##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 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 oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
 Contents
 PagePART I
    
    FINANCIAL INFORMATION:Item 1.
    
    Financial StatementsConsolidated Statements of Financial Condition as of
June 30, 2008 (Unaudited) and September 30, 2007
    
    
    1Unaudited Consolidated Statements of Income for the Three and Nine
Months Ended June 30, 2008 and 2007
    
    
    2Unaudited Consolidated Statement of Changes in Stockholders Equity
for the Nine Months Ended June 30, 2008 and 2007
    
    
    3Unaudited Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 2008 and 2007
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4T.
    
    Controls and Procedures
    
    
    25PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3.
    
    Defaults Upon Senior Securities
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Item 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits
    
    
    27SIGNATURES
    
    
    29CERTIFICATIONCERTIFICATIONCERTIFICATION
  -i-




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##### Table of Contents



June 30,
    
    
    September 30,2008
    
    
    2007ASSETS:Cash and amounts due from depository institutions
    
    $
    8,643
    
    
    $
    4,642Interest-bearing deposits with depository institutions
    
    
    22,079
    
    
    
    48,293Total cash and cash equivalents
    
    
    30,722
    
    
    
    52,935Investment securities available for sale
    
    
    29,179
    
    
    
    29,284Mortgage-related securities available for sale
    
    
    106,781
    
    
    
    79,178Investment securities held to maturity  at amortized cost
(approximate fair value of $3,273 at June 30, 2008
and $3,266 at September 30, 2007)
    
    
    3,255
    
    
    
    3,256Mortgage-related securities held to maturity  at amortized cost
(approximate fair value of $26,507 at June 30, 2008
and $30,511 at September 30, 2007)
    
    
    26,783
    
    
    
    31,294Loans receivable (net of allowance for loan losses of $3,376 and $3,322
at June 30, 2008 and September 30, 2007, respectively)
    
    
    284,515
    
    
    
    292,418Accrued interest receivable
    
    
    2,417
    
    
    
    2,702FHLBank Stock, at cost
    
    
    6,821
    
    
    
    6,338Office properties and equipment, net
    
    
    4,499
    
    
    
    4,762Deferred income taxes
    
    
    3,329
    
    
    
    2,505Cash surrender value of life insurance
    
    
    17,768
    
    
    
    17,234Prepaid expenses and other assets
    
    
    3,389
    
    
    
    2,975TOTAL ASSETS
    
    $
    519,458
    
    
    $
    524,881LIABILITIES AND STOCKHOLDERS EQUITY:Liabilities:Deposits:Non-interest-bearing
    
    $
    18,002
    
    
    $
    18,404Interest-bearing
    
    
    323,496
    
    
    
    335,304Total deposits
    
    
    341,498
    
    
    
    353,708Advances from FHLBank and other borrowings
    
    
    124,185
    
    
    
    115,384Junior subordinated debentures
    
    
    11,637
    
    
    
    15,264Accrued interest payable
    
    
    2,366
    
    
    
    2,324Advances from borrowers for taxes and insurance
    
    
    3,172
    
    
    
    870Accounts payable and accrued expenses
    
    
    2,747
    
    
    
    2,637Total liabilities
    
    
    485,605
    
    
    
    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 June 30, 2008 and September 30, 2007, 2,432,998 shares
    
    
    27
    
    
    
    27Additional paid in capital
    
    
    12,591
    
    
    
    12,598Employee stock ownership plan
    
    
    (2,901
    )
    
    
    (2,985
    )Treasury stock at cost: 279,558 shares at June 30, 2008 and at September 30, 2007
    
    
    (4,244
    )
    
    
    (4,244
    )Accumulated other comprehensive loss
    
    
    (2,823
    )
    
    
    (1,223
    )Retained earnings  partially restricted
    
    
    31,203
    
    
    
    30,521Total stockholders equity
    
    
    33,853
    
    
    
    34,694TOTAL LIABILITIES AND STOCKHOLDERS EQUITY:
    
    $
    519,458
    
    
    $
    524,881
  -1-




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##### Table of Contents



Three months ended
    
    
    Nine months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007INTEREST INCOME:Interest and fees on loans
    
    $
    4,284
    
    
    $
    5,109
    
    
    $
    13,346
    
    
    $
    15,723Interest and dividends on:Mortgage-related securities
    
    
    1,696
    
    
    
    1,264
    
    
    
    4,659
    
    
    
    3,680Investment securities:Taxable
    
    
    391
    
    
    
    371
    
    
    
    1,188
    
    
    
    995Tax-exempt
    
    
    42
    
    
    
    48
    
    
    
    125
    
    
    
    344Dividends
    
    
    46
    
    
    
    77
    
    
    
    198
    
    
    
    320Interest on interest-bearing deposits
    
    
    70
    
    
    
    176
    
    
    
    411
    
    
    
    353Total interest income
    
    
    6,529
    
    
    
    7,045
    
    
    
    19,927
    
    
    
    21,415INTEREST EXPENSE:Interest on:Deposits
    
    
    2,169
    
    
    
    2,864
    
    
    
    7,270
    
    
    
    8,406FHLBank and other borrowings
    
    
    1,409
    
    
    
    1,211
    
    
    
    4,008
    
    
    
    3,958Junior subordinated debentures
    
    
    353
    
    
    
    465
    
    
    
    1,085
    
    
    
    1,466Total interest expense
    
    
    3,931
    
    
    
    4,540
    
    
    
    12,363
    
    
    
    13,830Net interest income
    
    
    2,598
    
    
    
    2,505
    
    
    
    7,564
    
    
    
    7,585PROVISION FOR LOAN LOSS
    
    
    
    
    
    
    100
    
    
    
    56
    
    
    
    275Net interest income after provision for loan losses
    
    
    2,598
    
    
    
    2,405
    
    
    
    7,508
    
    
    
    7,310NON-INTEREST INCOME:Service charges and other fees
    
    
    401
    
    
    
    437
    
    
    
    1,233
    
    
    
    1,234Net gain on sales of loans held for sale
    
    
    7
    
    
    
    39
    
    
    
    7
    
    
    
    163Net gain on sales of investments
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    120Net gain on sales of REO
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61Increase in cash surrender value of life insurance
    
    
    174
    
    
    
    145
    
    
    
    534
    
    
    
    438Other income
    
    
    121
    
    
    
    105
    
    
    
    330
    
    
    
    310Total non-interest income
    
    
    703
    
    
    
    726
    
    
    
    2,173
    
    
    
    2,326NON-INTEREST EXPENSE:Salaries and employee benefits
    
    
    1,450
    
    
    
    1,481
    
    
    
    4,321
    
    
    
    4,452Occupancy and equipment
    
    
    387
    
    
    
    414
    
    
    
    1,204
    
    
    
    1,214Professional fees
    
    
    379
    
    
    
    262
    
    
    
    960
    
    
    
    1,132Federal deposit insurance premium
    
    
    47
    
    
    
    42
    
    
    
    146
    
    
    
    116Data processing
    
    
    144
    
    
    
    149
    
    
    
    425
    
    
    
    427Advertising
    
    
    98
    
    
    
    95
    
    
    
    309
    
    
    
    321Deposit processing
    
    
    150
    
    
    
    153
    
    
    
    440
    
    
    
    450Other
    
    
    382
    
    
    
    450
    
    
    
    1,156
    
    
    
    1,324Total non-interest expense
    
    
    3,037
    
    
    
    3,046
    
    
    
    8,961
    
    
    
    9,436Income before income tax expense (benefit)
    
    
    264
    
    
    
    85
    
    
    
    720
    
    
    
    200Income tax expense (benefit)
    
    
    21
    
    
    
    (30
    )
    
    
    38
    
    
    
    (170
    )Net income
    
    $
    243
    
    
    $
    115
    
    
    $
    682
    
    
    $
    370Earnings per common share:Basic
    
    $
    0.10
    
    
    $
    0.05
    
    
    $
    0.29
    
    
    $
    0.17Diluted
    
    $
    0.10
    
    
    $
    0.05
    
    
    $
    0.29
    
    
    $
    0.17Weighted average shares  basic
    
    
    2,319,244
    
    
    
    2,307,671
    
    
    
    2,317,072
    
    
    
    2,200,013Weighted average shares  diluted
    
    
    2,319,244
    
    
    
    2,325,708
    
    
    
    2,317,266
    
    
    
    2,218,253
  -2-




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##### Table of Contents



Employee
    
    
    
    
    
    
    Accumulated
    
    
    RetainedAdditional
    
    
    stock
    
    
    
    
    
    
    other
    
    
    earnings-
    
    
    TotalCommon
    
    
    paid-in
    
    
    ownership
    
    
    Treasury
    
    
    comprehensive
    
    
    partially
    
    
    stockholdersstock
    
    
    capital
    
    
    plan
    
    
    stock
    
    
    loss
    
    
    restricted
    
    
    equityBALANCE AT OCTOBER 1, 2006
    
    $
    27
    
    
    $
    12,974
    
    
    $
    (3,089
    )
    
    $
    (10,522
    )
    
    $
    (787
    )
    
    $
    30,056
    
    
    $
    28,659Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    370Other comprehensive loss, net of tax benefit:Net unrealized loss on securities
net of reclassification adjustment,
net of tax benefit of $488(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (948
    )
    
    
    
    
    
    
    (948
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (578
    )ESOP shares committed to be released
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77Share-based compensation
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26Excess of fair value above cost of
ESOP shares committed to be released
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34Exercise of stock options
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    57Release of treasury shares for equity offering
    
    
    
    
    
    
    (430
    )
    
    
    
    
    
    
    6,200
    
    
    
    
    
    
    
    
    
    
    
    5,770BALANCE AT JUNE 30, 2007
    
    $
    27
    
    
    $
    12,590
    
    
    $
    (3,012
    )
    
    $
    (4,251
    )
    
    $
    (1,735
    )
    
    $
    30,426
    
    
    $
    34,045BALANCE AT OCTOBER 1, 2007
    
    $
    27
    
    
    $
    12,598
    
    
    $
    (2,985
    )
    
    $
    (4,244
    )
    
    $
    (1,223
    )
    
    $
    30,521
    
    
    $
    34,694Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    682
    
    
    
    682Other comprehensive loss, net of tax benefit:Net unrealized loss on securities
net of reclassification adjustment,
net of tax benefit of $824(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,600
    )
    
    
    
    
    
    
    (1,600
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (918
    )ESOP shares committed to be released
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84Excess of fair value above cost of
ESOP shares committed to be released
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )BALANCE AT JUNE 30, 2008
    
    $
    27
    
    
    $
    12,591
    
    
    $
    (2,901
    )
    
    $
    (4,244
    )
    
    $
    (2,823
    )
    
    $
    31,203
    
    
    $
    33,853
 
 (1)
    
    Disclosure of reclassification amount, net of tax: June 30,2008
    
    
    2007Net unrealized depreciation arising during the period
    
    $
    (1,600
    )
    
    $
    (1,027
    )Less: reclassification adjustment for net gains included in net income
(net of tax)
    
    
    
    
    
    
    79Net unrealized loss on securities
    
    $
    (1,600
    )
    
    $
    (948
    )
  -3-




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##### Table of Contents



Nine months endedJune 30,2008
    
    
    2007OPERATING ACTIVITIES:Net income
    
    $
    682
    
    
    $
    370Adjustments to reconcile net income to net cash provided by operating activities:Provision for depreciation and amortization
    
    
    428
    
    
    
    416Amortization of premiums and discounts
    
    
    35
    
    
    
    123Increase in cash surrender value of life insurance
    
    
    (534
    )
    
    
    (438
    )Net gain on sales of loans held for sale
    
    
    (7
    )
    
    
    (163
    )Net gain on sales of investments
    
    
    (69
    )
    
    
    (120
    )Net gain on sales of real estate owned
    
    
    
    
    
    
    (61
    )Provision for loan losses
    
    
    56
    
    
    
    275Amortization of ESOP
    
    
    77
    
    
    
    111Deferred income tax
    
    
    
    
    
    
    (791
    )Share-based compensation
    
    
    
    
    
    
    26Changes in assets and liabilities which provided (used) cash:Origination of loans held for sale
    
    
    (1,235
    )
    
    
    (271
    )Loans sold in the secondary market
    
    
    1,242
    
    
    
    1,605Accrued interest receivable
    
    
    285
    
    
    
    155Prepaid expenses and other assets
    
    
    (414
    )
    
    
    3,326Accrued interest payable
    
    
    42
    
    
    
    243Accrued expenses
    
    
    110
    
    
    
    (1,238
    )Net cash provided by operating activities
    
    
    698
    
    
    
    3,568INVESTING ACTIVITIES:Loans originated
    
    
    (57,814
    )
    
    
    (76,623
    )Purchases of:Mortgage-related securities available for sale
    
    
    (41,625
    )
    
    
    (17,974
    )Investment securities available for sale
    
    
    (5,082
    )
    
    
    (5,878
    )Redemption of FHLB stock
    
    
    1,584
    
    
    
    2,293Purchase of FHLB stock
    
    
    (2,067
    )
    
    
    (1,921
    )Principal collected on loans
    
    
    65,723
    
    
    
    95,446Proceeds 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
    
    
    3,075
    
    
    
    1,220Mortgage-related securities available for sale
    
    
    13,662
    
    
    
    9,837Mortgage-related securities held to maturity
    
    
    4,463
    
    
    
    5,177Purchase of property and equipment
    
    
    (165
    )
    
    
    (551
    )Net cash (used in) provided by investing activities
    
    
    (18,177
    )
    
    
    21,449FINANCING ACTIVITIES:Net (decrease) increase in deposit accounts
    
    
    (12,210
    )
    
    
    4,115FHLBank advances and other borrowings  repayments
    
    
    (66,702
    )
    
    
    (75,144
    )FHLBank advances and other borrowings  draws
    
    
    75,503
    
    
    
    72,301Net increase in advances from borrowers for taxes and insurance
    
    
    2,302
    
    
    
    2,176Exercise of stock options
    
    
    
    
    
    
    57Net proceeds from equity offering
    
    
    
    
    
    
    5,770Purchase of trust preferred securities
    
    
    (1,565
    )
    
    
    Retirement of subordinated debt
    
    
    (2,062
    )
    
    
    (6,186
    )Net cash used in financing activities
    
    
    (4,734
    )
    
    
    (3,089
    )(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (22,213
    )
    
    
    28,106CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    52,935
    
    
    
    12,787CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    30,722
    
    
    $
    40,893SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:Cash payments for interest on deposits and borrowings
    
    $
    12,320
    
    
    $
    13,587Cash payments of income taxes
    
    
    125
    
    
    
    
  -4-




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##### Table of Contents



1.
    
    BASIS OF PRESENTATION
   2.
    
    INVESTMENT SECURITIES
  June 30, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:U.S. Government and agency bonds:Over 10 years
    
    $
    2,964
    
    
    $
    34
    
    
    $
    
    
    
    $
    2,998Municipal obligations:5 to 10 years
    
    
    2,138
    
    
    
    45
    
    
    
    (4
    )
    
    
    2,179Over 10 years
    
    
    1,816
    
    
    
    85
    
    
    
    
    
    
    
    1,901Corporate bonds:Less than 1 year
    
    
    1,000
    
    
    
    14
    
    
    
    
    
    
    
    1,0141 to 5 years
    
    
    1,061
    
    
    
    
    
    
    
    (91
    )
    
    
    9705 to 10 years
    
    
    2,000
    
    
    
    
    
    
    
    (389
    )
    
    
    1,611Over 10 years
    
    
    9,429
    
    
    
    
    
    
    
    (1,518
    )
    
    
    7,911Mutual funds
    
    
    10,547
    
    
    
    7
    
    
    
    (899
    )
    
    
    9,655Other equity investments
    
    
    1,040
    
    
    
    
    
    
    
    (100
    )
    
    
    940Total
    
    $
    31,995
    
    
    $
    185
    
    
    $
    (3,001
    )
    
    $
    29,179Held to Maturity:Municipal obligations:1 to 5 years
    
    $
    1,039
    
    
    $
    4
    
    
    $
    (1
    )
    
    $
    1,0425 to 10 years
    
    
    2,216
    
    
    
    15
    
    
    
    
    
    
    
    2,231Total
    
    $
    3,255
    
    
    $
    19
    
    
    $
    (1
    )
    
    $
    3,273
 -5-




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##### Table of Contents



Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesCorporate bonds
    
    $
    9,311
    
    
    $
    (1,082
    )
    
    $
    3,096
    
    
    $
    (916
    )
    
    $
    12,407
    
    
    $
    (1,998
    )Equity securities
    
    
    540
    
    
    
    (100
    )
    
    
    
    
    
    
    
    
    
    
    540
    
    
    
    (100
    )Municipal obligations
    
    
    1,590
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    1,590
    
    
    
    (5
    )Mutual funds
    
    
    
    
    
    
    
    
    
    
    9,124
    
    
    
    (899
    )
    
    
    9,124
    
    
    
    (899
    )Total
    
    $
    11,441
    
    
    $
    (1,187
    )
    
    $
    12,220
    
    
    $
    (1,815
    )
    
    $
    23,661
    
    
    $
    (3,002
    )
  -6-




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##### Table of Contents



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
 -7-




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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 SECURITIES
  June 30, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:FHLMC pass-through certificates
    
    $
    36,023
    
    
    $
    63
    
    
    $
    (328
    )
    
    $
    35,758FNMA pass-through certificates
    
    
    43,731
    
    
    
    172
    
    
    
    (420
    )
    
    
    43,483GNMA pass-through certificates
    
    
    1,709
    
    
    
    2
    
    
    
    (11
    )
    
    
    1,700Collateralized mortgage obligations
    
    
    26,779
    
    
    
    3
    
    
    
    (942
    )
    
    
    25,840Total
    
    $
    108,242
    
    
    $
    240
    
    
    $
    (1,701
    )
    
    $
    106,781Held to Maturity:FHLMC pass-through certificates
    
    $
    10,271
    
    
    $
    37
    
    
    $
    (127
    )
    
    $
    10,181FNMA pass-through certificates
    
    
    16,500
    
    
    
    7
    
    
    
    (193
    )
    
    
    16,314Collateralized mortgage obligations
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    12Total
    
    $
    26,783
    
    
    $
    44
    
    
    $
    (320
    )
    
    $
    26,507
  Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesPass-through
certificates
    
    $
    70,623
    
    
    $
    (1,030
    )
    
    $
    1,445
    
    
    $
    (49
    )
    
    $
    72,068
    
    
    $
    (1,079
    )Collateralized
mortgage
obligations
    
    
    18,784
    
    
    
    (647
    )
    
    
    6,847
    
    
    
    (295
    )
    
    
    25,631
    
    
    
    (942
    )Total
    
    $
    89,407
    
    
    $
    (1,677
    )
    
    $
    8,292
    
    
    $
    (344
    )
    
    $
    97,699
    
    
    $
    (2,021
    )
 -8-




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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
  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
    )
 -9-




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##### Table of Contents



4.
    
    LOANS RECEIVABLELoans receivable consist of the following:
 June 30,
    
    
    September 30,2008
    
    
    2007Real estate loans:Single-family
    
    $
    147,147
    
    
    $
    139,888Construction and land
    
    
    29,396
    
    
    
    23,501Multi-family and commercial
    
    
    53,662
    
    
    
    60,026Home equity and lines of credit
    
    
    53,966
    
    
    
    57,808Consumer loans
    
    
    1,282
    
    
    
    1,204Commercial loans
    
    
    15,239
    
    
    
    19,044Total loans
    
    
    300,692
    
    
    
    301,471Loans in process
    
    
    (13,072
    )
    
    
    (6,008
    )Allowance for loan losses
    
    
    (3,376
    )
    
    
    (3,322
    )Deferred loan costs
    
    
    271
    
    
    
    277Loans receivable  net
    
    $
    284,515
    
    
    $
    292,418
 At June 30, 2008 and September 30, 2007, non-performing loans (which include loans in excess
of 90 days delinquent) amounted to approximately $1,418 and $4,685, respectively. At June
30, 2008, non-performing loans consisted of one single-family residential mortgage loan of
$114, one non-residential mortgage loan in the amount of $220, two construction loans
aggregating $811, three home equity loans aggregating $271, and two consumer loans
aggregating $2.At June 30, 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 nine months ended June 30, 2008. Interest income of
approximately $14 was not recognized as interest income due to the non-accrual status of
such loans for the nine months ended June 30, 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:
 June 30,
    
    
    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:
 Nine Months EndedJune 30,2008
    
    
    2007Balance beginning of period
    
    $
    3,322
    
    
    $
    3,367Provisions charged to income
    
    
    56
    
    
    
    275Charge-offs
    
    
    (23
    )
    
    
    (455
    )Recoveries
    
    
    21
    
    
    
    47Total
    
    $
    3,376
    
    
    $
    3,234
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##### Table of Contents



5.
    
    DEPOSITSDeposits consist of the following major classifications:
 June 30,
    
    
    September 30,2008
    
    
    2007Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentNon-interest bearing
    
    $
    18,002
    
    
    
    5.3
    %
    
    $
    18,404
    
    
    
    5.2
    %NOW
    
    
    75,927
    
    
    
    22.2
    
    
    
    75,194
    
    
    
    21.2Passbook
    
    
    37,229
    
    
    
    10.9
    
    
    
    37,369
    
    
    
    10.6Money market demand
    
    
    39,909
    
    
    
    11.7
    
    
    
    34,252
    
    
    
    9.7Certificates of deposit
    
    
    170,431
    
    
    
    49.9
    
    
    
    188,489
    
    
    
    53.3Total
    
    $
    341,498
    
    
    
    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
June 30, 2008, anti-dilutive shares consisted of options covering 43,079 shares. At June 30,
2007, there were no anti-dilutive shares.The calculation of basic and diluted earnings per share (EPS) is as follows:
 For the Three Months Ended
    
    
    For the Nine Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator
    
    $
    243
    
    
    $
    115
    
    
    $
    682
    
    
    $
    370Denominators:Basic shares outstanding
    
    
    2,319,244
    
    
    
    2,307,671
    
    
    
    2,317,072
    
    
    
    2,200,013Effect of dilutive securities
    
    
    
    
    
    
    18,037
    
    
    
    194
    
    
    
    18,240Diluted shares outstanding
    
    
    2,319,244
    
    
    
    2,325,708
    
    
    
    2,317,266
    
    
    
    2,218,253EPS:Basic
    
    $
    0.10
    
    
    $
    0.05
    
    
    $
    0.29
    
    
    $
    0.17Diluted
    
    $
    0.10
    
    
    $
    0.05
    
    
    $
    0.29
    
    
    $
    0.17
 -11-




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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 June 30, 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.
 Well CapitalizedRequired for
    
    Under Prompt CorrectiveActual
    
    Capital Adequacy Purpose
    
    ActionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAt June 30, 2008:Core Capital (to Adjusted Tangible
Assets)
    
    $
    45,008
    
    
    
    8.65
    %
    
    $
    20,816
    
    
    
    4.0
    %
    
    $
    26,020
    
    
    
    5.0
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    45,008
    
    
    
    14.67
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    18,414
    
    
    
    6.0Total Capital (to Risk-Weighted Assets)
    
    
    48,384
    
    
    
    15.77
    
    
    
    24,551
    
    
    
    8.0
    
    
    
    30,689
    
    
    
    10.0Tangible Capital (to Tangible Assets)
    
    
    44,934
    
    
    
    8.64
    
    
    
    7,805
    
    
    
    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 June 30, 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.
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##### Table of Contents



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 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. 157, Fair Value Measurements (SFAS No. 157).
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) (SFAS
No. 158). 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 February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115,(SFAS No.
159) which provides all entities with an option to report selected financial assets and
liabilities at fair value. The objective of the SFAS No. 159 is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in earnings
caused by measuring related assets and liabilities differently without having to apply the
complex provisions of hedge accounting. SFAS No. 159 is effective as of the beginning of an
entitys first fiscal year beginning after November 15, 2007. Early adoption is permitted
as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the
entity also elects to apply the provisions of SFAS No. 157. The Company is currently
evaluating the impact the adoption of the standard will have on the Companys 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
 -13-




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##### Table of Contents



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.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 adoption of this standard is not expected to have a
material effect on the Companys results of operations or financial position.In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles(SFAS No. 162). FAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles (GAAP) (the GAAP hierarchy). SFAS No. 162 will
become effective 60 days following the SECs approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. The Company does not expect the adoption of
SFAS No. 162 to have a material effect on its results of operations and financial position.In April 2008, the FASB issued FASB Staff Position 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 adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement 109, (FIN 48) effective
October 1, 2007. FIN 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 48 also provides guidance on the accounting for and disclosure of
unrecognized tax benefits, interest and penalties. Adoption of FIN 48 did not have a
significant impact on the Companys financial statements.
 -14-




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In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues
Task Force (EITF) Issue 06-4 (EITF 06-4), Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.
The guidance is applicable to endorsement split-dollar life insurance arrangements, whereby
the employer owns and controls the insurance policy, that are associated with a
post-retirement benefit. EITF 06-4 requires that for a split-dollar life insurance
arrangement within the scope of the Issue, an employer should recognize a liability for
future benefits in accordance with SFAS No. 106 (if, in substance, a post-retirement benefit
plan exists) or Accounting Principles Board Opinion No. 12 (if the arrangement is, in
substance, an individual deferred compensation contract) based on the substantive agreement
with the employee. EITF 06-4 is effective for fiscal years beginning after December 15,
2007. The adoption of EITF 06-4 is not expected to have a material effect on the Companys
results of operations or financial positionIn March 2007, the FASB ratified EITF Issue No. 06-10 (EITF 06-10), Accounting for
Collateral Assignment Split-Dollar Life Insurance Agreements.EITF 06-10 provides guidance
for determining a liability for the post-retirement benefit obligation as well as
recognition and measurement of the associated asset on the basis of the terms of the
collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after
December 15, 2007. The adoption of EITF 06-10 is not expected to have a material effect on
the Companys results of operations or financial positionIn June 2007, the FASB ratified EITF 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
EITF 06-11 will have on the Companys results of operations.In June 2008, the FASB issued FASB Staff Position (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.
 -15-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   General
  Critical Accounting Policies
   -16-




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Supervisory Agreements
      -17-




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##### Table of Contents



Comparison of Financial Condition at June 30, 2008 and September 30, 2007
   Comparison of Results of Operations for the Three and Nine Months Ended June 30, 2008 and 2007
 Net Income.
 Net Interest Income.
  -18-




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##### Table of Contents



For the three months endedJune 30, 2008
    
    
    June 30, 2007Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    CostInterest-earning assets:Loans receivable(1) (2)
    
    $
    281,564
    
    
    $
    4,284
    
    
    
    6.09
    %
    
    $
    308,893
    
    
    $
    5,109
    
    
    
    6.62
    %Mortgage-related securities(2)
    
    
    138,834
    
    
    
    1,696
    
    
    
    4.89
    
    
    
    108,852
    
    
    
    1,264
    
    
    
    4.64Investment securities
    
    
    40,423
    
    
    
    479
    
    
    
    4.74
    
    
    
    37,143
    
    
    
    496
    
    
    
    5.34Other interest-earning assets
    
    
    17,579
    
    
    
    70
    
    
    
    1.59
    
    
    
    18,784
    
    
    
    176
    
    
    
    3.75Total interest-earning assets
    
    
    478,400
    
    
    
    6,529
    
    
    
    5.46
    
    
    
    473,672
    
    
    
    7,045
    
    
    
    5.95Non-interest-earning assets
    
    
    34,807
    
    
    
    
    
    
    
    
    
    
    
    35,083Total assets
    
    $
    513,207
    
    
    
    
    
    
    
    
    
    
    $
    508,755Interest-bearing liabilities:Deposits
    
    $
    342,008
    
    
    
    2,169
    
    
    
    2.54
    
    
    $
    359,175
    
    
    
    2,864
    
    
    
    3.19FHLB advances and other borrowings
    
    
    112,827
    
    
    
    1,409
    
    
    
    5.00
    
    
    
    87,058
    
    
    
    1,211
    
    
    
    5.56Junior subordinated debentures
    
    
    14,645
    
    
    
    353
    
    
    
    9.64
    
    
    
    19,899
    
    
    
    465
    
    
    
    9.35Total interest-bearing liabilities
    
    
    469,480
    
    
    
    3,931
    
    
    
    3.35
    
    
    
    466,132
    
    
    
    4,540
    
    
    
    3.90Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    2.11
    %
    
    
    
    
    
    
    
    
    
    
    2.05
    %Non-interest-bearing liabilities
    
    
    8,456
    
    
    
    
    
    
    
    
    
    
    
    8,025Total liabilities
    
    
    477,936
    
    
    
    
    
    
    
    
    
    
    
    474,157Stockholders equity
    
    
    35,271
    
    
    
    
    
    
    
    
    
    
    
    34,598Total liabilities and stockholders equity
    
    $
    513,207
    
    
    
    
    
    
    
    
    
    
    $
    508,755Net interest-earning assets
    
    $
    8,920
    
    
    
    
    
    
    
    
    
    
    $
    7,540Net interest income
    
    
    
    
    
    $
    2,598
    
    
    
    
    
    
    
    
    
    
    $
    2,505Net interest margin(3)
    
    
    
    
    
    
    
    
    
    
    2.17
    %
    
    
    
    
    
    
    
    
    
    
    2.12
    %Ratio of average interest-earning assets
to average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    101.90
    %
    
    
    
    
    
    
    
    
    
    
    101.62
    %
 
 (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. -19-




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##### Table of Contents



For the nine months endedJune 30, 2008
    
    
    June 30, 2007Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    CostInterest-earning assets:Loans receivable(1) (2)
    
    $
    281,892
    
    
    $
    13,346
    
    
    
    6.31
    %
    
    $
    314,937
    
    
    $
    15,723
    
    
    
    6.66
    %Mortgage-related securities(2)
    
    
    128,085
    
    
    
    4,659
    
    
    
    4.85
    
    
    
    107,172
    
    
    
    3,680
    
    
    
    4.58Investment securities
    
    
    39,612
    
    
    
    1,511
    
    
    
    5.09
    
    
    
    40,423
    
    
    
    1,659
    
    
    
    5.47Other interest-earning assets
    
    
    20,332
    
    
    
    411
    
    
    
    2.70
    
    
    
    13,698
    
    
    
    353
    
    
    
    3.44Total interest-earning assets
    
    
    469,921
    
    
    
    19,927
    
    
    
    5.65
    
    
    
    476,230
    
    
    
    21,415
    
    
    
    6.00Non-interest-earning assets
    
    
    34,662
    
    
    
    
    
    
    
    
    
    
    
    35,579Total assets
    
    $
    504,583
    
    
    
    
    
    
    
    
    
    
    $
    511,809Interest-bearing liabilities:Deposits
    
    $
    343,913
    
    
    
    7,270
    
    
    
    2.82
    
    
    $
    355,711
    
    
    
    8,406
    
    
    
    3.15FHLB advances and other borrowings
    
    
    102,465
    
    
    
    4,008
    
    
    
    5.22
    
    
    
    95,126
    
    
    
    3,958
    
    
    
    5.55Junior subordinated debentures
    
    
    15,058
    
    
    
    1,085
    
    
    
    9.61
    
    
    
    20,950
    
    
    
    1,466
    
    
    
    9.33Total interest-bearing liabilities
    
    
    461,436
    
    
    
    12,363
    
    
    
    3.57
    
    
    
    471,787
    
    
    
    13,830
    
    
    
    3.91Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    2.08
    %
    
    
    
    
    
    
    
    
    
    
    2.09
    %Non-interest-bearing liabilities
    
    
    7,631
    
    
    
    
    
    
    
    
    
    
    
    7,414Total liabilities
    
    
    469,067
    
    
    
    
    
    
    
    
    
    
    
    479,201Stockholders equity
    
    
    35,516
    
    
    
    
    
    
    
    
    
    
    
    32,608Total liabilities and stockholders equity
    
    $
    504,583
    
    
    
    
    
    
    
    
    
    
    $
    511,809Net interest-earning assets
    
    $
    8,485
    
    
    
    
    
    
    
    
    
    
    $
    4,443Net interest income
    
    
    
    
    
    $
    7,564
    
    
    
    
    
    
    
    
    
    
    $
    7,585Net interest margin(3)
    
    
    
    
    
    
    
    
    
    
    2.15
    %
    
    
    
    
    
    
    
    
    
    
    2.12
    %Ratio of average interest-earning assets
to average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    101.84
    %
    
    
    
    
    
    
    
    
    
    
    100.94
    %
 
 (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. -20-




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##### Table of Contents



Provision for Loan Losses.
    Non-interest Income.
  Non-interest Expense.
 -21-




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##### Table of Contents



Income Tax Expense.
 -22-




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##### Table of Contents



Liquidity and Capital Resources
    Impact of Inflation and Changing Prices
   -23-




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##### Table of Contents



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
    
    
    
    
    $
    37,401
    
    
    $
    (20,466
    )
    
    
    (35
    )%
    
    
    7.39
    %
    
    (345) bp200
    
    
    
    
    
    44,699
    
    
    
    (13,168
    )
    
    
    (23
    )
    
    
    8.67
    
    
    (217) bp100
    
    
    
    
    
    51,743
    
    
    
    (6,124
    )
    
    
    (11
    )
    
    
    9.85
    
    
    (98) bp50
    
    
    
    
    
    54,975
    
    
    
    (2,892
    )
    
    
    (5
    )
    
    
    10.38
    
    
    (46) bp0
    
    
    
    
    
    57,867
    
    
    
    
    
    
    
    
    
    
    
    10.84
    
    
     bp(50
    )
    
    
    
    
    60,091
    
    
    
    2,223
    
    
    
    4
    
    
    
    11.17
    
    
    34 bp(100
    )
    
    
    
    
    62,142
    
    
    
    4,275
    
    
    
    7
    
    
    
    11.47
    
    
    64 bp
   -24-




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##### Table of Contents



Item 4T. Controls and Procedures
   -25-




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##### Table of Contents



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
   -26-




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##### Table of Contents



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
    
    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-Q31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Principal Financial Officer32.1
    
    Certification of Chief Executive and Principal Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 200299.1
    
    Code 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.(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). -27-




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##### Table of Contents



(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. 
 -28-




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##### Table of Contents



SIGNATURES
  FIRST KEYSTONE FINANCIAL, INC.Date: August 14, 2008
    By:
    /s/ Thomas M. KellyThomas M. KellyPresident and Chief Executive Officer
(principal executive officer and 
principal financial officer) -29-