such
securities as an adjustment to other comprehensive income.  Such
charges reflected management’s assessment of the future of the estimated future
cash flows of such securities. It also recorded an $184,000 credit-related
non-cash impairment charge with respect to the private label collateralized
mortgage obligations.  There was no non-credit-related charge recorded
with respect to such securities for the quarter.




Non-interest
Expense.Non-interest expense increased $322,000 to $3.5
million for the quarter ended December 31, 2009 as compared to the same period
last year.  The increase for the quarter ended December 31, 2009 was
primarily due to merger-related expenses of $385,000 and a $118,000 increase in
federal deposit insurance premiums, partially offset by decreases of $68,000 and
$62,000 in salaries and employee benefits expense and advertising expense,
respectively.




Income Tax Expense.The Company incurred an
income tax expense of $93,000 for the quarter ended December 31, 2008 as
compared to an income tax benefit of $540,000 for the quarter ended December 31,
2009 reflecting the loss incurred for the quarter ended December 31, 2009 as
compared to a small amount of net income for the same period last
year.


- 24
-




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 December 31, 2009, the Company had $102.7 million of
outstanding advances and no overnight borrowings from the FHLBank
Pittsburgh.  The Bank currently has the ability to obtain up to $89.7
million of additional advances from the FHLBank Pittsburgh.




Liquidity management is both a daily
and long-term function of business management.  Excess liquidity is
generally invested in short-term investments such as overnight
deposits.  On a longer term basis, the Company maintains a strategy of
investing in various lending products, mortgage-related securities and
investment securities.  The Company uses its sources of funds
primarily to meet its ongoing commitments, to fund maturing certificates of
deposit and savings withdrawals, fund loan commitments and maintain a portfolio
of mortgage-related and investment securities.  At December 31, 2009,
total approved loan commitments outstanding amounted to $3.4 million, not
including $9.3 million in loans in process.  At the same date,
commitments under unused lines of credit amounted to $36.0
million.  Certificates of deposit scheduled to mature in one year or
less at December 31, 2009 totaled $119.8 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 December 31, 2009, the Bank had
tangible capital and core capital equal to 8.4% of adjusted total assets and
total capital equal to 13.4% 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.


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-




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 December 31, 2009.





Net Portfolio Value
                          (Dollars in thousands)Changes in
                          Rates in
                          Basis Points
                        
                        
                        Amount
                        
                        
                        Dollar
                          Change
                        
                        
                        Percentage
                          Change
                        
                        
                        Net
                          Portfolio Value As
                          a % of Assets
                        
                        
                        Change300
                        
                        
                        $
                        37,372
                        
                        
                        $
                        (19,303
                        )
                        
                        
                        (34
                        )%
                        
                        
                        7.48
                        %
                        
                        
                        (329
                        )
      bp200
                        
                        
                        
                        44,678
                        
                        
                        
                        (11,997
                        )
                        
                        
                        (21
                        )
                        
                        
                        8.78
                        
                        
                        
                        (199
                        )
      bp100
                        
                        
                        
                        51,376
                        
                        
                        
                        (5,299
                        )
                        
                        
                        (
      9
                        )
                        
                        
                        9.92
                        
                        
                        
                        (85
                        )
      bp0
                        
                        
                        
                        56,675
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        10.77
                        
                        
                        
                        —
                        bp(100
                        )
                        
                        
                        60,786
                        
                        
                        
                        4,111
                        
                        
                        
                        7
                        
                        
                        
                        11.42
                        
                        
                        
                        65
                        bp





As of December 31, 2009, the Company’s
NPV was $56.7 million or 10.77% of the market value of
assets.  Following a 200 basis point increase in interest rates, the
Company’s “post shock” NPV would be $44.7 million or 8.78% of the market value
of assets.  The change in the NPV ratio or the Company’s sensitivity
measure was a decline of 199 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, the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based on such evaluation, our Chief Executive Officer 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 Rule 13a-15(f) under the Securities Exchange
Act of 1934) occurred during the most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.


- 26
-





PART
II





Item
      1.
            Legal
      Proceedings




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





Item
      1A.
            Risk
      Factors




There
were no material changes from the risk factors described in the Company’s Annual
Report on Form 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.
            Submission of Matters
      to a Vote of Security
Holders





Not applicable





Item
      5.
            Other
      Information




(a) Not
applicable




(b) No
changes in procedures.




- 27
-


Item
      6.
            Exhibits




List of Exhibits




ExhibitNo
              
              Description2.1
              
              Agreement
      and Plan of Merger By and Between Bryn Mawr Bank Corporation and First
      Keystone Financial, Inc. dated November 3, 2009 13.1
              
              Amended
      and Restated Articles of Incorporation of First Keystone Financial, Inc.
      23.2
              
              Amended
      and Restated Bylaws of First Keystone Financial, Inc. 24.1
              
              Specimen
      Stock Certificate of First Keystone Financial, Inc. 34.2
              
              Instrument
      defining the rights of security holders **10.1
              
              Form
      of Amended and Restated Severance Agreement between First Keystone
      Financial, Inc. and Carol Walsh 4,*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
              
              Form
      of Amended and Restated Severance Agreement between First Keystone Bank
      and Carol Walsh 4, *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
    710.10
              
              Form
      of Registration Rights Agreement 811
              
              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 Officer31.2
              
              Section
      302 Certification of Chief Financial Officer32.1
              
              Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 200232.2
              
              Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 200299.1
              
              Supervisory
      Agreement between First Keystone Financial, Inc. and the Office of Thrift
      Supervision dated February 13, 2006. 999.2
              
              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 10.1, 10.4, 10.6, 10.5, and 10.3, respectively,
      in the Form 8-K filed by the Registrant with SEC on December 1, 2007 (File
      No. 000-25328).




- 28
-




(5)
            Incorporated
      by reference from Exhibit 10.1 in the Form 8-K filed by the Registrant
      with the SEC on July 3, 2007.




(6)
            Incorporated
      by reference from Exhibit 10.1 in the Form 8-K filed by the Registrant
      with the SEC on August 19, 2006.




(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.


- 29
-


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:    February
      16, 2010
            By:
            /s/ David M. TakatsDavid
      M. TakatsSenior
      Vice President and Chief Financial OfficerDate:    February
      16, 2010
            By:
            /s/ Hugh J. GarchinskyHugh
      J. GarchinskyPresident
      and Chief Executive Officer




- 30
-