UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 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.
 
  Pennsylvania
    
    23-2576479(State or other jurisdiction 
of incorporation or organization)
    
    (I.R.S. Employer
Identification Number)22 West State Street 
Media, Pennsylvania
    
    19063(Address of principal executive office)
    
    (Zip Code)
  þ o
 o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ o þ




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##### 



FIRST KEYSTONE FINANCIAL, INC.
 Contents
 PagePART I
    
    FINANCIAL INFORMATION:Item 1.
    
    Financial StatementsConsolidated Statements of Financial Condition as of March 31, 2009 (Unaudited) and September 30, 2008
    
    
    1Unaudited Consolidated Statements of Income for the Three and Six Months Ended March 31, 2009 and 2008
    
    
    2Unaudited Consolidated Statement of Changes in Stockholders Equity for the Six Months Ended March 31, 2009 and 2008
    
    
    3Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2009 and 2008
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4T.
    
    Controls and Procedures
    
    
    29PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    30Item 1A.
    
    Risk Factors
    
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3.
    
    Defaults Upon Senior Securities
    
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    30Item 5.
    
    Other Information
    
    
    31Item 6.
    
    Exhibits
    
    
    31SIGNATURES
    
    
    
    
    33




---



##### 



March
    
    
    September31,
    
    
    30,2009
    
    
    2008ASSETS:Cash and amounts due from depository institutions
    
    $
    2,950
    
    
    $
    4,340Interest-bearing deposits with depository institutions
    
    
    43,322
    
    
    
    34,980Total cash and cash equivalents
    
    
    46,272
    
    
    
    39,320Investment securities available for sale
    
    
    21,885
    
    
    
    26,545Mortgage-related securities available for sale
    
    
    101,714
    
    
    
    102,977Investment securities held to maturity  at amortized cost
(approximate fair value of $3,379 at March 31, 2009
and $3,271 at September 30, 2008)
    
    
    3,254
    
    
    
    3,255Mortgage-related securities held to maturity  at amortized cost
(approximate fair value of $23,331 at March 31, 2009
and $25,204 at September 30, 2008)
    
    
    22,699
    
    
    
    25,359Loans receivable (net of allowance for loan losses of $3,998 and $3,453
at March 31, 2009 and September 30, 2008, respectively)
    
    
    289,914
    
    
    
    286,106Accrued interest receivable
    
    
    2,248
    
    
    
    2,452FHLBank stock, at cost
    
    
    7,060
    
    
    
    6,995Office properties and equipment, net
    
    
    4,306
    
    
    
    4,386Deferred income taxes
    
    
    3,451
    
    
    
    4,323Cash surrender value of life insurance
    
    
    18,186
    
    
    
    17,941Prepaid expenses and other assets
    
    
    3,282
    
    
    
    2,397TOTAL ASSETS
    
    $
    524,271
    
    
    $
    522,056LIABILITIES AND STOCKHOLDERS EQUITY:Liabilities:Deposits:Non-interest-bearing
    
    $
    16,660
    
    
    $
    20,101Interest-bearing
    
    
    307,344
    
    
    
    310,763Total deposits
    
    
    324,004
    
    
    
    330,864Advances from FHLBank and other borrowings
    
    
    126,658
    
    
    
    137,574Repurchase agreements
    
    
    21,665
    
    
    
    3,585Junior subordinated debentures
    
    
    11,642
    
    
    
    11,639Accrued interest payable
    
    
    1,871
    
    
    
    1,886Advances from borrowers for taxes and insurance
    
    
    2,052
    
    
    
    974Accounts payable and accrued expenses
    
    
    3,212
    
    
    
    3,238Total liabilities
    
    
    491,104
    
    
    
    489,760Commitments and contingencies
    
    
    
    
    
    
    Stockholders Equity:Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.01 par value, 20,000,000 shares authorized; issued 2,712,556
shares; outstanding at March 31, 2009 and September 30, 2008, 2,432,998 shares
    
    
    27
    
    
    
    27Additional paid-in capital
    
    
    12,574
    
    
    
    12,586Employee stock ownership plan
    
    
    (2,813
    )
    
    
    (2,872
    )Treasury stock at cost: 279,558 shares at March 31, 2009 and at September 30, 2008
    
    
    (4,244
    )
    
    
    (4,244
    )Accumulated other comprehensive loss
    
    
    (1,022
    )
    
    
    (2,714
    )Retained earnings  partially restricted
    
    
    28,645
    
    
    
    29,513Total stockholders equity
    
    
    33,167
    
    
    
    32,296TOTAL LIABILITIES AND STOCKHOLDERS EQUITY:
    
    $
    524,271
    
    
    $
    522,056
  -1-




---



##### 



Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2009
    
    
    2008INTEREST INCOME:Interest and fees on loans
    
    $
    4,092
    
    
    $
    4,391
    
    
    $
    8,353
    
    
    $
    9,062Interest and dividends on:Mortgage-related securities
    
    
    1,424
    
    
    
    1,583
    
    
    
    2,978
    
    
    
    2,963Investment securities:Taxable
    
    
    316
    
    
    
    402
    
    
    
    666
    
    
    
    797Tax-exempt
    
    
    46
    
    
    
    42
    
    
    
    88
    
    
    
    84Dividends
    
    
    4
    
    
    
    66
    
    
    
    7
    
    
    
    152Interest on interest-bearing deposits
    
    
    12
    
    
    
    178
    
    
    
    27
    
    
    
    341Total interest income
    
    
    5,894
    
    
    
    6,662
    
    
    
    12,119
    
    
    
    13,399INTEREST EXPENSE:Interest on:Deposits
    
    
    1,492
    
    
    
    2,423
    
    
    
    3,219
    
    
    
    5,101FHLBank and other borrowings
    
    
    1,286
    
    
    
    1,374
    
    
    
    2,676
    
    
    
    2,599Junior subordinated debentures
    
    
    286
    
    
    
    365
    
    
    
    571
    
    
    
    732Total interest expense
    
    
    3,064
    
    
    
    4,162
    
    
    
    6,466
    
    
    
    8,432Net interest income
    
    
    2,830
    
    
    
    2,500
    
    
    
    5,653
    
    
    
    4,967PROVISION FOR LOAN LOSS
    
    
    700
    
    
    
    14
    
    
    
    775
    
    
    
    56Net interest income after provision for loan losses
    
    
    2,130
    
    
    
    2,486
    
    
    
    4,878
    
    
    
    4,911NON-INTEREST INCOME:Service charges and other fees
    
    
    331
    
    
    
    410
    
    
    
    743
    
    
    
    832Net gain on sales of loans held for sale
    
    
    75
    
    
    
    
    
    
    
    83
    
    
    
    Net (loss) gain on sale of investments
    
    
    (10
    )
    
    
    
    
    
    
    180
    
    
    
    69Total other-than-temporary impairment losses
    
    
    (994
    )
    
    
    
    
    
    
    (1,417
    )
    
    
    Portion of loss recognized in other comprehensive income (before taxes)
    
    
    245
    
    
    
    
    
    
    
    245
    
    
    
    Net impairment loss recognized in earnings
    
    
    (749
    )
    
    
    
    
    
    
    (1,172
    )
    
    
    Increase in cash surrender value of life insurance
    
    
    90
    
    
    
    178
    
    
    
    245
    
    
    
    360Other income
    
    
    98
    
    
    
    120
    
    
    
    189
    
    
    
    209Total non-interest income
    
    
    (165
    )
    
    
    708
    
    
    
    268
    
    
    
    1,470NON-INTEREST EXPENSE:Salaries and employee benefits
    
    
    1,438
    
    
    
    1,440
    
    
    
    2,911
    
    
    
    2,870Occupancy and equipment
    
    
    415
    
    
    
    417
    
    
    
    812
    
    
    
    817Professional fees
    
    
    297
    
    
    
    299
    
    
    
    659
    
    
    
    581Federal deposit insurance premium
    
    
    219
    
    
    
    49
    
    
    
    329
    
    
    
    100Data processing
    
    
    140
    
    
    
    144
    
    
    
    293
    
    
    
    281Advertising
    
    
    84
    
    
    
    110
    
    
    
    215
    
    
    
    211Deposit processing
    
    
    177
    
    
    
    145
    
    
    
    323
    
    
    
    290Other
    
    
    403
    
    
    
    378
    
    
    
    782
    
    
    
    774Total non-interest expense
    
    
    3,173
    
    
    
    2,982
    
    
    
    6,324
    
    
    
    5,924Income (loss) before income tax expense (benefit)
    
    
    (1,208
    )
    
    
    212
    
    
    
    (1,178
    )
    
    
    457Income tax expense (benefit)
    
    
    (402
    )
    
    
    5
    
    
    
    (310
    )
    
    
    18Net income (loss)
    
    $
    (806
    )
    
    $
    207
    
    
    $
    (868
    )
    
    $
    439Earnings per common share:Basic
    
    $
    (0.35
    )
    
    $
    0.09
    
    
    $
    (0.37
    )
    
    $
    0.19Diluted
    
    $
    (0.35
    )
    
    $
    0.09
    
    
    $
    (0.37
    )
    
    $
    0.19Weighted average shares  basic
    
    
    2,325,768
    
    
    
    2,317,080
    
    
    
    2,324,670
    
    
    
    2,315,998Weighted average shares  diluted
    
    
    2,325,768
    
    
    
    2,317,337
    
    
    
    2,324,670
    
    
    
    2,316,311
  -2-




---



##### 



Employee
    
    
    
    
    
    
    Accumulated
    
    
    RetainedAdditional
    
    
    stock
    
    
    
    
    
    
    other
    
    
    earnings-
    
    
    TotalCommon
    
    
    paid-in
    
    
    ownership
    
    
    Treasury
    
    
    comprehensive
    
    
    partially
    
    
    stockholdersstock
    
    
    capital
    
    
    plan
    
    
    stock
    
    
    loss
    
    
    restricted
    
    
    equityBALANCE AT OCTOBER 1, 2007
    
    $
    27
    
    
    $
    12,598
    
    
    $
    (2,985
    )
    
    $
    (4,244
    )
    
    $
    (1,223
    )
    
    $
    30,521
    
    
    $
    34,694Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    439
    
    
    
    439Other comprehensive income, net of taxes:Net unrealized gain on securitiesNet of reclassification adjustment(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    715
    
    
    
    
    
    
    
    715Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,154ESOP shares committed to be released
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55Difference between cost and fair value of
ESOP shares committed to be released
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )BALANCE AT MARCH 31, 2008
    
    $
    27
    
    
    $
    12,595
    
    
    $
    (2,930
    )
    
    $
    (4,244
    )
    
    $
    (508
    )
    
    $
    30,960
    
    
    $
    35,900BALANCE AT OCTOBER 1, 2008
    
    $
    27
    
    
    $
    12,586
    
    
    $
    (2,872
    )
    
    $
    (4,244
    )
    
    $
    (2,714
    )
    
    $
    29,513
    
    
    $
    32,296Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (868
    )
    
    
    (868
    )Other comprehensive income, net of taxes:Unrealized loss on securities for which
an other-than-temporary impairment
loss has been recognized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162
    )
    
    
    
    
    
    
    (162
    )Net unrealized gain on securities
Net of reclassification adjustment(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,854
    
    
    
    
    
    
    
    1,854Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    824ESOP shares committed to be released
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59Difference between cost and fair value of
ESOP shares committed to be released
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )Share-based compensation
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4BALANCE AT MARCH 31, 2009
    
    $
    27
    
    
    $
    12,574
    
    
    $
    (2,813
    )
    
    $
    (4,244
    )
    
    $
    (1,022
    )
    
    $
    28,645
    
    
    $
    33,167
 
 (1)
    
    Components of other comprehensive gain: March 31,2009
    
    
    2008Change in net unrealized loss on investment securities available for sale
    
    $
    1,037
    
    
    $
    761Realized loss (gain) included in net loss (income), net of tax benefit
(expense) of $337 and $(23), respectively
    
    
    655
    
    
    
    (46
    )Net unrealized gain on securities
    
    $
    1,692
    
    
    $
    715
  -3-




---



##### 



Six months ended March 31,2009
    
    
    2008OPERATING ACTIVITIES:Net (loss) income
    
    $
    (868
    )
    
    $
    439Adjustments to reconcile net income (loss) to net cash provided by operating activities:Provision for depreciation and amortization
    
    
    288
    
    
    
    285Amortization of premiums and discounts
    
    
    (4
    )
    
    
    40Increase in cash surrender value of life insurance
    
    
    (245
    )
    
    
    (360
    )(Gain) loss on sales of:Loans held for sale
    
    
    (83
    )
    
    
    Investment securities available for sale
    
    
    85
    
    
    
    (69
    )Mortgage-related securities available for sale
    
    
    (265
    )
    
    
    Net impairment losses realized in earnings
    
    
    1,172
    
    
    
    Provision for loan losses
    
    
    775
    
    
    
    56Amortization of ESOP
    
    
    43
    
    
    
    52Share-based compensation
    
    
    4
    
    
    
    Changes in assets and liabilities which provided (used) cash:Origination of loans held for sale
    
    
    (10,035
    )
    
    
    Loans sold in the secondary market
    
    
    10,118
    
    
    
    Accrued interest receivable
    
    
    204
    
    
    
    170Prepaid expenses and other assets
    
    
    (885
    )
    
    
    (62
    )Accrued interest payable
    
    
    (15
    )
    
    
    15Accrued expenses
    
    
    (26
    )
    
    
    401Net cash provided by operating activities
    
    
    263
    
    
    
    967INVESTING ACTIVITIES:Loans originated
    
    
    (73,031
    )
    
    
    (32,121
    )Purchases of:Mortgage-related securities available for sale
    
    
    (24,187
    )
    
    
    (41,625
    )Investment securities available for sale
    
    
    (4,966
    )
    
    
    (4,977
    )Redemption of FHLB stock
    
    
    1,328
    
    
    
    1,521Purchase of FHLB stock
    
    
    (1,393
    )
    
    
    (1,480
    )Proceeds from sales of investment and mortgage-related securities available for sale
    
    
    23,532
    
    
    
    69Principal collected on loans
    
    
    68,421
    
    
    
    46,103Proceeds from maturities, calls, or repayments of:Investment securities available for sale
    
    
    4,421
    
    
    
    3,027Mortgage-related securities available for sale
    
    
    8,753
    
    
    
    7,981Mortgage-related securities held to maturity
    
    
    2,637
    
    
    
    2,766Purchase of property and equipment
    
    
    (208
    )
    
    
    (110
    )Net cash used in investing activities
    
    
    (5,307
    )
    
    
    (18,846
    )FINANCING ACTIVITIES:Net decrease in deposit accounts
    
    
    (6,860
    )
    
    
    (5,937
    )FHLBank advances and other borrowings  repayments
    
    
    (98,940
    )
    
    
    (56,190
    )FHLBank advances and other borrowings  draws
    
    
    88,024
    
    
    
    54,002Net increase in repurchase agreements
    
    
    18,080
    
    
    
    Net increase in advances from borrowers for taxes and insurance
    
    
    1,078
    
    
    
    1,173Net cash provided by (used in) financing activities
    
    
    1,382
    
    
    
    (6,952
    )INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    6,952
    
    
    
    (24,831
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    39,320
    
    
    
    52,935CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    46,272
    
    
    $
    28,104SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:Cash payments for interest on deposits and borrowings
    
    $
    6,481
    
    
    $
    8,417Cash payments of income taxes
    
    
    60
    
    
    
    50
  -4-




---



##### 



1.
    
    BASIS OF PRESENTATIONThe accompanying unaudited consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. However, such information reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the periods.The results of operations for the three and six months ended March 31, 2009 are not
necessarily indicative of the results to be expected for the fiscal year ending September
30, 2009 or any other period. The consolidated financial statements presented herein should
be read in conjunction with the audited consolidated financial statements and related notes
thereto included in the First Keystone Financial, Inc. (the Company) Annual Report on Form
10-K for the year ended September 30, 2008.
 2.
    
    INVESTMENT SECURITIESThe amortized cost and approximate fair value of investment securities available for sale and held
to maturity, by contractual maturities, as of March 31, 2009 are as follows:
 March 31, 2009Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:Municipal obligations:1 to 5 years
    
    $
    813
    
    
    $
    3
    
    
    $
    
    
    
    $
    8165 to 10 years
    
    
    3,602
    
    
    
    145
    
    
    
    (2
    )
    
    
    3,745Over 10 years
    
    
    997
    
    
    
    49
    
    
    
    
    
    
    
    1,046Corporate bonds:1 to 5 years
    
    
    4,087
    
    
    
    69
    
    
    
    (10
    )
    
    
    4,1465 to 10 years
    
    
    1,532
    
    
    
    28
    
    
    
    
    
    
    
    1,560Pooled trust preferred securities
    
    
    8,534
    
    
    
    
    
    
    
    (2,889
    )
    
    
    5,645Mutual funds
    
    
    3,865
    
    
    
    20
    
    
    
    
    
    
    
    3,885Other equity investments
    
    
    1,040
    
    
    
    31
    
    
    
    (29
    )
    
    
    1,042Total
    
    $
    24,470
    
    
    $
    345
    
    
    $
    (2,930
    )
    
    $
    21,885Held to Maturity:Municipal obligations:1 to 5 years
    
    $
    2,586
    
    
    $
    95
    
    
    $
    
    
    
    $
    2,6815 to 10 years
    
    
    668
    
    
    
    30
    
    
    
    
    
    
    
    698Total
    
    $
    3,254
    
    
    $
    125
    
    
    $
    
    
    
    $
    3,379
 -5-




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##### 



Provided below is a summary of investment securities available for sale and held to maturity
which were in an unrealized loss position at March 31, 2009.
 Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalApproximate
    
    
    Unrealized
    
    
    Approximate
    
    
    Unrealized
    
    
    Approximate
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesCorporate bonds
    
    $
    1,335
    
    
    $
    (10
    )
    
    $
    
    
    
    $
    
    
    
    $
    1,335
    
    
    $
    (10
    )Pooled trust preferred
securities
    
    
    
    
    
    
    
    
    
    
    5,355
    
    
    
    (2,889
    )
    
    
    5,355
    
    
    
    (2,889
    )Municipal obligations
    
    
    198
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    198
    
    
    
    (2
    )Other equity investments
    
    
    276
    
    
    
    (29
    )
    
    
    
    
    
    
    
    
    
    
    276
    
    
    
    (29
    )Total
    
    $
    1,809
    
    
    $
    (41
    )
    
    $
    5,355
    
    
    $
    (2,889
    )
    
    $
    7,164
    
    
    $
    (2,930
    )
 The above table represents 21 investment securities where the current value is less than the
related amortized cost.
 Included in the first table above are pooled trust preferred securities. Trust preferred
securities are very long-term (usually 30-year maturity) instruments with characteristics of
both debt and equity, mainly issued by banks. 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 March 31, 2009, the Company had investments in
five pooled trust preferred securities with an aggregate balance of $5.6 million. Although
permitted by the debt instruments, as of March 31, 2009, none of the pooled trust preferred
securities had begun to defer payments. However, as a result of the overall deterioration of
the credit markets and the number of underlying issuers deferring interest payments, as well
as issuers defaulting, the rating agencies have downgraded three of the Companys
investments in pooled trust preferred securities aggregating $2.2 million. Management
believes that trust-preferred valuations have been negatively affected by an inactive market
and by concerns that the underlying banks and other companies may have significant exposure
to losses from sub-prime mortgages, defaulted collateralized debt obligations or other
concerns.In addition, the fair value of the Companys $3.3 million investment in a mutual fund
continued to decline during the period. Management attributes this continued decline to a
widening of the spreads in the bond market for mortgage-related securities due to the
ongoing instability in the mortgage markets.The Company reviews investment debt securities on an ongoing basis for the presence of other
than temporary impairment (OTTI) with formal reviews performed quarterly. OTTI losses on
individual investment securities were recognized during the second quarter of fiscal 2009
according to FSP FAS 115-2 and FAS 124-2 issued by FASB on April 9, 2009. This new guidance
requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on
securities not expected to be sold is recognized in other comprehensive income (loss) (OCI).
The credit-related OTTI recognized during the second quarter 2009 was $623,000, before
taxes, and was solely related to available-for-sale securities newly having a book value of
$3.6 million. Non-credit-related OTTI on these securities, which are not expected to be
sold, was $220,000 and was recognized in OCI, net of taxes during the second quarter 2009.
 -6-




---



##### 



The following table details the rollforward of credit-related losses recorded in earnings
for the six months ended March 31, 2009:
 Pooled TrustPreferredSecuritiesAmount of Other-Than-Temporary Impairment
Related to credit losses at October 1, 2008
    
    
    
    
    
    $
    Addition
    
    
    
    
    
    
    490Amount of Other-Than-Temporary Impairment
Related to credit losses at March 31, 2009
    
    
    
    
    
    $
    490
 At March 31, 2009, investment securities in a gross unrealized loss position for twelve
months or longer consisted of six securities having an aggregate depreciation of 35.0% from
the Companys amortized cost basis. Management believes the declines in market value are the
result of the current volatility in interest rates and turmoil in the capital and debt
markets. Fair values for certain pooled trust preferred securities were determined utilizing
discounted cash flow models due to the absence of a current market to provide a reliable
market quotes for the instruments. The Companys analysis for each pooled trust preferred
securities performed at the CUSIP level shows that the credit quality of the individual
bonds ranges from good to deteriorating. Credit risk does exist and the default of an
individual issuer in a particular pool could affect the ultimate collectability of
contractual amounts. The Company does not have the intent to sell these securities and it is
more likely than not, that it will not have to sell the securities before recovery of their
cost bases. However, the Company will continue to review its investment portfolio to
determine whether any particular impairment is other than temporary. Management does not
believe that any individual unrealized loss as of March 31, 2009 represents an
other-than-temporary impairment.Proceeds from the sales of available-for-sale securities for the three- and six- months
ending March 31, 2009 totaled $250,000 and $4.2 million, respectively. Losses on sales of
available-for-sale investment securities for the three- and six- months ending March 31,
2009 totaled $10,000 and $85,000, respectively. There were no gains on sales of
available-for-sale investment securities for the three- and six- months ending March 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, 2008 are as follows:
 September 30, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:U.S. Government bonds:Over 10 years
    
    $
    2,965
    
    
    $
    7
    
    
    $
    
    
    
    $
    2,972Municipal obligations:5 to 10 years
    
    
    2,901
    
    
    
    55
    
    
    
    (22
    )
    
    
    2,934Over 10 years
    
    
    997
    
    
    
    52
    
    
    
    
    
    
    
    1,049Corporate bonds:Less than 1 year
    
    
    1,000
    
    
    
    4
    
    
    
    
    
    
    
    1,0041 to 5 years
    
    
    1,057
    
    
    
    
    
    
    
    (107
    )
    
    
    9505 to 10 years
    
    
    1,532
    
    
    
    
    
    
    
    
    
    
    
    1,532
 -7-




---



##### 



September 30, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValuePooled trust preferred securities
    
    
    9,415
    
    
    
    
    
    
    
    (2,835
    )
    
    
    6,580Mutual funds
    
    
    8,563
    
    
    
    8
    
    
    
    
    
    
    
    8,571Other equity investments
    
    
    1,040
    
    
    
    
    
    
    
    (87
    )
    
    
    953Total
    
    $
    29,470
    
    
    $
    126
    
    
    $
    (3,051
    )
    
    $
    26,545Held to Maturity:Municipal obligations:1 to 5 years
    
    $
    1,537
    
    
    $
    5
    
    
    $
    (9
    )
    
    $
    1,5335 to 10 years
    
    
    1,718
    
    
    
    21
    
    
    
    (1
    )
    
    
    1,738Total
    
    $
    3,255
    
    
    $
    26
    
    
    $
    (10
    )
    
    $
    3,271
 Provided below is a summary of investment securities available for sale and held to maturity
which were in an unrealized loss position at September 30, 2008.
 Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalApproximate
    
    
    Unrealized
    
    
    Approximate
    
    
    Unrealized
    
    
    Approximate
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesCorporate bonds
    
    $
    950
    
    
    $
    (107
    )
    
    $
    
    
    
    $
    
    
    
    $
    950
    
    
    $
    (107
    )Pooled trust preferred
securities
    
    
    5,118
    
    
    
    (2,285
    )
    
    
    1,462
    
    
    
    (550
    )
    
    
    6,580
    
    
    
    (2,835
    )Municipal obligations
    
    
    2,062
    
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    2,062
    
    
    
    (32
    )Other equity investments
    
    
    553
    
    
    
    (87
    )
    
    
    
    
    
    
    
    
    
    
    553
    
    
    
    (87
    )Total
    
    $
    8,683
    
    
    $
    (2,511
    )
    
    $
    1,462
    
    
    $
    (550
    )
    
    $
    10,145
    
    
    $
    (3,061
    )
 The above table represents 13 investment securities where the current value is less than the
related amortized cost.Proceeds from the sales of available-for-sale securities for the three- and six- months
ending March 31, 2008 totaled $69,000 and $69,000, respectively. Gains on sales of
available-for-sale investment securities for the three- and six- months ending March 31, 2008
totaled $69,000 and $69,000, respectively. There were no losses on sales of
available-for-sale investment securities for the three- and six- months ending March 31,
2008.
 -8-




---



##### 



3.
    
    MORTGAGE-RELATED SECURITIESMortgage-related securities available for sale and mortgage-related securities held to maturity are
summarized as follows:
 March 31, 2009Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:FHLMC pass-through certificates
    
    $
    26,927
    
    
    $
    852
    
    
    $
    (3
    )
    
    $
    27,776FNMA pass-through certificates
    
    
    47,068
    
    
    
    1,508
    
    
    
    (43
    )
    
    
    48,533GNMA pass-through certificates
    
    
    1,332
    
    
    
    7
    
    
    
    
    
    
    
    1,339Collateralized mortgage obligations
    
    
    25,105
    
    
    
    186
    
    
    
    (1,225
    )
    
    
    24,066Total
    
    $
    100,432
    
    
    $
    2,553
    
    
    $
    (1,271
    )
    
    $
    101,714Held to Maturity:FHLMC pass-through certificates
    
    $
    8,687
    
    
    $
    234
    
    
    $
    
    
    
    $
    8,921FNMA pass-through certificates
    
    
    14,012
    
    
    
    403
    
    
    
    (5
    )
    
    
    14,410Total
    
    $
    22,699
    
    
    $
    637
    
    
    $
    (5
    )
    
    $
    23,331
 Provided below is a summary of mortgage-related securities available for sale and held to
maturity which were in an unrealized loss position at March 31, 2009.
 Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesPass-through
certificates
    
    $
    7,504
    
    
    $
    (46
    )
    
    $
    87
    
    
    $
    (5
    )
    
    $
    7,591
    
    
    $
    (51
    )Collateralized
mortgage
obligations
    
    
    1,674
    
    
    
    (42
    )
    
    
    15,020
    
    
    
    (1,183
    )
    
    
    16,694
    
    
    
    (1,225
    )Total
    
    $
    9,178
    
    
    $
    (88
    )
    
    $
    15,107
    
    
    $
    (1,188
    )
    
    $
    24,285
    
    
    $
    (1,276
    )
 The above table represents 19 mortgage-related securities where the current value is less
than the related amortized cost.At March 31, 2009, mortgage-related securities in a gross unrealized loss position for
twelve months or longer consisted of sixteen securities that at such date had an aggregate
depreciation of 7.3% from the Companys amortized cost basis. For the three months ending
March 31, 2009, the Companys $41,000 investments in three private-label collateralized
mortgage obligations included in the first table above, were impaired as a result of the
Companys determination that the continued decline in its fair market value was other than
temporary. As a result of this determination, the Company recognized a $126,000, before tax,
non-cash charge, which was recorded in non-interest income. 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. Management does not believe any
other individual unrealized loss as of March 31, 2009 represents an other-than-temporary
impairment. The unrealized losses reported for mortgage-related securities relate primarily
to securities issued by the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation and private institutions. The substantial majority of the unrealized
 -9-




---



##### 



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 has the ability and intent to hold these
securities until the securities mature or recover in value.The Company reviews mortgage-related securities on an ongoing basis for the presence of
other than temporary impairment (OTTI) with formal reviews performed quarterly. OTTI losses
on individual investment securities were recognized during the second quarter of fiscal 2009
according to FSP FAS 115-2 and FAS 124-2 issued by FASB on April 9, 2009. This new guidance
requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on
securities not expected to be sold is recognized in other comprehensive income (loss) (OCI).
The credit-related OTTI recognized during the second quarter 2009 was
$126,000, before
taxes, and was solely related to available-for-sale securities newly having a book value of
$41,000. Non-credit-related OTTI on these securities, which are not expected to be sold, was
$26,000 and was recognized in OCI, net of taxes during the second quarter 2009.The following table details the rollforward of credit-related losses recorded in earnings
for the six months ended March 31, 2009:
 CollateralizedMortgageObligationsAmount of Other-Than-Temporary Impairment Related to credit
losses at October 1, 2008
    
    $
    Addition
    
    
    43Amount of Other-Than-Temporary Impairment Related to credit
losses at March 31, 2009
    
    $
    43
 Proceeds from the sales of available-for-sale mortgage-related securities for the three- and
six- months ending March 31, 2009 totaled $0 and $19.3 million, respectively. Gains on sales
of available-for-sale mortgage-related securities for the three- and six- months ending
March 31, 2009 totaled $0 and $289,000, respectively. Losses on sales of available-for-sale
mortgage-related securities for the three- and six- months ending March 31, 2009 totaled $0
and $24,000, respectively.
 -10-




---



##### 



Mortgage-related securities available for sale and mortgage-related securities held to maturity are
summarized as follows:
 September 30, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:FHLMC pass-through certificates
    
    $
    34,860
    
    
    $
    117
    
    
    $
    (175
    )
    
    $
    34,802FNMA pass-through certificates
    
    
    41,982
    
    
    
    235
    
    
    
    (216
    )
    
    
    42,001GNMA pass-through certificates
    
    
    1,669
    
    
    
    10
    
    
    
    
    
    
    
    1,679Collateralized mortgage obligations
    
    
    25,653
    
    
    
    3
    
    
    
    (1,161
    )
    
    
    24,495Total
    
    $
    104,164
    
    
    $
    365
    
    
    $
    (1,552
    )
    
    $
    102,977Held to Maturity:FHLMC pass-through certificates
    
    $
    9,776
    
    
    $
    42
    
    
    $
    (84
    )
    
    $
    9,734FNMA pass-through certificates
    
    
    15,582
    
    
    
    3
    
    
    
    (116
    )
    
    
    15,469Collateralized mortgage obligations
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Total
    
    $
    25,359
    
    
    $
    45
    
    
    $
    (200
    )
    
    $
    25,204
 Provided below is a summary of mortgage-related securities available for sale and held to
maturity which were in an unrealized loss position at September 30, 2008.
 Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesPass-through
certificates
    
    $
    54,080
    
    
    $
    (561
    )
    
    $
    1,401
    
    
    $
    (30
    )
    
    $
    55,481
    
    
    $
    (591
    )Collateralized
mortgage
obligations
    
    
    17,914
    
    
    
    (678
    )
    
    
    6,385
    
    
    
    (483
    )
    
    
    24,299
    
    
    
    (1,161
    )Total
    
    $
    71,994
    
    
    $
    (1,239
    )
    
    $
    7,786
    
    
    $
    (513
    )
    
    $
    79,780
    
    
    $
    (1,752
    )
 The above table represents 66 mortgage-related securities where the current value is less
than the related amortized cost.There were no sales of mortgage-related securities for the six months ended March 31, 2008.
 4.
    
    FAIR VALUE MEASUREMENTIn the first quarter of 2009, the Company adopted the provisions of FAS No. 157, Fair Value
Measurements,for financial assets and financial liabilities. FAS No. 157 provides enhanced
guidance for using fair value to measure assets and liabilities. The standard applies
whenever other standards require or permit assets or liabilities to be measured at fair
value. The standard does not expand the use of fair value in any new circumstances. The FASB
issued Staff Position No. 157-1, Application of FASB Statement No. 157 to FASB Statement No.
13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of
Lease Classification or Measurement under statement 13,which removed leasing transactions
accounted for under FAS No. 13 and related guidance from the scope of FAS No. 157. On April
9, 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No.
157-4 (FSP 157-4), Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly.The Company elected to early adopt this FSP and the results have been applied on
the financial statements and disclosures herein, without a material impact on the
consolidated financial statements. FSP 157-4 provides guidance
 -11-




---



##### 



for determining fair value if
there has been a significant decrease in the volume and level of activity for an
asset or liability in relation to normal market activity. In that circumstance, transactions
or quoted prices may not be determinative of fair value. Significant adjustments may be
necessary to quoted prices or alternative valuation techniques may be required in order to
determine the fair value of the asset or liability under current market conditions.
 Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement date.Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data.Level 3: Significant unobservable that inputs reflect a reporting entitys own assumptions
about the parameters that market participants would use in pricing an asset or liability.Most of the securities classified as available for sale are reported at fair value utilizing
Level 2 inputs. For these securities, the Company obtains fair value measurements from an
independent pricing service. The fair value measurements consider observable data that may
include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live
trading levels, trade execution data, market consensus prepayment speeds, credit information
and the bonds terms and conditions, among other things. Impaired loans are reported at fair
value utilizing level 2 inputs. For these loans, a review of the collateral is conducted and
an appropriate allowance for loan loss is allocated to the loan.Securities reported at fair value utilizing Level 1 inputs are limited to actively traded
equity securities whose market price is readily available from the New York Stock Exchange
or the NASDAQ exchange.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.Assets measured at fair value on a recurring and nonrecurring basis are summarized as
follows:
 Fair Value Measurement at March 31, 2009 Using:Quoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsTotal
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available for sale
securities measured
on a recurring
basis
    
    $
    122,096
    
    
    $
    4,526
    
    
    $
    106,371
    
    
    $
    11,198Impaired loans
measured on a
nonrecurring basis
    
    
    1,814
    
    
    
    
    
    
    
    1,814
    
    
    
    Total
    
    $
    123,800
    
    
    $
    4,526
    
    
    $
    108,075
    
    
    $
    11,198
 -12-




---



##### 



The following table presents the changes in the Level III fair-value category for the six
months ended March 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 ValueMeasurementsUsingSignificantUnobservableInputs(Level 3)Available forSale SecuritiesBeginning balance
    
    $
    8,112Total gains or losses (realized/unrealized)Included in earnings (or changes in net assets)
    
    
    (616
    )Included in other comprehensive income
    
    
    (130
    )Purchases, issuances and settlements
    
    
    (333
    )Transfers in and/or out of Level 3
    
    
    4,165Ending balance
    
    $
    11,198The amount of total gains or losses for the period
included in earnings (or changes in net assets)
attributable to the change in unrealized gains or
losses relating to assets still held at the reporting
date
    
    $
    616
 5.
    
    LOANS RECEIVABLELoans receivable consist of the following:
 March 31,
    
    
    September 30,2009
    
    
    2008Single-family
    
    $
    144,234
    
    
    $
    145,626Construction and land
    
    
    28,746
    
    
    
    27,493Multi-family and commercial
    
    
    54,507
    
    
    
    54,419Home equity and lines of credit
    
    
    54,952
    
    
    
    55,246Consumer loans
    
    
    1,487
    
    
    
    1,330Commercial loans
    
    
    19,886
    
    
    
    15,955Total loans
    
    
    303,812
    
    
    
    300,069Loans in process
    
    
    (10,132
    )
    
    
    (10,802
    )Allowance for loan losses
    
    
    (3,998
    )
    
    
    (3,453
    )Deferred loan costs
    
    
    232
    
    
    
    292Loans receivable  net
    
    $
    289,914
    
    
    $
    286,106
 At March 31, 2009 and September 30, 2008, non-performing loans (which include loans in
excess of 90 days delinquent) amounted to approximately $3,893 and $2,420, respectively. At
March 31, 2009, non-performing loans consisted of three single-family residential mortgage
loans aggregating $672, six non-residential mortgage loans aggregating $2,190, two
commercial business loans aggregating $461, one construction loan of $195, three home equity
loans aggregating $366, and two consumer loans aggregating $8.At March 31, 2009 and September 30, 2008 the Company had impaired loans with a total
recorded
 -13-




---



##### 



investment of $2,856 and $817, respectively. Interest income of $5 and $12 was
recognized on these impaired loans during the three and six months ended March 31, 2009,
respectively. Interest income of
approximately $57 and $104 was not recognized as interest income due to the non-accrual
status of such loans for the three and six months ended March 31, 2009, respectively.
 Loans collectively evaluated for impairment include residential real estate, home equity
(including lines of credit) and consumer loans and are not included in the data that follow:
 March 31,
    
    
    September 30,2008
    
    
    2009Impaired loans with related allowance for loan losses
under SFAS No. 114
    
    $
    2,856
    
    
    $
    817Impaired loans with no related allowance for loan losses
under SFAS No. 114
    
    
    
    
    
    
    Total impaired loans
    
    $
    2,856
    
    
    $
    817Valuation allowance related to impaired loans
    
    $
    1,042
    
    
    $
    370
  Six Months EndedMarch 31,2009
    
    
    2008Balance beginning of period
    
    $
    3,453
    
    
    $
    3,322Provisions charged to income
    
    
    775
    
    
    
    56Charge-offs
    
    
    (250
    )
    
    
    (14
    )Recoveries
    
    
    20
    
    
    
    13Total
    
    $
    3,998
    
    
    $
    3,377
 6.
    
    DEPOSITSDeposits consist of the following major classifications:
 March 31,
    
    
    September 30,2009
    
    
    2008Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentNon-interest bearing
    
    $
    16,660
    
    
    
    5.1
    %
    
    $
    20,101
    
    
    
    6.0
    %NOW
    
    
    68,461
    
    
    
    21.2
    
    
    
    70,344
    
    
    
    21.3Passbook
    
    
    37,067
    
    
    
    11.4
    
    
    
    34,796
    
    
    
    10.5Money market demand
    
    
    44,641
    
    
    
    13.8
    
    
    
    43,572
    
    
    
    13.2Certificates of deposit
    
    
    157,175
    
    
    
    48.5
    
    
    
    162,051
    
    
    
    49.0Total
    
    $
    324,004
    
    
    
    100.0
    %
    
    $
    330,864
    
    
    
    100.0
    %
 -14-




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##### 



7.
    
    EARNINGS PER SHAREBasic net income (loss) per share is based upon the weighted average number of common shares
outstanding, while diluted net income (loss) per share is based upon the weighted average
number of common shares outstanding and common share equivalents that would arise from the
exercise of dilutive securities. All dilutive shares consist of options the exercise price
of which is lower than the market price of the common stock covered thereby at the dates
presented. At March 31, 2009 and 2008, anti-dilutive shares consisted of options covering
58,566 and 47,237 shares, respectively.The calculation of basic and diluted earnings per share (EPS) is as follows:
 For the Three Months Ended
    
    
    For the Six Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Numerator
    
    $
    (806
    )
    
    $
    207
    
    
    $
    (868
    )
    
    $
    439Denominators:Basic shares outstanding
    
    
    2,325,768
    
    
    
    2,317,080
    
    
    
    2,324,670
    
    
    
    2,315,988Effect of dilutive securities
    
    
    
    
    
    
    257
    
    
    
    
    
    
    
    323Diluted shares outstanding
    
    
    2,325,768
    
    
    
    2,317,337
    
    
    
    2,324,670
    
    
    
    2,316,311EPS:Basic
    
    $
    (0.35
    )
    
    $
    0.09
    
    
    $
    (0.37
    )
    
    $
    0.19Diluted
    
    $
    (0.35
    )
    
    $
    0.09
    
    
    $
    (0.37
    )
    
    $
    0.19
 8.
    
    REGULATORY CAPITAL REQUIREMENTSThe Bank is subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum regulatory capital requirements can result in
certain mandatory, and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Companys financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures of the Banks
assets, liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Banks capital amounts and classification are also subject to
qualitative judgments by regulators about components, risk weightings, and other factors.Quantitative measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth below) of tangible and core capital (as
defined in the regulations) to adjusted assets (as defined), and of Tier I and total capital
(as defined) to average assets (as defined). Management believes, as of March 31, 2009, that
the Bank met all regulatory capital adequacy requirements to which it was subject.
 -15-




---



##### 



Required for
    
    Well CapitalizedCapital Adequacy
    
    Under PromptActual
    
    Purpose
    
    Corrective ActionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAt March 31, 2009:Core Capital (to Adjusted Tangible
Assets)
    
    $
    43,681
    
    
    
    8.35
    %
    
    $
    20,928
    
    
    
    4.0
    %
    
    $
    26,160
    
    
    
    5.0
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    43,681
    
    
    
    13.35
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    19,633
    
    
    
    6.0Total Capital (to Risk-Weighted Assets)
    
    
    46,656
    
    
    
    14.26
    
    
    
    26,177
    
    
    
    8.0
    
    
    
    32,722
    
    
    
    10.0Tangible Capital (to Tangible Assets)
    
    
    43,621
    
    
    
    8.34
    
    
    
    7,847
    
    
    
    1.5
    
    
    
    N/A
    
    
    
    N/AAt September 30, 2008:Core Capital (to Adjusted Tangible
Assets)
    
    $
    44,234
    
    
    
    8.46
    %
    
    $
    20,911
    
    
    
    4.0
    %
    
    $
    26,139
    
    
    
    5.0
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    44,234
    
    
    
    14.02
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    18,935
    
    
    
    6.0Total Capital (to Risk-Weighted Assets)
    
    
    47,322
    
    
    
    14.99
    
    
    
    24,247
    
    
    
    8.0
    
    
    
    31,559
    
    
    
    10.0Tangible Capital (to Tangible Assets)
    
    
    44,167
    
    
    
    8.45
    
    
    
    7,841
    
    
    
    1.5
    
    
    
    N/A
    
    
    
    N/A
 On February 13, 2006, the Bank entered into a supervisory agreement with the Office of
Thrift Supervision (OTS). The supervisory agreement requires the Bank, among other
things, to maintain minimum core capital and total risk-based capital ratios of 7.5% and
12.5%, respectively. At March 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 PRONOUNCEMENTSIn December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS No. 141(R)), which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in an acquiree, including the
recognition and measurement of goodwill acquired in a business combination. SFAS No. 141(R)
is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is
prohibited. The Company is evaluating the impact of this pronouncement but does not expect
that the guidance will have a material effect on the Companys financial position or results
of operations.In September 2006, the FASB issued FAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106
and 132(R). This Statement requires that employers measure plan assets and obligations as of
the balance sheet date. This requirement is effective for fiscal years ending after
December 15, 2008. The other provisions of the Statement were effective for public
companies as of the end of the fiscal year ending after December 15, 2006. The Company has
determined that the guidance provided by SFAS No. 158 will not have an impact on its
stockholders equity or on the Companys financial position or results of operations.In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51(SFAS No. 160). SFAS No. 160 amends
ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary, which is sometimes referred to as minority
interest, is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. Among other requirements, this statement
requires consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. It also requires
disclosure, on the face of the consolidated income statement, of the amounts of consolidated
net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 is
effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is
prohibited. The adoption of this standard is not expected to have a material effect on the
Companys results of operations or financial position.
 -16-




---



##### 



In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities,(SFAS No. 161) to require enhanced disclosures about derivative
instruments and hedging activities. The new standard has revised financial reporting for
derivative instruments and hedging activities by requiring more transparency about how and
why an entity uses derivative instruments, how derivative instruments and related hedged
items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities,and how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows. SFAS No. 161 requires
disclosure of the fair values of derivative instruments and their gains and losses in a
tabular format. It also requires entities to provide more information about their liquidity
by requiring disclosure of derivative features that are credit risk-related. Further, it
requires cross-referencing within footnotes to enable financial statement users to locate
important information about derivative instruments. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The Company has determined that the adoption of this
standard will not have a material effect on the Companys results of operations or financial
position.In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, Determination of the
Useful Life of Intangible Assets(FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing assumptions about renewal or extension used in estimating the
useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets.This standard is intended to improve the consistency between the useful
life of a recognized intangible asset under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS No. 141R and other GAAP. FSP
142-3 is effective for financial statements issued for fiscal years beginning after December
15, 2008. The measurement provisions of this standard will apply only to intangible assets
of the Company acquired after the effective date. The Company does not expect the adoption
of FSP 142-3 to have a material effect on its results of operations or financial position.In February 2007, the FASB issued FSP No. FAS 158-1, Conforming Amendments to the
Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the Related Staff
Implementation Guides. This FSP provides conforming amendments to the illustrations in FAS
Statements No. 87, 88, and 106 and to related staff implementation guides as a result of the
issuance of FAS Statement No. 158. The conforming amendments made by this FSP are effective
as of the effective dates of Statement No. 158. The unaffected guidance that this FSP
codifies into Statements No. 87, 88, and 106 does not contain new requirements and therefore
does not require a separate effective date or transition method. The Company is currently
evaluating the impact the adoption of the FSP will have on the Companys results of
operations.In February 2008, the FASB issued FSP No. FAS 140-3, Accounting for Transfers of Financial
Assets and Repurchase Financing Transactions.This FSP concludes that a transferor and
transferee should not separately account for a transfer of a financial asset and a related
repurchase financing unless (a) the two transactions have a valid and distinct business or
economic purpose for being entered into separately and (b) the repurchase financing does not
result in the initial transferor regaining control over the financial asset. The FSP is
effective for financial statements issued for fiscal years beginning on or after November
15, 2008, and interim periods within those fiscal years. The Company is currently evaluating
the impact the adoption of the FSP will have on the Companys results of operations.In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement.)This FSP
provides guidance on the accounting for certain types of convertible debt instruments that
may be settled in cash upon conversion. Additionally, this FSP specifies that issuers of
such instruments should separately account for the liability and equity components in a
manner that will reflect the entitys nonconvertible debt borrowing rate when interest cost
is recognized in subsequent periods. The FSP is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within those fiscal
years. The Company is currently evaluating the impact the adoption of the FSP will have on
the Companys results of operations.
 -17-




---



##### 



In June 2008, the FASB ratified EITF Issue No. 08-4, Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjusted Conversion Ratios. This Issue
provides
transition guidance for conforming changes made to EITF Issue No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently Adjusted
Conversion Ratios, that resulted from EITF Issue No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, and FAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity. The conforming changes are
effective for financial statements issued for fiscal years ending after December 15, 2008,
with earlier application permitted. The Company is currently evaluating the impact the
adoption of the FSP will have on the Companys results of operations.In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities,to clarify that
instruments granted in share-based payment transactions can be participating securities
prior to the requisite service having been rendered. A basic principle of the FSP is that
unvested share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and are to be
included in the computation of EPS pursuant to the two-class method. The provisions of this
FSP are effective for financial statements issued for fiscal years beginning after December
15, 2008, and interim periods within those years. All prior-period EPS data presented
(including interim financial statements, summaries of earnings, and selected financial data)
are required to be adjusted retrospectively to conform with the provisions of the FSP. The
Company is currently evaluating the impact the adoption of the FSP will have on the
Companys results of operations.In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets. FSP FAS 132(R)-1 requires more detailed
disclosures about employers plan assets in a defined benefit pension or other
postretirement plan, including employers investment strategies, major categories of plan
assets, concentrations of risk within plan assets, and inputs and valuation techniques used
to measure the fair value of plan assets. FSP FAS 132(R)-1 also requires, for fair value
measurements using significant unobservable inputs (Level 3), disclosure of the effect of
the measurements on changes in plan assets for the period. The disclosures about plan
assets required by FSP FAS 132(R)-1 must be provided for fiscal years ending after December
15, 2009. As this pronouncement is only disclosure-related, it will not have an impact on
the financial position and results of operations.In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies. This FSP
requires companies acquiring contingent assets or assuming contingent liabilities in
business combination to either (a) if the assets or liabilities fair value can be
determined, recognize them at fair value, at the acquisition date, or (b) if the assets or
liabilities fair value cannot be determined, but (i) it is probable that an asset existed
or that a liability had been incurred at the acquisition date and (ii) the amount of the
asset or liability can be reasonably estimated, recognize them at their estimated amount, at
the acquisition date. If the fair value of these contingencies cannot be determined and
they are not probable or cannot be reasonably estimated, then companies should not recognize
these contingencies as of the acquisition date and instead should account for them in
subsequent periods by following other applicable GAAP. This FSP also eliminates the FAS
141R requirement of disclosing in the footnotes to the financial statements the range of
expected outcomes for a recognized contingency. This FSP shall be effective for assets or
liabilities arising from contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The adoption of this FSP is not expected to have a material effect on
the Companys results of operations or financial positionIn April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.This FSP relates to determining fair values
when there is no active market or where the price inputs being used represent distressed
sales. It reaffirms the need to use judgment to ascertain if a formerly active market has
become inactive and in determining fair values when markets have become inactive. FSP No.
FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, but
entities may early adopt this FSP for the interim and annual periods ending after March 15,
2009. The
 -18-




---



##### 



Company has early adopted the provisions of FSP 157-4 during the second quarter of
fiscal 2009 and the results have been applied in the financial statements and disclosures
included herein, without a material impact.In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments,which relates to fair value disclosures for any
financial instruments that are not currently reflected on the balance sheet of companies at
fair value. Prior to issuing this FSP, fair values for these assets and liabilities were
only disclosed once a year. The FSP now requires these disclosures on a quarterly basis,
providing qualitative and quantitative information about fair value estimates for all those
financial instruments not measured on the balance sheet at fair value. FSP No. FAS 107-1
and APB 28-1 is effective for interim and annual periods ending after June 15, 2009, but
entities may early adopt this FSP for the interim and annual periods ending after March 15,
2009. The Company is currently evaluating the impact the adoption of the FSP will have on
the Companys results of operations.In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, which provides additional guidance
designed to create greater clarity and consistency in accounting for and presenting
impairment losses on securities. FSP SFAS No. 115-2 and SFAS No. 124-2 amends existing
guidance for determining whether an impairment is other than temporary to debt securities
and replaces the existing requirement that the entitys management assert it has both the
intent and ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security; and (b) it is more
likely than not it will not have to sell the security before recovery of its cost basis.
Under FSP SFAS No. 115-2 and SFAS No. 124-2, declines in the fair value of held-to-maturity
and available-for-sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the extent the impairment is
related to credit losses. The amount of impairment related to other factors is recognized
in other comprehensive income. FSP No. FAS 115-2 and FAS 124-2 are effective for interim and
annual periods ending after June 15, 2009, but entities may early adopt this FSP for the
interim and annual periods ending after March 15, 2009. The company has early adopted FAS
115-2 and FAS 124-2 during the second quarter of 2009 (see Notes 2 & 3).In January 2009, the FASB issued final FSP No. EITF 99-20-1, Amendments to the Impairment
Guidance of EITF Issue No. 99-20. The FSP amends the impairment guidance in EITF Issue No.
99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and
Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial
Assets, to achieve more consistent determination of whether an other-than-temporary
impairment (OTTI) has occurred. The FSP retains and emphasizes the OTTI guidance and
required disclosures in Statement 115, FSP FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments, SEC Staff
Accounting Bulletin (SAB) Topic 5M, Other Than Temporary Impairment of Certain Investments
in Debt and Equity Securities, and other related literature. The FSP is effective for
interim and annual reporting periods ending after December 15, 2008, and shall be applied
prospectively. Retrospective application to a prior interim or annual reporting period is
not permitted. Consistent with paragraph 15 of FSP FAS 115-1 and FAS 124-1, any other-than
temporary impairment resulting from the application of Statement 115 or Issue 99-20 shall be
recognized in earnings equal to the entire difference between the investments cost and its
fair value at the balance sheet date of the reporting period for which the assessment is
made (for example, December 31, 2008, for a calendar year-end entity). The adoption of the
requirements of FSB No. EITF 99-20-1 by the Company did not have a material impact on its
financial condition or results of operations.
 -19-




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   General
  Critical Accounting Policies
  -20-




---



##### 



Allowance for Loan Losses.
 Income Taxes.
 Fair Value Measurement.
 
    
    Level 1  Valuation is based upon quoted prices for identical instruments traded in active
markets.
    
    Level 2  Valuation is based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not active, and model-based
valuation techniques for which all significant assumptions are observable in the market.
    
    Level 3  Valuation is generated from model-based techniques that use significant
assumptions not observable in the market. These unobservable assumptions reflect the Companys own
estimates of assumptions that market participants would use in pricing the asset.
  -21-




---



##### 



Supervisory Agreements
     -22-




---



##### 



Comparison of Financial Condition at March 31, 2009 and September 30, 2008
   Comparison of Results of Operations for the Three and Six Months Ended March 31, 2009 and 2008
 Net Income (Loss).
 Net Interest Income.
 -23-




---



##### 



For the three months endedMarch 31, 2009
    
    
    March 31, 2008Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    CostInterest-earning assets:Loans receivable(1)
    
    $
    285,271
    
    
    $
    4,092
    
    
    
    5.74
    %
    
    $
    277,586
    
    
    $
    4,391
    
    
    
    6.33
    %Mortgage-related securities(2)
    
    
    116,307
    
    
    
    1,424
    
    
    
    4.90
    
    
    
    130,792
    
    
    
    1,583
    
    
    
    4.84Investment securities(2)
    
    
    31,624
    
    
    
    366
    
    
    
    4.63
    
    
    
    40,398
    
    
    
    510
    
    
    
    5.05Other interest-earning assets
    
    
    19,390
    
    
    
    12
    
    
    
    0.25
    
    
    
    25,638
    
    
    
    178
    
    
    
    2.78Total interest-earning assets
    
    
    452,592
    
    
    
    5,894
    
    
    
    5.21
    
    
    
    474,414
    
    
    
    6,662
    
    
    
    5.62Non-interest-earning assets
    
    
    33,603
    
    
    
    
    
    
    
    
    
    
    
    34,443Total assets
    
    $
    486,195
    
    
    
    
    
    
    
    
    
    
    $
    508,857Interest-bearing liabilities:Deposits
    
    $
    324,838
    
    
    
    1,492
    
    
    
    1.84
    
    
    $
    342,678
    
    
    
    2,423
    
    
    
    2.83FHLB advances and other borrowings
    
    
    108,644
    
    
    
    1,286
    
    
    
    4.73
    
    
    
    107,025
    
    
    
    1,374
    
    
    
    5.14Junior subordinated debentures
    
    
    11,641
    
    
    
    286
    
    
    
    9.83
    
    
    
    15,264
    
    
    
    365
    
    
    
    9.56Total interest-bearing liabilities
    
    
    445,123
    
    
    
    3,064
    
    
    
    2.75
    
    
    
    464,967
    
    
    
    4,162
    
    
    
    3.58Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    2.46
    %
    
    
    
    
    
    
    
    
    
    
    2.04
    %Non-interest-bearing liabilities
    
    
    7,469
    
    
    
    
    
    
    
    
    
    
    
    7,647Total liabilities
    
    
    453,038
    
    
    
    
    
    
    
    
    
    
    
    472,614Stockholders equity
    
    
    33,157
    
    
    
    
    
    
    
    
    
    
    
    36,243Total liabilities and stockholders equity
    
    $
    486,195
    
    
    
    
    
    
    
    
    
    
    $
    508,857Net interest-earning assets
    
    $
    7,469
    
    
    
    
    
    
    
    
    
    
    $
    9,447Net interest income
    
    
    
    
    
    $
    2,830
    
    
    
    
    
    
    
    
    
    
    $
    2,500Net interest margin(3)
    
    
    
    
    
    
    
    
    
    
    2.50
    %
    
    
    
    
    
    
    
    
    
    
    2.11
    %Ratio of average interest-earning assets
to average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    101.68
    %
    
    
    
    
    
    
    
    
    
    
    102.03
    %
 
 (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. -24-




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##### 



For the six months endedMarch 31, 2009
    
    
    March 31, 2008Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    CostInterest-earning assets:Loans receivable(1)
    
    $
    285,661
    
    
    $
    8,353
    
    
    
    5.85
    %
    
    $
    282,055
    
    
    $
    9,062
    
    
    
    6.43
    %Mortgage-related securities(2)
    
    
    119,806
    
    
    
    2,978
    
    
    
    4.97
    
    
    
    122,739
    
    
    
    2,963
    
    
    
    4.83Investment securities(2)
    
    
    32,783
    
    
    
    761
    
    
    
    4.64
    
    
    
    39,209
    
    
    
    1,033
    
    
    
    5.27Other interest-earning assets
    
    
    17,768
    
    
    
    27
    
    
    
    0.30
    
    
    
    21,700
    
    
    
    341
    
    
    
    3.14Total interest-earning assets
    
    
    456,018
    
    
    
    12,119
    
    
    
    5.32
    
    
    
    465,703
    
    
    
    13,399
    
    
    
    5.75Non-interest-earning assets
    
    
    34,124
    
    
    
    
    
    
    
    
    
    
    
    34,594Total assets
    
    $
    490,142
    
    
    
    
    
    
    
    
    
    
    $
    500,297Interest-bearing liabilities:Deposits
    
    $
    323,622
    
    
    
    3,219
    
    
    
    1.99
    
    
    $
    344,860
    
    
    
    5,101
    
    
    
    2.96FHLB advances and other borrowings
    
    
    114,875
    
    
    
    2,676
    
    
    
    4.66
    
    
    
    97,312
    
    
    
    2,599
    
    
    
    5.34Junior subordinated debentures
    
    
    11,640
    
    
    
    571
    
    
    
    9.81
    
    
    
    15,264
    
    
    
    732
    
    
    
    9.59Total interest-bearing liabilities
    
    
    450,137
    
    
    
    6,466
    
    
    
    2.87
    
    
    
    457,436
    
    
    
    8,432
    
    
    
    3.69Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    2.45
    %
    
    
    
    
    
    
    
    
    
    
    2.06
    %Non-interest-bearing liabilities
    
    
    7,464
    
    
    
    
    
    
    
    
    
    
    
    7,219Total liabilities
    
    
    457,601
    
    
    
    
    
    
    
    
    
    
    
    464,655Stockholders equity
    
    
    32,541
    
    
    
    
    
    
    
    
    
    
    
    35,642Total liabilities and stockholders equity
    
    $
    490,142
    
    
    
    
    
    
    
    
    
    
    $
    500,297Net interest-earning assets
    
    $
    5,887
    
    
    
    
    
    
    
    
    
    
    $
    8,267Net interest income
    
    
    
    
    
    $
    5,653
    
    
    
    
    
    
    
    
    
    
    $
    4,967Net interest margin(3)
    
    
    
    
    
    
    
    
    
    
    2.48
    %
    
    
    
    
    
    
    
    
    
    
    2.13
    %Ratio of average interest-earning assets
to average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    101.31
    %
    
    
    
    
    
    
    
    
    
    
    101.81
    %
 
 (1)
    
    Includes non-accrual loans.(2)
    
    Includes assets classified as either available for sale or held to maturity.(3)
    
    Net interest income divided by average interest-earning assets. Provision for Loan Losses.
  -25-




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##### 



Non-interest Income.
   Non-interest Expense.
  -26-




---



##### 



Income Tax Expense.
 Liquidity and Capital Resources
    Impact of Inflation and Changing Prices
   -27-




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
    Net Portfolio Value(Dollars in thousands)Changes in
    
    
    
    
    
    
    
    
    
    
    
    
    
    NetRates in
    
    
    
    
    
    Dollar
    
    Percentage
    
    Portfolio Value AsBasis Points
    
    Amount
    
    Change
    
    Change
    
    a % of Assets
    
    Change300
    
    $
    40,079
    
    
    $
    (11,536
    )
    
    
    (22
    )%
    
    
    7.70
    %
    
    (184) bp200
    
    
    45,927
    
    
    
    (5,688
    )
    
    
    (11
    )
    
    
    8.68
    
    
    (86) bp100
    
    
    49,930
    
    
    
    (1,685
    )
    
    
    (3
    )
    
    
    9.32
    
    
    (22) bp50
    
    
    50,795
    
    
    
    (821
    )
    
    
    (2
    )
    
    
    9.43
    
    
    (11) bp0
    
    
    51,615
    
    
    
    
    
    
    
    
    
    
    
    9.54
    
    
     bp(50)
    
    
    51,394
    
    
    
    (221
    )
    
    
    (0
    )
    
    
    9.47
    
    
    (7) bp(100)
    
    
    50,706
    
    
    
    (910
    )
    
    
    (2
    )
    
    
    9.33
    
    
    (22) bp
   -28-




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##### 



Item 4T. Controls and Procedures
   -29-




---



##### 



PART II
 Legal Proceedings
  Risk Factors
  Unregistered Sales of Equity Securities and Use of Proceeds
   Defaults Upon Senior Securities
  Submission of Matters to a Vote of Security Holders
    Nominee
    
    For
    
    WithheldDonald G. Hosier, Jr.
    
    
    1,964,887
    
    
    
    271,769
  For
    
    Against
    
    Abstain2,156,412
    
    64,948
    
    15,296
  -30-




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##### 



Other Information
   Exhibits
  ExhibitNo
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of First Keystone Financial, Inc. 13.2
    
    Amended and Restated Bylaws of First Keystone Financial, Inc. 14.1
    
    Specimen Stock Certificate of First Keystone Financial, Inc. 24.2
    
    Instrument defining the rights of security holders **10.1
    
    Form of Amended and Restated Severance Agreement between First Keystone
Financial, Inc. and Carol Walsh 3,*10.2
    
    Amended and Restated 1995 Stock Option Plan 3, *10.3
    
    Amended and Restated 1995 Recognition and Retention Plan and Trust Agreement 3,*10.4
    
    Amended and Restated 1998 Stock Option Plan 3, *10.5
    
    Form of Amended and Restated Severance Agreement between First Keystone
Bank and Carol Walsh 3, *10.6
    
    Amended and Restated First Keystone Bank Supplemental Executive Retirement
Plan 4,*10.7
    
    Amended and Restated Transition, Consulting, Noncompetition and Retirement
Agreement by and between First Keystone Financial, Inc., First Keystone Bank and
Donald S. Guthrie 3,*10.8
    
    Severance and Release Agreement by and among First Keystone Financial,
Inc., First Keystone Bank and Thomas M. Kelly 5,*10.9
    
    Letter dated December 11, 2006 with respect to appointment to Board 610.10
    
    Form of Registration Rights Agreement 711
    
    Statement re: computation of per share earnings. See Note 2 to the
Consolidated Financial Statements included in Item 8 hereof.31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 200299.2
    
    Supervisory Agreement between First Keystone Financial, Inc. and the Office
of Thrift Supervision dated February 13, 2006. 899.3
    
    Supervisory Agreement between First Keystone Bank and the Office of Thrift
Supervision dated February 13, 2006. 8
 
 (1)
    
    Incorporated by reference from Exhibit 3.1(with respect to the
Articles) and Exhibit 3.2 (with respect to the Bylaws) on Form 8-K filed by the
Registrant with the SEC on February 12, 2008.(2)
    
    Incorporated by reference from the Registration Statement on
Form S-1 (Registration No. 33-84824) filed by the Registrant with the SEC on
October 6, 1994, as amended.(3)
    
    Incorporated by reference from Exhibits 10.1, 10.4, 10.6, 10.5,
10.2 and 10.3 respectively, in the Form 8-K filed by the Registrant with the
SEC on December 1, 2008 (File No. 000-25328). -31-




---



##### 



(4)
    
    Incorporated by reference from Exhibit 10.1 in the Form 8-K
filed by the Registrant with SEC on July 2, 2007 (File No. 000-25328).(5)
    
    Incorporated by reference from Exhibit 10.1 in the Form 8-K
filed by the Registrant with the SEC on August 19, 2008.(6)
    
    Incorporated by reference from Exhibit 10.1 in the Form 8-K
filed by the Registrant with the SEC on December 20, 2006.(7)
    
    Incorporated by reference from the Form 10-K filed by the
Registrant with the SEC on December 29, 2006(8)
    
    Incorporated by reference from the Form 10-Q for the quarter
ended December 31, 2005 filed by the Registrant with the SEC on February 14,
2006.(*)
    
    Consists of a management contract or compensatory plan(**)
    
    The Company has no instruments defining the rights of holders
of long-term debt where the amount of securities authorized under such
instrument exceeds 10% of the total assets of the Company and its subsidiaries
on a consolidated basis. The Company hereby agrees to furnish a copy of any
such instrument to the SEC upon request. -32-




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##### 



SIGNATURES
  FIRST KEYSTONE FINANCIAL, INC.Date:      May 15, 2009
    By:
    /s/ Hugh J. GarchinskyHugh J. GarchinskyPresident and Chief Executive Officer
(principal executive officer and principal financial officer) -33-