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, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-25328
 FIRST KEYSTONE FINANCIAL, INC.
  Pennsylvania
    
    23-2576479(State or other jurisdiction 
of incorporation or organization)
    
    (I.R.S. Employer
Identification Number)22 West State StreetMedia, Pennsylvania
    
    19063(Address of principal executive office)
    
    (Zip Code)
  þ o
 
 Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 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, 2008 (Unaudited) and September 30, 2007
    
    
    1Unaudited Consolidated Statements of Income for the Three and Six Months Ended March 31, 2008 and 2007
    
    
    2Unaudited Consolidated Statement of Changes in Stockholders Equity for the Six Months Ended March 31, 2008 and 2007
    
    
    3Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2008 and 2007
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    22Item 1A.
    
    Risk Factors
    
    
    22Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3.
    
    Defaults Upon Senior Securities
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22Item 5.
    
    Other Information
    
    
    22Item 6.
    
    Exhibits
    
    
    23SIGNATURES
    
    
    
    
    25




---



##### 



March 31,
    
    
    September 30,2008
    
    
    2007ASSETS:Cash and amounts due from depository institutions
    
    $
    8,331
    
    
    $
    4,642Interest-bearing deposits with depository institutions
    
    
    19,773
    
    
    
    48,293Total cash and cash equivalents
    
    
    28,104
    
    
    
    52,935Investment securities available for sale
    
    
    30,614
    
    
    
    29,284Mortgage-related securities available for sale
    
    
    114,489
    
    
    
    79,178Investment securities held to maturity
(approximate fair value of $3,350 at March 31, 2008
and $3,266 at September 30, 2007)
    
    
    3,255
    
    
    
    3,256Mortgage-related securities held to maturity
(approximate fair value of $28,655 at March 31, 2008
and $30,511 at September 30, 2007)
    
    
    28,495
    
    
    
    31,294Loans receivable (net of allowance for loan losses of $3,377 and $3,322
at March 31, 2008 and September 30, 2007, respectively)
    
    
    278,410
    
    
    
    292,418Accrued interest receivable
    
    
    2,532
    
    
    
    2,702FHLBank stock, at cost
    
    
    6,297
    
    
    
    6,338Office properties and equipment, net
    
    
    4,587
    
    
    
    4,762Deferred income taxes
    
    
    2,137
    
    
    
    2,505Cash surrender value of life insurance
    
    
    17,594
    
    
    
    17,234Prepaid expenses and other assets
    
    
    3,037
    
    
    
    2,975TOTAL ASSETS
    
    $
    519,551
    
    
    $
    524,881LIABILITIES AND STOCKHOLDERS EQUITY:Liabilities:Deposits:Non-interest-bearing
    
    $
    16,020
    
    
    $
    18,404Interest-bearing
    
    
    331,751
    
    
    
    335,304Total deposits
    
    
    347,771
    
    
    
    353,708Advances from FHLBank and other borrowings
    
    
    113,196
    
    
    
    115,384Junior subordinated debentures
    
    
    15,264
    
    
    
    15,264Accrued interest payable
    
    
    2,339
    
    
    
    2,324Advances from borrowers for taxes and insurance
    
    
    2,043
    
    
    
    870Accounts payable and accrued expenses
    
    
    3,038
    
    
    
    2,637Total liabilities
    
    
    483,651
    
    
    
    490,187Commitments and contingencies
    
    
    
    
    
    
    Stockholders Equity:Preferred stock, $.01 par value, 10,000,000 shares authorized; none issuedCommon stock, $.01 par value, 20,000,000 shares authorized; issued 2,712,556
shares; outstanding at March 31, 2008 and September 30, 2007, 2,432,998 shares
    
    
    27
    
    
    
    27Additional paid in capital
    
    
    12,595
    
    
    
    12,598Employee stock ownership plan
    
    
    (2,930
    )
    
    
    (2,985
    )Treasury stock at cost: 279,558 shares at March 31, 2008 and at September 30, 2007
    
    
    (4,244
    )
    
    
    (4,244
    )Accumulated other comprehensive loss
    
    
    (508
    )
    
    
    (1,223
    )Retained earnings  partially restricted
    
    
    30,960
    
    
    
    30,521Total stockholders equity
    
    
    35,900
    
    
    
    34,694TOTAL LIABILITIES AND STOCKHOLDERS EQUITY:
    
    $
    519,551
    
    
    $
    524,881
  - 1 -




---



##### 



Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007INTEREST INCOME:Interest and fees on loans
    
    $
    4,391
    
    
    $
    5,259
    
    
    $
    9,062
    
    
    $
    10,614Interest and dividends on:Mortgage-related securities
    
    
    1,583
    
    
    
    1,209
    
    
    
    2,963
    
    
    
    2,416Investment securities:Taxable
    
    
    402
    
    
    
    315
    
    
    
    797
    
    
    
    625Tax-exempt
    
    
    42
    
    
    
    145
    
    
    
    84
    
    
    
    296Dividends
    
    
    66
    
    
    
    156
    
    
    
    152
    
    
    
    243Interest on interest-bearing deposits
    
    
    178
    
    
    
    114
    
    
    
    341
    
    
    
    177Total interest income
    
    
    6,662
    
    
    
    7,198
    
    
    
    13,399
    
    
    
    14,371INTEREST EXPENSE:Interest on:Deposits
    
    
    2,423
    
    
    
    2,838
    
    
    
    5,101
    
    
    
    5,542FHLBank and other borrowings
    
    
    1,374
    
    
    
    1,242
    
    
    
    2,599
    
    
    
    2,747Junior subordinated debentures
    
    
    365
    
    
    
    499
    
    
    
    732
    
    
    
    1,001Total interest expense
    
    
    4,162
    
    
    
    4,579
    
    
    
    8,432
    
    
    
    9,290Net interest income
    
    
    2,500
    
    
    
    2,619
    
    
    
    4,967
    
    
    
    5,081PROVISION FOR LOAN LOSS
    
    
    14
    
    
    
    100
    
    
    
    56
    
    
    
    175Net interest income after provision for loan losses
    
    
    2,486
    
    
    
    2,519
    
    
    
    4,911
    
    
    
    4,906NON-INTEREST INCOME:Service charges and other fees
    
    
    410
    
    
    
    410
    
    
    
    832
    
    
    
    797Net gain on sales of loans held for sale
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    124Net gain on sales of investments
    
    
    
    
    
    
    120
    
    
    
    69
    
    
    
    120Net gain on sales of REO
    
    
    
    
    
    
    61
    
    
    
    
    
    
    
    61Increase in cash surrender value of life insurance
    
    
    178
    
    
    
    147
    
    
    
    360
    
    
    
    294Other income
    
    
    120
    
    
    
    107
    
    
    
    209
    
    
    
    204Total non-interest income
    
    
    708
    
    
    
    853
    
    
    
    1,470
    
    
    
    1,600NON-INTEREST EXPENSE:Salaries and employee benefits
    
    
    1,440
    
    
    
    1,473
    
    
    
    2,870
    
    
    
    2,971Occupancy and equipment
    
    
    417
    
    
    
    404
    
    
    
    817
    
    
    
    800Professional fees
    
    
    299
    
    
    
    533
    
    
    
    581
    
    
    
    870Federal deposit insurance premium
    
    
    49
    
    
    
    36
    
    
    
    100
    
    
    
    74Data processing
    
    
    144
    
    
    
    140
    
    
    
    281
    
    
    
    278Advertising
    
    
    110
    
    
    
    119
    
    
    
    211
    
    
    
    226Deposit processing
    
    
    145
    
    
    
    142
    
    
    
    290
    
    
    
    296Other
    
    
    378
    
    
    
    406
    
    
    
    774
    
    
    
    875Total non-interest expense
    
    
    2,982
    
    
    
    3,253
    
    
    
    5,924
    
    
    
    6,390Income before income tax expense (benefit)
    
    
    212
    
    
    
    119
    
    
    
    457
    
    
    
    116Income tax expense (benefit)
    
    
    5
    
    
    
    (48
    )
    
    
    18
    
    
    
    (139
    )Net income
    
    $
    207
    
    
    $
    167
    
    
    $
    439
    
    
    $
    255Earnings per common share:Basic
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    0.19
    
    
    $
    0.12Diluted
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    0.19
    
    
    $
    0.12Weighted average shares  basic
    
    
    2,317,080
    
    
    
    2,303,333
    
    
    
    2,315,988
    
    
    
    2,146,185Weighted average shares  diluted
    
    
    2,317,337
    
    
    
    2,323,978
    
    
    
    2,316,311
    
    
    
    2,166,137
  - 2 -




---



##### 



Employee
    
    
    
    
    
    
    Accumulated
    
    
    RetainedAdditional
    
    
    stock
    
    
    
    
    
    
    other
    
    
    earnings-
    
    
    TotalCommon
    
    
    paid-in
    
    
    ownership
    
    
    Treasury
    
    
    comprehensive
    
    
    partially
    
    
    stockholdersstock
    
    
    capital
    
    
    plan
    
    
    stock
    
    
    (loss) gain
    
    
    restricted
    
    
    equityBALANCE AT OCTOBER 1, 2006
    
    $
    27
    
    
    $
    12,974
    
    
    $
    (3,089
    )
    
    $
    (10,522
    )
    
    $
    (787
    )
    
    $
    30,056
    
    
    $
    28,659Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    255
    
    
    
    255Other comprehensive income, net of tax:Net unrealized loss on securities
net of reclassification adjustment,
net of tax benefit of $38(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74
    )
    
    
    
    
    
    
    (74
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181ESOP shares committed to be released
    
    
    
    
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51Share-based compensation
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21Excess of fair value above cost of
ESOP shares committed to be released
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Release of treasury shares for equity offering
    
    
    
    
    
    
    (412
    )
    
    
    
    
    
    
    6,200
    
    
    
    
    
    
    
    
    
    
    
    5,788BALANCE AT MARCH 31, 2007
    
    $
    27
    
    
    $
    12,605
    
    
    $
    (3,038
    )
    
    $
    (4,321
    )
    
    $
    (861
    )
    
    $
    30,311
    
    
    $
    34,723BALANCE AT OCTOBER 1, 2007
    
    $
    27
    
    
    $
    12,598
    
    
    $
    (2,985
    )
    
    $
    (4,244
    )
    
    $
    (1,223
    )
    
    $
    30,521
    
    
    $
    34,694Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    439
    
    
    
    439Other comprehensive income, net of tax:Net unrealized gain on securities
net of reclassification adjustment,
net of taxes of $368(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    715
    
    
    
    715Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,154ESOP shares committed to be released
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55Excess of fair value above cost of
ESOP shares committed to be released
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )BALANCE AT MARCH 31, 2008
    
    $
    27
    
    
    $
    12,595
    
    
    $
    (2,930
    )
    
    $
    (4,244
    )
    
    $
    (508
    )
    
    $
    30,960
    
    
    $
    35,900
 
 (1)
    
    Disclosure of reclassification amount, net of tax: March 31,2008
    
    
    2007Net unrealized appreciation (depreciation) arising during the period
    
    $
    715
    
    
    $
    5Less: reclassification adjustment for net gains included in net income
(net of tax)
    
    
    
    
    
    
    (79
    )Net unrealized gain (loss) on securities
    
    $
    715
    
    
    $
    (74
    )
  - 3 -




---



##### 



Six months endedMarch 31,2008
    
    
    2007OPERATING ACTIVITIES:Net income
    
    $
    439
    
    
    $
    255Adjustments to reconcile net income to net cash provided by operating activities:Provision for depreciation and amortization
    
    
    285
    
    
    
    272Amortization of premiums and discounts
    
    
    40
    
    
    
    93Increase in cash surrender value of life insurance
    
    
    (360
    )
    
    
    (294
    )Net gain on sales of loans held for sale
    
    
    
    
    
    
    (124
    )Net gain on sales of investments
    
    
    (69
    )
    
    
    (120
    )Net gain on sale of real estate owned
    
    
    
    
    
    
    (61
    )Provision for loan losses
    
    
    56
    
    
    
    175Amortization of ESOP
    
    
    52
    
    
    
    73Deferred income tax
    
    
    
    
    
    
    770Share-based compensation
    
    
    
    
    
    
    21Changes in assets and liabilities which provided (used) cash:Origination of loans held for sale
    
    
    
    
    
    
    (272
    )Loans sold in the secondary market
    
    
    
    
    
    
    1,214Accrued interest receivable
    
    
    170
    
    
    
    (7
    )Prepaid expenses and other assets
    
    
    (62
    )
    
    
    3,158Accrued interest payable
    
    
    15
    
    
    
    488Accrued expenses
    
    
    401
    
    
    
    (978
    )Net cash provided by operating activities
    
    
    967
    
    
    
    3,123INVESTING ACTIVITIES:Loans originated
    
    
    (32,121
    )
    
    
    (54,827
    )Purchases of:Mortgage-related securities available for sale
    
    
    (41,625
    )
    
    
    (10,038
    )Investment securities available for sale
    
    
    (4,977
    )
    
    
    (4,271
    )Redemption of FHLB stock
    
    
    1,521
    
    
    
    1,975Purchase of FHLB stock
    
    
    (1,480
    )
    
    
    (1,201
    )Principal collected on loans
    
    
    46,103
    
    
    
    66,477Proceeds from sales of investments
    
    
    69
    
    
    
    7,912Proceeds from sales of real estate owned
    
    
    
    
    
    
    2,511Proceeds from maturities, calls, or repayments of:Investment securities available for sale
    
    
    3,027
    
    
    
    1,058Mortgage-related securities available for sale
    
    
    7,981
    
    
    
    6,559Mortgage-related securities held to maturity
    
    
    2,766
    
    
    
    3,275Purchase of property and equipment
    
    
    (110
    )
    
    
    (106
    )Net cash (used in) provided by investing activities
    
    
    (18,846
    )
    
    
    19,324FINANCING ACTIVITIES:Net decrease in deposit accounts
    
    
    (5,937
    )
    
    
    5,050FHLBank advances and other borrowings  repayments
    
    
    (56,190
    )
    
    
    (64,630
    )FHLBank advances and other borrowings  draws
    
    
    54,002
    
    
    
    51,801Net increase in advances from borrowers for taxes and insurance
    
    
    1,173
    
    
    
    1,179Exercise of stock options
    
    
    
    
    
    
    1Net proceeds from equity offering
    
    
    
    
    
    
    5,788Net cash used in financing activities
    
    
    (6,952
    )
    
    
    (811
    )(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (24,831
    )
    
    
    21,636CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    52,935
    
    
    
    12,787CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    28,104
    
    
    $
    34,423SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:Cash payments for interest on deposits and borrowings
    
    $
    8,417
    
    
    $
    8,802Cash payments of income taxes
    
    
    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 month period ended March 31, 2008 are not
necessarily indicative of the results to be expected for the fiscal year ending September
30, 2008 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, 2007.2.
    
    INVESTMENT SECURITIESThe amortized cost and approximate fair value of investment securities available for sale and
held to maturity, by contractual maturities, are as follows:
 March 31, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:U.S. Government and agency bonds:Over 10 years
    
    $
    2,964
    
    
    $
    37
    
    
    $
    
    
    
    $
    3,001Municipal obligations:5 to 10 years
    
    
    2,138
    
    
    
    81
    
    
    
    
    
    
    
    2,219Over 10 years
    
    
    1,815
    
    
    
    112
    
    
    
    
    
    
    
    1,927Corporate bonds:Less than 1 year
    
    
    1,000
    
    
    
    25
    
    
    
    
    
    
    
    1,0251 to 5 years
    
    
    1,066
    
    
    
    
    
    
    
    (48
    )
    
    
    1,0185 to 10 years
    
    
    2,000
    
    
    
    
    
    
    
    (640
    )
    
    
    1,360Over 10 years
    
    
    9,493
    
    
    
    
    
    
    
    (624
    )
    
    
    8,869Mutual funds
    
    
    10,441
    
    
    
    18
    
    
    
    (321
    )
    
    
    10,138Other equity investments
    
    
    1,040
    
    
    
    17
    
    
    
    
    
    
    
    1,057Total
    
    $
    31,957
    
    
    $
    290
    
    
    $
    (1,633
    )
    
    $
    30,614Held to Maturity:Municipal obligations:1 to 5 years
    
    $
    276
    
    
    $
    4
    
    
    $
    
    
    
    $
    2805 to 10 years
    
    
    2,979
    
    
    
    91
    
    
    
    
    
    
    
    3,070$
    3,255
    
    
    $
    95
    
    
    $
    
    
    
    $
    3,350
 - 5 -




---



##### 



Provided below is a summary of investment securities available for sale and held to maturity
which were in an unrealized loss position at March 31, 2008.
 Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesCorporate bonds
    
    $
    8,136
    
    
    $
    (409
    )
    
    $
    3,110
    
    
    $
    (903
    )
    
    $
    11,246
    
    
    $
    (1,312
    )Mutual funds
    
    
    
    
    
    
    
    
    
    
    9,602
    
    
    
    (321
    )
    
    
    9,602
    
    
    
    (321
    )Total
    
    $
    8,136
    
    
    $
    (409
    )
    
    $
    12,712
    
    
    $
    (1,224
    )
    
    $
    20,848
    
    
    $
    (1,633
    )
 At March 31, 2008, investment securities in a gross unrealized loss position for twelve
months or longer consisted of three securities and investments in two mutual funds having an
aggregate depreciation of 8.8% from the Companys amortized cost basis. Management believes
that the estimated fair value of the securities disclosed above is primarily dependent upon
the movement in market interest rates. These investment securities are comprised of
securities that are rated investment grade by at least one bond credit rating service.
Although the fair value will fluctuate as the market interest rates move, management
believes that these fair values will recover as the underlying portfolios mature and are
reinvested in investments yielding market rates of interest. Mutual funds in an unrealized
loss position for 12 months or longer consist of two funds primarily invested in
asset-backed securities and have an aggregate depreciation of 3.2%. Corporate bonds in an
unrealized loss position for 12 months or longer consisted of three debt securities and had
an aggregate depreciation of 22.5%. The Company has the ability and intent to hold all of
these securities until such time as the value recovers. Management does not believe any
individual unrealized loss as of March 31, 2008 represents an other-than-temporary
impairment.The amortized cost and approximate fair value of investment securities available for sale
and held to maturity, by contractual maturities, are as follows:
 September 30, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:U.S. Government bonds:1 to 5 years
    
    $
    2,000
    
    
    $
    
    
    
    $
    
    
    
    $
    2,000Over 10 years
    
    
    3,950
    
    
    
    10
    
    
    
    (9
    )
    
    
    3,951Municipal obligations:5 to 10 years
    
    
    1,130
    
    
    
    
    
    
    
    (14
    )
    
    
    1,116Corporate bonds:1 to 5 years
    
    
    2,074
    
    
    
    50
    
    
    
    
    
    
    
    2,1245 to 10 years
    
    
    2,000
    
    
    
    
    
    
    
    (560
    )
    
    
    1,440Over 10 years
    
    
    7,654
    
    
    
    61
    
    
    
    (42
    )
    
    
    7,673Mutual funds
    
    
    10,203
    
    
    
    7
    
    
    
    (322
    )
    
    
    9,888Other equity investments
    
    
    1,040
    
    
    
    60
    
    
    
    (8
    )
    
    
    1,092Total
    
    $
    30,051
    
    
    $
    188
    
    
    $
    (955
    )
    
    $
    29,284Held to Maturity:Municipal obligations:5 to 10 years
    
    $
    3,256
    
    
    $
    10
    
    
    $
    
    
    
    $
    3,266
 - 6 -




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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 September 30, 2007.
 Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. Government
bonds
    
    $
    2,954
    
    
    $
    (9
    )
    
    $
    
    
    
    $
    
    
    
    $
    2,954
    
    
    $
    (9
    )Corporate bonds
    
    
    
    
    
    
    
    
    
    
    3,420
    
    
    
    (602
    )
    
    
    3,420
    
    
    
    (602
    )Municipal bonds
    
    
    
    
    
    
    
    
    
    
    986
    
    
    
    (14
    )
    
    
    986
    
    
    
    (14
    )Mutual funds
    
    
    
    
    
    
    
    
    
    
    9,374
    
    
    
    (322
    )
    
    
    9,374
    
    
    
    (322
    )Equity securities
    
    
    327
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    327
    
    
    
    (8
    )Total
    
    $
    3,281
    
    
    $
    (17
    )
    
    $
    13,780
    
    
    $
    (938
    )
    
    $
    17,061
    
    
    $
    (955
    )
 3.
    
    MORTGAGE-RELATED SECURITIESMortgage-related securities available for sale and mortgage-related securities held to maturity are
summarized as follows:
 March 31, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:FHLMC pass-through certificates
    
    $
    37,601
    
    
    $
    586
    
    
    $
    (19
    )
    
    $
    38,168FNMA pass-through certificates
    
    
    46,216
    
    
    
    690
    
    
    
    (52
    )
    
    
    46,854GNMA pass-through certificates
    
    
    1,965
    
    
    
    70
    
    
    
    (1
    )
    
    
    2,034Collateralized mortgage obligations
    
    
    28,134
    
    
    
    51
    
    
    
    (752
    )
    
    
    27,433Total
    
    $
    113,916
    
    
    $
    1,397
    
    
    $
    (824
    )
    
    $
    114,489Held to Maturity:FHLMC pass-through certificates
    
    $
    10,931
    
    
    $
    76
    
    
    $
    (12
    )
    
    $
    10,995FNMA pass-through certificates
    
    
    17,542
    
    
    
    115
    
    
    
    (19
    )
    
    
    17,638Collateralized mortgage obligations
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Total
    
    $
    28,495
    
    
    $
    191
    
    
    $
    (31
    )
    
    $
    28,655
 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, 2008.
 Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesPass-through
certificates
    
    $
    16,237
    
    
    $
    (83
    )
    
    $
    1,550
    
    
    $
    (20
    )
    
    $
    17,787
    
    
    $
    (103
    )Collateralized
mortgage
obligations
    
    
    14,069
    
    
    
    (434
    )
    
    
    7,157
    
    
    
    (318
    )
    
    
    21,226
    
    
    
    (752
    )Total
    
    $
    30,306
    
    
    $
    (517
    )
    
    $
    8,707
    
    
    $
    (338
    )
    
    $
    39,013
    
    
    $
    (855
    )
 - 7 -




---



##### 



At March 31, 2008, mortgage-related securities in a gross unrealized loss position for
twelve months or longer consisted of seven securities that at such date had an aggregate
depreciation of 3.7% from the Companys amortized cost basis. Management does not believe
any individual unrealized loss as of March 31, 2008 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 majority of the unrealized losses
associated with mortgage-related securities are attributable to changes in interest rates
and 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.Mortgage-related securities available for sale and mortgage-related securities held to maturity are
summarized as follows:
 September 30, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:FHLMC pass-through certificates
    
    $
    15,647
    
    
    $
    1
    
    
    $
    (137
    )
    
    $
    15,511FNMA pass-through certificates
    
    
    31,744
    
    
    
    80
    
    
    
    (320
    )
    
    
    31,504GNMA pass-through certificates
    
    
    2,185
    
    
    
    3
    
    
    
    (7
    )
    
    
    2,181Collateralized mortgage obligations
    
    
    30,689
    
    
    
    19
    
    
    
    (726
    )
    
    
    29,982Total
    
    $
    80,265
    
    
    $
    103
    
    
    $
    (1,190
    )
    
    $
    79,178Held to Maturity:FHLMC pass-through certificates
    
    $
    11,957
    
    
    $
    5
    
    
    $
    (316
    )
    
    $
    11,646FNMA pass-through certificates
    
    
    19,289
    
    
    
    4
    
    
    
    (476
    )
    
    
    18,817Collateralized mortgage obligations
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    48Total
    
    $
    31,294
    
    
    $
    9
    
    
    $
    (792
    )
    
    $
    30,511
 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, 2007.
 Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesPass-through
certificates
    
    $
    21,075
    
    
    $
    (176
    )
    
    $
    47,185
    
    
    $
    (1,080
    )
    
    $
    68,260
    
    
    $
    (1,256
    )Collateralized
mortgage
obligations
    
    
    2,754
    
    
    
    (20
    )
    
    
    26,392
    
    
    
    (706
    )
    
    
    29,146
    
    
    
    (726
    )Total
    
    $
    23,829
    
    
    $
    (196
    )
    
    $
    73,577
    
    
    $
    (1,786
    )
    
    $
    97,406
    
    
    $
    (1,982
    )
 - 8 -




---



##### 



4.
    
    LOANS RECEIVABLELoans receivable consist of the following:
 March 31,
    
    
    September 30,2008
    
    
    2007Real estate loans:Single-family
    
    $
    143,323
    
    
    $
    139,888Construction and land
    
    
    24,963
    
    
    
    23,501Multi-family and commercial
    
    
    53,512
    
    
    
    60,026Home equity and lines of credit
    
    
    54,504
    
    
    
    57,808Consumer loans
    
    
    1,168
    
    
    
    1,204Commercial loans
    
    
    14,791
    
    
    
    19,044Total loans
    
    
    292,261
    
    
    
    301,471Loans in process
    
    
    (10,782
    )
    
    
    (6,008
    )Allowance for loan losses
    
    
    (3,377
    )
    
    
    (3,322
    )Deferred loan costs
    
    
    308
    
    
    
    277Loans receivable  net
    
    $
    278,410
    
    
    $
    292,418
 At March 31, 2008 and September 30, 2007, non-performing loans (which include loans in
excess of 90 days delinquent) amounted to approximately $1,187 and $4,685, respectively. At
March 31, 2008, non-performing loans consisted of three single-family residential mortgage
loans aggregating $219, one non-residential mortgage loan in the amount of $220, three
commercial business loans aggregating $504, two home equity lines of credit aggregating
$237, and three consumer loans aggregating $7.At March 31, 2008 and September 30, 2007, the Company had impaired loans with a total
recorded investment of $244 and $1,173, respectively. Interest income of $1 was recognized
on these impaired loans during the six months ended March 31, 2008. Interest income of
approximately $9 was not recognized as interest income due to the non-accrual status of such
loans for the six months ended March 31, 2008.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
    
    
    2007Impaired loans with related allowance for loan losses
under SFAS No. 114
    
    $
    220
    
    
    $
    1,148Impaired loans with no related allowance for loan losses
under SFAS No. 114
    
    
    24
    
    
    
    25Total impaired loans
    
    $
    244
    
    
    $
    1,173Valuation allowance related to impaired loans
    
    $
    110
    
    
    $
    271
 The following is an analysis of the allowance for loan losses:
 Six Months EndedMarch 31,2008
    
    
    2007Balance beginning of period
    
    $
    3,322
    
    
    $
    3,367Provisions charged to income
    
    
    56
    
    
    
    175Charge-offs
    
    
    (14
    )
    
    
    (43
    )Recoveries
    
    
    13
    
    
    
    26Total
    
    $
    3,377
    
    
    $
    3,525
 - 9 -




---



##### 



5.
    
    DEPOSITSDeposits consist of the following major classifications:
 March 31,
    
    
    September 30,2008
    
    
    2007Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentNon-interest bearing
    
    $
    16,020
    
    
    
    4.6
    %
    
    $
    18,404
    
    
    
    5.2
    %NOW
    
    
    78,233
    
    
    
    22.5
    
    
    
    75,194
    
    
    
    21.2Passbook
    
    
    36,302
    
    
    
    10.5
    
    
    
    37,369
    
    
    
    10.6Money market demand
    
    
    33,512
    
    
    
    9.6
    
    
    
    34,252
    
    
    
    9.7Certificates of deposit
    
    
    183,704
    
    
    
    52.8
    
    
    
    188,489
    
    
    
    53.3Total
    
    $
    347,771
    
    
    
    100.0
    %
    
    $
    353,708
    
    
    
    100.0
    %
 6.
    
    EARNINGS PER SHAREBasic net income per share is based upon the weighted average number of common shares
outstanding, while diluted net income per share is based upon the weighted average number of
common shares outstanding and common share equivalents that would arise from the exercise of
dilutive securities. All dilutive shares consist of options the exercise price of which is
lower than the market price of the common stock covered thereby at the dates presented. At
March 31, 2008 and 2007, anti-dilutive shares consisted of options covering 47,237 and 527
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 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator
    
    $
    207
    
    
    $
    167
    
    
    $
    439
    
    
    $
    255Denominators:Basic shares outstanding
    
    
    2,317,080
    
    
    
    2,303,333
    
    
    
    2,315,988
    
    
    
    2,146,185Effect of dilutive securities
    
    
    257
    
    
    
    20,645
    
    
    
    323
    
    
    
    19,952Diluted shares outstanding
    
    
    2,317,337
    
    
    
    2,323,978
    
    
    
    2,316,311
    
    
    
    2,166,137EPS:Basic
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    0.19
    
    
    $
    0.12Diluted
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    0.19
    
    
    $
    0.12
 - 10 -




---



##### 



7.
    
    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, 2008, that
the Bank meets all regulatory capital adequacy requirements to which it is subject.The Banks actual capital amounts and ratios are presented in the following table.
 Required for
    
    Well CapitalizedCapital Adequacy
    
    Under Prompt CorrectiveActual
    
    Purpose
    
    ActionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAt March 31, 2008:Core Capital (to Adjusted Tangible
Assets)
    
    $
    50,126
    
    
    
    9.68
    %
    
    $
    20,723
    
    
    
    4.0
    %
    
    $
    25,904
    
    
    
    5.0
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    50,126
    
    
    
    16.53
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    18,196
    
    
    
    6.0Total Capital (to Risk-Weighted Assets)
    
    
    53,503
    
    
    
    17.64
    
    
    
    24,261
    
    
    
    8.0
    
    
    
    30,326
    
    
    
    10.0Tangible Capital (to Tangible Assets)
    
    
    50,052
    
    
    
    9.66
    
    
    
    7,770
    
    
    
    1.5
    
    
    
    N/A
    
    
    
    N/AAt September 30, 2007:Core Capital (to Adjusted Tangible
Assets)
    
    $
    49,207
    
    
    
    9.38
    %
    
    $
    20,975
    
    
    
    4.0
    %
    
    $
    26,219
    
    
    
    5.0
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    49,207
    
    
    
    15.44
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    19,118
    
    
    
    6.0Total Capital (to Risk-Weighted Assets)
    
    
    52,529
    
    
    
    16.49
    
    
    
    25,491
    
    
    
    8.0
    
    
    
    31,864
    
    
    
    10.0Tangible Capital (to Tangible Assets)
    
    
    49,126
    
    
    
    9.37
    
    
    
    7,864
    
    
    
    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, 2008, 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.
 - 11 -




---



##### 



8.
    
    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 currently evaluating the impact the adoption of the standard
will have on the Companys results of operations.In September 2007, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. SFAS No. 157 does not require any new fair value
measurements. The definition of fair value retains the exchange price notion in earlier
definitions of fair value. SFAS No. 157 clarifies that the exchange price is the price in an
orderly transaction between market participants to sell the asset or transfer the liability
in the market in which the reporting entity would transact for the asset or liability. The
definition focuses on the price that would be received to sell the asset or paid to transfer
the liability (an exit price), not the price that would be paid to acquire the asset or
received to assume the liability (an entry price). SFAS No. 157 emphasizes that fair value
is a market-based measurement, not an entity-specific measurement. This Statement is
effective for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. Early adoption is permitted. 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 2007, the FASB issued SFAS 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). For defined benefit post-retirement plans, SFAS No. 158 requires that the funded
status be recognized in the statement of financial position, that assets and obligations
that determine funded status be measured as of the end of the employers fiscal year, and
that changes in funded status be recognized in comprehensive income in the year the changes
occur. SFAS No. 158 does not change the amount of net periodic benefit cost included in net
income or address measurement issues related to defined benefit post-retirement plans. This
requirement is effective for fiscal years ending after December 15, 2008. The other
provisions of the Statement were effective as of the end of the fiscal year ending after
December 15, 2006, for public companies. The Company has determined that the guidance
provided by SFAS No. 158 does 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 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 Company is currently
evaluating the impact the adoption of the standard will have on the Companys results of
operations.
 - 12 -




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##### 



The Company adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement 109, effective October 1, 2007. FIN No. 48
prescribes a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
Benefits from tax positions should be recognized in the financial statements only when it is
more likely than not that the tax position will be sustained upon examination by the
appropriate taxing authority that would have full knowledge of all relevant information. A
tax position that meets the more-likely-than-not recognition threshold is measured at the
largest amount of benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not
recognition threshold should be recognized in the first subsequent financial reporting
period in which that threshold is met. Previously recognized tax positions that no longer
meet the more-likely-than-not recognition threshold should be derecognized in the first
subsequent financial reporting period in which that threshold is no longer met. FIN No. 48
also provides guidance on the accounting for and disclosure of unrecognized tax benefits,
interest and penalties. Adoption of FIN No. 48 did not have a significant impact on the
Companys financial statements.In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (EITF 06-11),
Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.EITF 06-11
applies to share-based payment arrangements with dividend protection features that entitle
employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend
equivalents on equity-classified nonvested share units, or (c) payments equal to the
dividends paid on the underlying shares while an equity-classified share option is
outstanding, when those dividends or dividend equivalents are charged to retained earnings
under SFAS No. 123R, Share-Based Payment, and result in an income tax deduction for the
employer. A consensus was reached that a realized income tax benefit from dividends or
dividend equivalents that are charged to retained earnings and are paid to employees for
equity-classified nonvested equity shares, nonvested equity share units, and outstanding
equity share options should be recognized as an increase in additional paid-in capital.
EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim
periods within those fiscal years. The Company is currently evaluating the impact the
adoption of the EITF will have on the Companys results of operations.
 - 13 -




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##### 



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




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##### 



Supervisory Agreements
      - 15 -




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##### 



Comparison of Financial Condition at March 31, 2008 and September 30, 2007
   Comparison of Results of Operations for the Three and Six Months Ended March 31, 2008 and 2007
 Net Income.
 Net Interest Income.
  - 16 -




---



##### 



For the three months endedMarch 31, 2008
    
    
    March 31, 2007Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    CostInterest-earning assets:Loans receivable(1) (2)
    
    $
    277,586
    
    
    $
    4,391
    
    
    
    6.33
    %
    
    $
    314,315
    
    
    $
    5,259
    
    
    
    6.69
    %Mortgage-related securities(2)
    
    
    130,792
    
    
    
    1,583
    
    
    
    4.84
    
    
    
    105,920
    
    
    
    1,209
    
    
    
    4.57Investment securities
    
    
    40,398
    
    
    
    510
    
    
    
    5.05
    
    
    
    41,133
    
    
    
    616
    
    
    
    5.99Other interest-earning assets
    
    
    25,638
    
    
    
    178
    
    
    
    2.78
    
    
    
    12,449
    
    
    
    114
    
    
    
    3.66Total interest-earning assets
    
    
    474,414
    
    
    
    6,662
    
    
    
    5.62
    
    
    
    473,817
    
    
    
    7,198
    
    
    
    6.08Non-interest-earning assets
    
    
    34,443
    
    
    
    
    
    
    
    
    
    
    
    35,880Total assets
    
    $
    508,857
    
    
    
    
    
    
    
    
    
    
    $
    509,697Interest-bearing liabilities:Deposits
    
    $
    342,678
    
    
    
    2,423
    
    
    
    2.83
    
    
    $
    355,649
    
    
    
    2,838
    
    
    
    3.19FHLB advances and other borrowings
    
    
    107,025
    
    
    
    1,374
    
    
    
    5.14
    
    
    
    90,469
    
    
    
    1,242
    
    
    
    5.49Junior subordinated debentures
    
    
    15,264
    
    
    
    365
    
    
    
    9.56
    
    
    
    21,471
    
    
    
    499
    
    
    
    9.30Total interest-bearing liabilities
    
    
    464,967
    
    
    
    4,162
    
    
    
    3.58
    
    
    
    467,589
    
    
    
    4,579
    
    
    
    3.92Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    2.04
    %
    
    
    
    
    
    
    
    
    
    
    2.16
    %Non-interest-bearing liabilities
    
    
    7,647
    
    
    
    
    
    
    
    
    
    
    
    7,691Total liabilities
    
    
    472,614
    
    
    
    
    
    
    
    
    
    
    
    475,280Stockholders equity
    
    
    36,243
    
    
    
    
    
    
    
    
    
    
    
    34,417Total liabilities and stockholders equity
    
    $
    508,857
    
    
    
    
    
    
    
    
    
    
    $
    509,697Net interest-earning assets
    
    $
    9,447
    
    
    
    
    
    
    
    
    
    
    $
    6,228Net interest income
    
    
    
    
    
    $
    2,500
    
    
    
    
    
    
    
    
    
    
    $
    2,619Net interest margin(3)
    
    
    
    
    
    
    
    
    
    
    2.11
    %
    
    
    
    
    
    
    
    
    
    
    2.21
    %Ratio of average interest-earning assets
to average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    102.03
    %
    
    
    
    
    
    
    
    
    
    
    101.33
    %
 
 (1)
    
    Includes non-accrual loans.(2)
    
    Includes assets classified as either available for sale or held for sale.(3)
    
    Net interest income divided by average interest-earning assets. - 17 -




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##### 



For the six months endedMarch 31, 2008
    
    
    March 31, 2007Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    CostInterest-earning assets:Loans receivable(1) (2)
    
    $
    282,055
    
    
    $
    9,062
    
    
    
    6.43
    %
    
    $
    317,960
    
    
    $
    10,614
    
    
    
    6.68
    %Mortgage-related securities(2)
    
    
    122,739
    
    
    
    2,963
    
    
    
    4.83
    
    
    
    106,332
    
    
    
    2,416
    
    
    
    4.54Investment securities
    
    
    39,209
    
    
    
    1,033
    
    
    
    5.27
    
    
    
    42,534
    
    
    
    1,164
    
    
    
    5.47Other interest-earning assets
    
    
    21,700
    
    
    
    341
    
    
    
    3.14
    
    
    
    11,154
    
    
    
    177
    
    
    
    3.17Total interest-earning assets
    
    
    465,703
    
    
    
    13,399
    
    
    
    5.75
    
    
    
    477,980
    
    
    
    14,371
    
    
    
    6.01Non-interest-earning assets
    
    
    34,594
    
    
    
    
    
    
    
    
    
    
    
    35,837Total assets
    
    $
    500,297
    
    
    
    
    
    
    
    
    
    
    $
    513,817Interest-bearing liabilities:Deposits
    
    $
    344,860
    
    
    
    5,101
    
    
    
    2.96
    
    
    $
    354,450
    
    
    
    5,542
    
    
    
    3.13FHLB advances and other borrowings
    
    
    97,312
    
    
    
    2,599
    
    
    
    5.34
    
    
    
    99,160
    
    
    
    2,747
    
    
    
    5.54Junior subordinated debentures
    
    
    15,264
    
    
    
    732
    
    
    
    9.59
    
    
    
    21,476
    
    
    
    1,001
    
    
    
    9.32Total interest-bearing liabilities
    
    
    457,436
    
    
    
    8,432
    
    
    
    3.69
    
    
    
    475,086
    
    
    
    9,290
    
    
    
    3.91Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    2.07
    %
    
    
    
    
    
    
    
    
    
    
    2.10
    %Non-interest-bearing liabilities
    
    
    7,219
    
    
    
    
    
    
    
    
    
    
    
    7,112Total liabilities
    
    
    464,655
    
    
    
    
    
    
    
    
    
    
    
    482,198Stockholders equity
    
    
    35,642
    
    
    
    
    
    
    
    
    
    
    
    31,619Total liabilities and stockholders equity
    
    $
    500,297
    
    
    
    
    
    
    
    
    
    
    $
    513,817Net interest-earning assets
    
    $
    8,267
    
    
    
    
    
    
    
    
    
    
    $
    2,894Net interest income
    
    
    
    
    
    $
    4,967
    
    
    
    
    
    
    
    
    
    
    $
    5,081Net interest margin(3)
    
    
    
    
    
    
    
    
    
    
    2.13
    %
    
    
    
    
    
    
    
    
    
    
    2.13
    %Ratio of average interest-earning assets
to average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    101.81
    %
    
    
    
    
    
    
    
    
    
    
    100.61
    %
 
 (1)
    
    Includes non-accrual loans.(2)
    
    Includes assets classified as either available for sale or held for sale.(3)
    
    Net interest income divided by average interest-earning assets. Provision for Loan Losses.
 - 18 -




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##### 



Non-interest Income.
  Non-interest Expense.
  Income Tax Expense.
 - 19 -




---



##### 



Liquidity and Capital Resources
    Impact of Inflation and Changing Prices
   - 20 -




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
    Net Portfolio Value(Dollars in thousands)Changes in
    
    
    
    
    
    
    
    
    
    
    
    
    
    NetRates in
    
    
    
    
    
    Dollar
    
    Percentage
    
    Portfolio Value AsBasis Points
    
    Amount
    
    Change
    
    Change
    
    a % of Assets
    
    Change300
    
    $
    43,101
    
    
    $
    (19,695
    )
    
    
    (31
    )%
    
    
    8.48
    %
    
    (324) bp200
    
    
    50,783
    
    
    
    (12,012
    )
    
    
    (19
    )
    
    
    9.80
    
    
    (192) bp100
    
    
    57,618
    
    
    
    (5,177
    )
    
    
    (8
    )
    
    
    10.92
    
    
    (80) bp50
    
    
    60,544
    
    
    
    (2,252
    )
    
    
    (4
    )
    
    
    11.38
    
    
    (34) bp0
    
    
    62,795
    
    
    
    
    
    
    
    
    
    
    
    11.72
    
    
       bp(50)
    
    
    64,191
    
    
    
    1,396
    
    
    
    2
    
    
    
    11.91
    
    
    19   bp(100)
    
    
    65,158
    
    
    
    2,363
    
    
    
    4
    
    
    
    12.03
    
    
    31   bp
   
 Item 4. Controls and Procedures
  - 21 -




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##### 



- 22 -




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##### 



PART II
 
 Legal Proceedings
  
 Risk Factors
  
 Unregistered Sales of Equity Securities and Use of Proceeds
   
 Defaults Upon Senior Securities
  
 Submission of Matters to a Vote of Security Holders
  
 Other Information
   - 23 -




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##### 



Exhibits
  Exhibit No
    
    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
    
    Employment Agreement between First
Keystone Financial, Inc. and Thomas M. Kelly dated December 1, 2004 3,*10.2
    
    Severance Agreement between First
Keystone Financial, Inc. and Carol Walsh dated December 1, 2004 3,*10.3
    
    1995 Stock Option Plan 4, *10.4
    
    1995 Recognition and Retention Plan and Trust Agreement 5,*10.5
    
    1998 Stock Option Plan 5, *10.6
    
    Employment Agreement between First
Keystone Bank and Thomas M. Kelly dated December 1, 2004 3, *10.7
    
    Severance Agreement between First
Keystone Bank and Carol Walsh dated December 1, 2004 3, *10.8
    
    First Keystone Bank Supplemental Executive Retirement Plan 6,*10.9
    
    Amendment No. 1 to the Employment
Agreement between First Keystone Financial, Inc. and Thomas M. Kelly 7,*10.10
    
    Amendment No. 1 to the Employment
Agreement between First Keystone Bank and Thomas M. Kelly 7,*10.11
    
    Transition, Consulting,
Noncompetition and Retirement Agreement by and between First Keystone Financial, Inc., First Keystone Bank and Donald S. Guthrie 8,*10.12
    
    Letter dated December 11, 2006 with respect to appointment to Board 910.13
    
    Form of Registration Rights Agreement 1011
    
    Statement re: computation of per
share earnings.  See Note 6 to the Consolidated Financial Statements included in Item I of Part I of this Form 10-Q23.1
    
    Consent of S.R. Snodgrass, A.C.23.2
    
    Consent of Deloitte & Touche LLP31.1
    
    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
    
    Codes of Ethics 1199.2
    
    Supervisory Agreement between First
Keystone Financial, Inc. and the Office of Thrift Supervision dated February 13, 2006. 1299.3
    
    Supervisory Agreement between First
Keystone Bank and the Office of Thrift Supervision dated February 13, 2006. 12
 
 (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. - 24 -




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##### 



(3)
    
    Incorporated by reference from Exhibits 10.5, 10.8, 10.14, and
10.16, respectively, in the Form 8-K filed by the Registrant with the SEC on
December 7, 2004 (File No. 000-25328).(4)
    
    Incorporated by reference from Exhibit 10.9 in the Form 10-K
filed by the Registrant with SEC on December 29, 1995 (File No. 000-25328).(5)
    
    Incorporated from Appendix A of the Registrants
definitive proxy statement dated December 24, 1998 (File No. 000-25328).(6)
    
    Incorporated by reference from Exhibit 10.1 in the Form 8-K
filed by the Registrant with the SEC on July 2, 2007.(7)
    
    Incorporated by reference from Exhibits 10.19 and 10.20,
respectively, in the Form 8-K filed by the Registrant with the SEC on March 29,
2005.(8)
    
    Incorporated by reference from Exhibit 10.21 in the Form 8-K
filed by the Registrant with the SEC on March 29, 2005.(9)
    
    Incorporated by reference from Exhibit 10.1 in the Form 8-K
filed by the Registrant with the SEC on December 20, 2006.(10)
    
    Incorporated by reference from Exhibit 10.17 in the Form 10-K
for the year ended September 30, 2006 filed by the Registrant with the SEC on
December 29, 2006.(11)
    
    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.(12)
    
    Incorporated by reference from Exhibit 99.2 and 99.3 in 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. - 25 -




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##### 



SIGNATURES
  FIRST KEYSTONE FINANCIAL, INC.Date:      May 9, 2008
    By:
    /s/ Thomas M. KellyThomas M. KellyPresident and Chief Executive OfficerDate:      May 9, 2008
    By:
    /s/ Rose M. DiMarcoRose M. DiMarcoChief Financial Officer - 26 -