UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 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
    
    (I.R.S. Employerof incorporation or organization)
    
    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 o
    Smaller reporting company
þ(Do not check if a smaller reporting company)
 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
December 31, 2008 (Unaudited) and September 30, 2008
    
    
    1Unaudited Consolidated Statements of Income for the Three
Months Ended December 31, 2008 and 2007
    
    
    2Unaudited Consolidated Statement of Changes in Stockholders Equity
for the Three Months Ended December 31, 2008 and 2007
    
    
    3Unaudited Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 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
    
    
    21Item 4T. Controls and Procedures
    
    
    22PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    25SIGNATURES
    
    
    27SECTION 302 CERTIFICATIONSECTION 302 CERTIFICATIONSECTION 906 CERTIFICATION
  - i -




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##### 



December 31,
    
    
    September 30,2008
    
    
    2008ASSETS:Cash and amounts due from depository institutions
    
    $
    3,463
    
    
    $
    4,340Interest-bearing deposits with depository institutions
    
    
    57,885
    
    
    
    34,980Total cash and cash equivalents
    
    
    61,348
    
    
    
    39,320Investment securities available for sale
    
    
    21,985
    
    
    
    26,545Mortgage-related securities available for sale
    
    
    88,896
    
    
    
    102,977Investment securities held to maturity  at amortized cost
(approximate fair value of $3,287 at December 31, 2008
and $3,271 at September 30, 2008)
    
    
    3,255
    
    
    
    3,255Mortgage-related securities held to maturity  at amortized cost 
(approximate fair value of $24,558 at December 31, 2008
and $25,204 at September 30, 2008)
    
    
    24,174
    
    
    
    25,359Loans receivable (net of allowance for loan losses of $3,300 and $3,453
at December 31, 2008 and September 30, 2008, respectively)
    
    
    283,792
    
    
    
    286,106Accrued interest receivable
    
    
    2,250
    
    
    
    2,452FHLBank stock, at cost
    
    
    7,060
    
    
    
    6,995Office properties and equipment, net
    
    
    4,357
    
    
    
    4,386Deferred income taxes
    
    
    3,820
    
    
    
    4,323Cash surrender value of life insurance
    
    
    18,096
    
    
    
    17,941Prepaid expenses and other assets
    
    
    2,790
    
    
    
    2,397TOTAL ASSETS
    
    $
    521,823
    
    
    $
    522,056LIABILITIES AND STOCKHOLDERS EQUITY:Liabilities:Deposits:Non-interest-bearing
    
    $
    17,758
    
    
    $
    20,101Interest-bearing
    
    
    304,404
    
    
    
    310,763Total deposits
    
    
    322,162
    
    
    
    330,864Advances from FHLBank and other borrowings
    
    
    147,394
    
    
    
    141,159Junior subordinated debentures
    
    
    11,641
    
    
    
    11,639Accrued interest payable
    
    
    2,218
    
    
    
    1,886Advances from borrowers for taxes and insurance
    
    
    1,999
    
    
    
    974Accounts payable and accrued expenses
    
    
    3,178
    
    
    
    3,238Total liabilities
    
    
    488,592
    
    
    
    489,760Commitments and contingencies
    
    
    
    
    
    
    Stockholders Equity:Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.01 par value, 20,000,000 shares authorized; issued 2,712,556
shares; outstanding at December 31, 2008 and September 30, 2008, 2,432,998 shares
    
    
    27
    
    
    
    27Additional paid-in capital
    
    
    12,579
    
    
    
    12,586Employee stock ownership plan
    
    
    (2,843
    )
    
    
    (2,872
    )Treasury stock at cost: 279,558 shares at December 31, 2008 and at September 30, 2008
    
    
    (4,244
    )
    
    
    (4,244
    )Accumulated other comprehensive loss
    
    
    (1,738
    )
    
    
    (2,714
    )Retained earnings  partially restricted
    
    
    29,450
    
    
    
    29,513Total stockholders equity
    
    
    33,231
    
    
    
    32,296TOTAL LIABILITIES AND STOCKHOLDERS EQUITY:
    
    $
    521,823
    
    
    $
    522,056
  - 1 -




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##### 



Three months endedDecember 31,2008
    
    
    2007INTEREST INCOME:Interest and fees on loans
    
    $
    4,260
    
    
    $
    4,671Interest and dividends on:Mortgage-related securities
    
    
    1,553
    
    
    
    1,380Investment securities:Taxable
    
    
    350
    
    
    
    395Tax-exempt
    
    
    42
    
    
    
    42Dividends
    
    
    3
    
    
    
    86Interest on interest-bearing deposits
    
    
    16
    
    
    
    162Total interest income
    
    
    6,224
    
    
    
    6,736INTEREST EXPENSE:Interest on:Deposits
    
    
    1,727
    
    
    
    2,678FHLBank and other borrowings
    
    
    1,390
    
    
    
    1,225Junior subordinated debentures
    
    
    286
    
    
    
    367Total interest expense
    
    
    3,403
    
    
    
    4,270Net interest income
    
    
    2,821
    
    
    
    2,466PROVISION FOR LOAN LOSS
    
    
    75
    
    
    
    42Net interest income after provision for loan losses
    
    
    2,746
    
    
    
    2,424NON-INTEREST INCOME:Service charges and other fees
    
    
    412
    
    
    
    422Net gain on sales of loans held for sale
    
    
    8
    
    
    
    Net (loss) gain on investments
    
    
    (233
    )
    
    
    69Increase in cash surrender value of life insurance
    
    
    155
    
    
    
    182Other income
    
    
    91
    
    
    
    89Total non-interest income
    
    
    433
    
    
    
    762NON-INTEREST EXPENSE:Salaries and employee benefits
    
    
    1,472
    
    
    
    1,430Occupancy and equipment
    
    
    397
    
    
    
    400Professional fees
    
    
    362
    
    
    
    283Federal deposit insurance premium
    
    
    110
    
    
    
    51Data processing
    
    
    153
    
    
    
    137Advertising
    
    
    130
    
    
    
    100Deposit processing
    
    
    146
    
    
    
    145Other
    
    
    379
    
    
    
    395Total non-interest expense
    
    
    3,149
    
    
    
    2,941Income before income tax expense
    
    
    30
    
    
    
    245Income tax expense
    
    
    93
    
    
    
    13Net (loss) income
    
    $
    (63
    )
    
    $
    232Earnings per common share:Basic
    
    $
    (0.03
    )
    
    $
    0.10Diluted
    
    $
    (0.03
    )
    
    $
    0.10Weighted average shares  basic
    
    
    2,323,596
    
    
    
    2,314,908Weighted average shares  diluted
    
    
    2,323,596
    
    
    
    2,314,908
  - 2 -




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##### 



Employee
    
    
    
    
    
    
    Accumulated
    
    
    RetainedAdditional
    
    
    stock
    
    
    
    
    
    
    other
    
    
    earnings-
    
    
    TotalCommon
    
    
    paid-in
    
    
    ownership
    
    
    Treasury
    
    
    comprehensive
    
    
    partially
    
    
    stockholdersstock
    
    
    capital
    
    
    plan
    
    
    stock
    
    
    loss
    
    
    restricted
    
    
    equityBALANCE AT OCTOBER 1, 2007
    
    $
    27
    
    
    $
    12,598
    
    
    $
    (2,985
    )
    
    $
    (4,244
    )
    
    $
    (1,223
    )
    
    $
    30,521
    
    
    $
    34,694Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    232
    
    
    
    232Other comprehensive income, net of taxes:Net unrealized gain on securitiesNet of reclassification adjustment(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    644
    
    
    
    
    
    
    
    644Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    876ESOP shares committed to be released
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27Excess of fair value above cost of
ESOP shares committed to be released
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )BALANCE AT DECEMBER 31, 2007
    
    $
    27
    
    
    $
    12,597
    
    
    $
    (2,958
    )
    
    $
    (4,244
    )
    
    $
    (579
    )
    
    $
    30,753
    
    
    $
    35,596BALANCE AT OCTOBER 1, 2008
    
    $
    27
    
    
    $
    12,586
    
    
    $
    (2,872
    )
    
    $
    (4,244
    )
    
    $
    (2,714
    )
    
    $
    32,296
    
    
    $
    29,513Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63
    )
    
    
    (63
    )Other comprehensive income, net of taxes:Net unrealized gain on securitiesNet of reclassification adjustment(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    976
    
    
    
    
    
    
    
    976Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    913ESOP shares committed to be released
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29Excess of fair value above cost of
ESOP shares committed to be released
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )BALANCE AT DECEMBER 31, 2008
    
    $
    27
    
    
    $
    12,579
    
    
    $
    (2,843
    )
    
    $
    (4,244
    )
    
    $
    (1,738
    )
    
    $
    29,450
    
    
    $
    33,231
 
 (1)
    
    Components of other comprehensive gain: December 31,2008
    
    
    2007Change in net unrealized loss on investment securities available for sale
    
    $
    822
    
    
    $
    644Realized loss included in net loss, net of tax benefit
of $79 and $0, respectively
    
    
    154
    
    
    
    Net unrealized gain on securities
    
    $
    976
    
    
    $
    644
  - 3 -




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##### 



Three months endedDecember 312008
    
    
    2007OPERATING ACTIVITIES:Net (loss) income
    
    $
    (63
    )
    
    $
    232Adjustments to reconcile net income (loss) to net cash provided by operating activities:Provision for depreciation and amortization
    
    
    142
    
    
    
    141Amortization of premiums and discounts
    
    
    3
    
    
    
    15Increase in cash surrender value of life insurance
    
    
    (155
    )
    
    
    (182
    )(Gain) loss on sales of:Loans held for sale
    
    
    (8
    )
    
    
    Investment securities available for sale
    
    
    75
    
    
    
    (69
    )Mortgage-related securities available for sale
    
    
    (265
    )
    
    
    Other-than-temporary impairment of investment securities
    
    
    423
    
    
    
    Provision for loan losses
    
    
    75
    
    
    
    42Amortization of ESOP
    
    
    22
    
    
    
    26Changes in assets and liabilities which provided (used) cash:Origination of loans held for sale
    
    
    (1,284
    )
    
    
    Loans sold in the secondary market
    
    
    1,292
    
    
    
    Accrued interest receivable
    
    
    202
    
    
    
    345Prepaid expenses and other assets
    
    
    (393
    )
    
    
    (153
    )Accrued interest payable
    
    
    332
    
    
    
    86Accrued expenses
    
    
    (60
    )
    
    
    118Net cash provided by operating activities
    
    
    338
    
    
    
    601INVESTING ACTIVITIES:Loans originated
    
    
    (18,880
    )
    
    
    (14,652
    )Purchases of:Mortgage-related securities available for sale
    
    
    (7,039
    )
    
    
    (14,895
    )Investment securities available for sale
    
    
    (1,313
    )
    
    
    (2,948
    )Redemption of FHLB stock
    
    
    1,328
    
    
    
    1,179Purchase of FHLB stock
    
    
    (1,393
    )
    
    
    (1,080
    )Proceeds from sales of investment and mortgage-related securities available for sale
    
    
    23,282
    
    
    
    69Principal collected on loans
    
    
    21,119
    
    
    
    26,516Proceeds from maturities, calls, or repayments of:Investment securities available for sale
    
    
    1,421
    
    
    
    1,039Mortgage-related securities available for sale
    
    
    3,547
    
    
    
    3,232Mortgage-related securities held to maturity
    
    
    1,173
    
    
    
    1,405Purchase of property and equipment
    
    
    (113
    )
    
    
    (77
    )Net cash provided by (used in) investing activities
    
    
    23,132
    
    
    
    (212
    )FINANCING ACTIVITIES:Net decrease in deposit accounts
    
    
    (8,702
    )
    
    
    (7,841
    )FHLBank advances and other borrowings  repayments
    
    
    (73,008
    )
    
    
    (34,177
    )FHLBank advances and other borrowings  draws
    
    
    79,243
    
    
    
    32,001Net increase in advances from borrowers for taxes and insurance
    
    
    1,025
    
    
    
    1,077Net cash used in financing activities
    
    
    (1,442
    )
    
    
    (8,940
    )INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    22,028
    
    
    
    (8,551
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    39,320
    
    
    
    52,935CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    61,348
    
    
    $
    44,384SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:Cash payments for interest on deposits and borrowings
    
    $
    3,071
    
    
    $
    4,184Cash payments of income taxes
    
    
    
    
    
    
    
  - 4 -




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##### 



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 months ended December 31, 2008 are not necessarily
indicative of the results to be expected for the fiscal year ending September 30, 2009 or
any other period. The consolidated financial statements presented herein should be read in
conjunction with the audited consolidated financial statements and related notes thereto
included in the First Keystone Financial, Inc. (the Company) Annual Report on Form 10-K
for the year ended September 30, 2008.2.
    
    INVESTMENT SECURITIESThe amortized cost and approximate fair value of investment securities available for sale and
held to maturity, by contractual maturities, are as follows:
 December 31, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:U.S. Government
and agency bonds:Over 10 years
    
    $
    2,965
    
    
    $
    36
    
    
    $
    
    
    
    $
    3,001Municipal obligations:5 to 10 years
    
    
    2,901
    
    
    
    154
    
    
    
    (14
    )
    
    
    3,041Over 10 years
    
    
    997
    
    
    
    106
    
    
    
    
    
    
    
    1,103Corporate bonds:1 to 5 years
    
    
    1,956
    
    
    
    48
    
    
    
    (103
    )
    
    
    1,9015 to 10 years
    
    
    1,532
    
    
    
    48
    
    
    
    
    
    
    
    1,580Over 10 years
    
    
    9,258
    
    
    
    
    
    
    
    (3,153
    )
    
    
    6,105Mutual funds
    
    
    4,252
    
    
    
    15
    
    
    
    
    
    
    
    4,267Other equity investments
    
    
    1,040
    
    
    
    
    
    
    
    (53
    )
    
    
    987Total
    
    $
    24,901
    
    
    $
    407
    
    
    $
    (3,323
    )
    
    $
    21,985Held to Maturity:Municipal obligations:1 to 5 years
    
    $
    2,587
    
    
    $
    30
    
    
    $
    (5
    )
    
    $
    2,6125 to 10 years
    
    
    668
    
    
    
    7
    
    
    
    
    
    
    
    675Total
    
    $
    3,255
    
    
    $
    37
    
    
    $
    (5
    )
    
    $
    3,287
 - 5 -




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##### 



Provided below is a summary of investment securities available for sale and held to maturity
which were in an unrealized loss position at December 31, 2008.
 Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalApproximate
    
    
    Unrealized
    
    
    Approximate
    
    
    Unrealized
    
    
    Approximate
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesCorporate bonds
    
    $
    2,134
    
    
    $
    (728
    )
    
    $
    4,921
    
    
    $
    (2,528
    )
    
    $
    7,055
    
    
    $
    (3,256
    )Municipal obligations
    
    
    1,479
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    1,479
    
    
    
    (19
    )Other equity investments
    
    
    587
    
    
    
    (53
    )
    
    
    
    
    
    
    
    
    
    
    587
    
    
    
    (53
    )Total
    
    $
    4,200
    
    
    $
    (800
    )
    
    $
    4,921
    
    
    $
    (2,528
    )
    
    $
    9,121
    
    
    $
    (3,328
    )
 At December 31, 2008, investment securities in a gross unrealized loss position for twelve
months or longer consisted of six securities having an aggregate depreciation of 33.9% from
the Companys amortized cost basis. Management believes the declines in market value are the
result of the current volatility in interest rates and turmoil in the capital and debt
markets. Fair values for certain corporate debt securities were determined utilizing
discounted cash flow models due to the absence of a current market to provide a reliable
market quotes for the instruments. The Companys analysis for each corporate debt security
performed at the CUSIP level shows that the credit quality of the individual bonds ranges
from good to deteriorating. Credit risk does exist and the default of an individual issuer
in a particular pool could affect the ultimate collectability of contractual amounts. The
Company has the ability and intent to hold these securities until such time as the value
recovers. However, the Company will continue to review its investment portfolio to determine
whether any particular impairment is other than temporary. Except as described below,
management does not believe any individual unrealized loss as of December 31, 2008
represents an other-than-temporary impairment. For the three months ending December 31,
2008, the Companys $3.7 million investment in a mutual fund, included in the first table
above, was impaired as a result of the Companys determination that the continued decline in
its fair market value was other than temporary. As a result of this determination, the
Company recognized a $423,000, before tax, non-cash charge, which was recorded as a loss on
investment securities in other non-interest income.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, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:U.S. Government bonds:Over 10 years
    
    $
    2,965
    
    
    $
    7
    
    
    $
    
    
    
    $
    2,972Municipal obligations:5 to 10 years
    
    
    2,901
    
    
    
    55
    
    
    
    (22
    )
    
    
    2,934Over 10 years
    
    
    997
    
    
    
    52
    
    
    
    
    
    
    
    1,049Corporate bonds:Less than 1 year
    
    
    1,000
    
    
    
    4
    
    
    
    
    
    
    
    1,0041 to 5 years
    
    
    1,057
    
    
    
    
    
    
    
    (107
    )
    
    
    9505 to 10 years
    
    
    1,532
    
    
    
    
    
    
    
    
    
    
    
    1,532Over 10 years
    
    
    9,415
    
    
    
    
    
    
    
    (2,835
    )
    
    
    6,580Mutual funds
    
    
    8,563
    
    
    
    8
    
    
    
    
    
    
    
    8,571Other equity investments
    
    
    1,040
    
    
    
    
    
    
    
    (87
    )
    
    
    953Total
    
    $
    29,470
    
    
    $
    126
    
    
    $
    (3,051
    )
    
    $
    26,545
 - 6 -




---



##### 



September 30, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueHeld to Maturity:Municipal obligations:1 to 5 years
    
    $
    1,537
    
    
    $
    5
    
    
    $
    (9
    )
    
    $
    1,5335 to 10 years
    
    
    1,718
    
    
    
    21
    
    
    
    (1
    )
    
    
    1,738Total
    
    $
    3,255
    
    
    $
    26
    
    
    $
    (10
    )
    
    $
    3,271
  Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalApproximate
    
    
    Unrealized
    
    
    Approximate
    
    
    Unrealized
    
    
    Approximate
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesCorporate bonds
    
    $
    6,068
    
    
    $
    (2,392
    )
    
    $
    1,462
    
    
    $
    (550
    )
    
    $
    7,530
    
    
    $
    (2,942
    )Municipal obligations
    
    
    2,062
    
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    2,062
    
    
    
    (32
    )Other equity investments
    
    
    553
    
    
    
    (87
    )
    
    
    
    
    
    
    
    
    
    
    553
    
    
    
    (87
    )Total
    
    $
    8,683
    
    
    $
    (2,511
    )
    
    $
    1,462
    
    
    $
    (550
    )
    
    $
    10,145
    
    
    $
    (3,061
    )
 3.
    
    MORTGAGE-RELATED SECURITIESMortgage-related securities available for sale and mortgage-related securities held to maturity are
summarized as follows:
 December 31, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:FHLMC pass-through certificates
    
    $
    22,644
    
    
    $
    602
    
    
    $
    (2
    )
    
    $
    23,244FNMA pass-through certificates
    
    
    37,670
    
    
    
    1,093
    
    
    
    (51
    )
    
    
    38,712GNMA pass-through certificates
    
    
    1,511
    
    
    
    
    
    
    
    (19
    )
    
    
    1,492Collateralized mortgage obligations
    
    
    26,788
    
    
    
    75
    
    
    
    (1,415
    )
    
    
    25,448Total
    
    $
    88,613
    
    
    $
    1,770
    
    
    $
    (1,487
    )
    
    $
    88,896Held to Maturity:FHLMC pass-through certificates
    
    $
    9,313
    
    
    $
    137
    
    
    $
    (11
    )
    
    $
    9,439FNMA pass-through certificates
    
    
    14,861
    
    
    
    275
    
    
    
    (17
    )
    
    
    15,119Total
    
    $
    24,174
    
    
    $
    412
    
    
    $
    (28
    )
    
    $
    24,558
 Provided below is a summary of mortgage-related securities available for sale and held to
maturity which were in an unrealized loss position at December 31, 2008.
 - 7 -




---



##### 



Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesPass-through
certificates
    
    $
    8,758
    
    
    $
    (99
    )
    
    $
    23
    
    
    $
    (1
    )
    
    $
    8,781
    
    
    $
    (100
    )Collateralized
mortgage
obligations
    
    
    14,751
    
    
    
    (1,001
    )
    
    
    6,314
    
    
    
    (414
    )
    
    
    21,065
    
    
    
    (1,415
    )Total
    
    $
    23,509
    
    
    $
    (1,100
    )
    
    $
    6,337
    
    
    $
    (415
    )
    
    $
    29,846
    
    
    $
    (1,515
    )
 At December 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 6.1% from the Companys amortized cost basis. Management does not believe
any individual unrealized loss as of December 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 conditions in the financial and credit markets not due to the deterioration of the
creditworthiness of the issuer. The Company has the ability and intent to hold these
securities until the securities mature or recover in value.
 Mortgage-related securities available for sale and mortgage-related securities held to maturity are
summarized as follows:
 September 30, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:FHLMC pass-through certificates
    
    $
    34,860
    
    
    $
    117
    
    
    $
    (175
    )
    
    $
    34,802FNMA pass-through certificates
    
    
    41,982
    
    
    
    235
    
    
    
    (216
    )
    
    
    42,001GNMA pass-through certificates
    
    
    1,669
    
    
    
    10
    
    
    
    
    
    
    
    1,679Collateralized mortgage obligations
    
    
    25,653
    
    
    
    3
    
    
    
    (1,161
    )
    
    
    24,495Total
    
    $
    104,164
    
    
    $
    365
    
    
    $
    (1,552
    )
    
    $
    102,977Held to Maturity:FHLMC pass-through certificates
    
    $
    9,776
    
    
    $
    42
    
    
    $
    (84
    )
    
    $
    9,734FNMA pass-through certificates
    
    
    15,582
    
    
    
    3
    
    
    
    (116
    )
    
    
    15,469Collateralized mortgage obligations
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Total
    
    $
    25,359
    
    
    $
    45
    
    
    $
    (200
    )
    
    $
    25,204
 - 8 -




---



##### 



Provided below is a summary of mortgage-related securities available for sale and held to
maturity which were in an unrealized loss position at September 30, 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
    
    $
    54,080
    
    
    $
    (561
    )
    
    $
    1,401
    
    
    $
    (30
    )
    
    $
    55,481
    
    
    $
    (591
    )Collateralized
mortgage
obligations
    
    
    17,914
    
    
    
    (678
    )
    
    
    6,385
    
    
    
    (483
    )
    
    
    24,299
    
    
    
    (1,161
    )Total
    
    $
    71,994
    
    
    $
    (1,239
    )
    
    $
    7,786
    
    
    $
    (513
    )
    
    $
    79,780
    
    
    $
    (1,752
    )
 4.
    
    FAIR VALUE MEASUREMENTIn the first quarter of 2009, the Company adopted FASB Statement 157, Fair Value
MeasurementsStatement 157 establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be used to
measure fair value:Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement date.Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data.Level 3: Significant unobservable inputs that reflect a reporting entitys own assumptions
about the parameters that market participants would use in pricing an asset or liability.Most of the securities classified as available for sale are reported at fair value utilizing
Level 2 inputs. For these securities, the Company obtains fair value measurements from an
independent pricing service. The fair value measurements consider observable data that may
include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live
trading levels, trade execution data, market consensus prepayment speeds, credit information
and the bonds terms and conditions, among other things. Impaired loans are reported at fair
value utilizing level 2 inputs. For these loans, a review of the collateral is conducted and
an appropriate allowance for loan loss is allocated to the loan.Securities reported at fair value utilizing Level 1 inputs are limited to actively traded
equity securities whose market price is readily available from the New York Stock Exchange
or the NASDAQ exchange.Securities reported at fair value utilizing Level 3 inputs consist predominantly of
corporate debt securities for which there is no active market. Fair values for these
securities are determined utilizing discounted cash flow models which incorporate various
assumptions including average historical spreads, credit ratings, and liquidity of the
underlying securities.Assets measured at fair value on a recurring and nonrecurring basis are summarized as
follows:
 - 9 -




---



##### 



Fair Value Measurement at December 31, 2008 Using:Quoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableIdentical Assets
    
    
    Observable Inputs
    
    
    InputsTotal
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available for sale
securities measured
on a recurring
basis
    
    $
    110,428
    
    
    $
    4,854
    
    
    $
    94,689
    
    
    $
    10,885Impaired loans
measured on a
nonrecurring basis
    
    
    2,541
    
    
    
    
    
    
    
    2,541
    
    
    
    Total
    
    $
    112,969
    
    
    $
    4,854
    
    
    $
    97,140
    
    
    $
    10,885
 The following table presents the changes in the Level III fair-value category for the three
months ended December 31, 2008. The Company classifies financial instruments in Level III of
the fair-value hierarchy when there is reliance on at least one significant unobservable
input to the valuation model. In addition to these unobservable inputs, the valuation models
for Level III financial instruments typically also rely on a number of inputs that are
readily observable either directly or indirectly.
 Fair Value Measurements UsingSignificant Unobservable Inputs(Level 3)Available for Sale SecuritiesBeginning balance
    
    $
    11,421Total gains or losses (realized/unrealized)Included in earnings (or changes in net assets)
    
    
    Included in other comprehensive income
    
    
    (275
    )Purchases, issuances and settlements
    
    
    (261
    )Transfers in and/or out of Level 3
    
    
    Ending balance
    
    $
    10,885The amount of total gains or losses for the period
included in earnings (or changes in net assets)
attributable to the change in unrealized gains or
losses relating to assets still held at the reporting
date
    
    $
    
 - 10 -




---



##### 



5.
    
    LOANS RECEIVABLELoans receivable consist of the following:
 December 31,
    
    
    September 30,2008
    
    
    2008Single-family
    
    $
    142,916
    
    
    $
    145,626Construction and land
    
    
    24,957
    
    
    
    27,493Multi-family and commercial
    
    
    54,077
    
    
    
    54,419Home equity and lines of credit
    
    
    55,365
    
    
    
    55,246Consumer loans
    
    
    1,527
    
    
    
    1,330Commercial loans
    
    
    16,976
    
    
    
    15,955Total loans
    
    
    295,818
    
    
    
    300,069Loans in process
    
    
    (9,023
    )
    
    
    (10,802
    )Allowance for loan losses
    
    
    (3,300
    )
    
    
    (3,453
    )Deferred loan costs
    
    
    297
    
    
    
    292Loans receivable  net
    
    $
    283,792
    
    
    $
    286,106
 At December 31, 2008 and September 30, 2008, non-performing loans (which include loans in
excess of 90 days delinquent) amounted to approximately $3,812 and $2,420, respectively. At
December 31, 2008, non-performing loans consisted of three single-family residential
mortgage loans aggregating $324, four non-residential mortgage loans aggregating $1,937,
four commercial business loans aggregating $1,153, one construction loan of $246, two home
equity loans aggregating $133, and five consumer loans aggregating $19.At December 31, 2008 and September 30, 2008 the Company had impaired loans with a total
recorded investment of $3,205 and $817, respectively. Interest income of $5 was recognized
on these impaired loans during the three months ended December 31, 2008. Interest income of
approximately $53 was not recognized as interest income due to the non-accrual status of
such loans for the three months ended December 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:
 December 31,
    
    
    September 30,2008
    
    
    2008Impaired loans with related allowance for loan losses
under SFAS No. 114
    
    $
    3,205
    
    
    $
    817Impaired loans with no related allowance for loan losses
under SFAS No. 114
    
    
    
    
    
    
    Total impaired loans
    
    $
    3,205
    
    
    $
    817Valuation allowance related to impaired loans
    
    $
    664
    
    
    $
    370
 - 11 -




---



##### 



The following is an analysis of the allowance for loan losses:
 Three Months EndedDecember 31,2008
    
    
    2007Balance beginning of period
    
    $
    3,453
    
    
    $
    3,322Provisions charged to income
    
    
    75
    
    
    
    42Charge-offs
    
    
    (229
    )
    
    
    Recoveries
    
    
    1
    
    
    
    12Total
    
    $
    3,300
    
    
    $
    3,376
 6.
    
    DEPOSITSDeposits consist of the following major classifications:
 December 31,
    
    
    September 30,2008
    
    
    2008Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentNon-interest bearing
    
    $
    17,758
    
    
    
    5.5
    %
    
    $
    20,101
    
    
    
    6.0
    %NOW
    
    
    66,188
    
    
    
    20.6
    
    
    
    70,344
    
    
    
    21.3Passbook
    
    
    34,726
    
    
    
    10.8
    
    
    
    34,796
    
    
    
    10.5Money market demand
    
    
    44,297
    
    
    
    13.7
    
    
    
    43,572
    
    
    
    13.2Certificates of deposit
    
    
    159,193
    
    
    
    49.4
    
    
    
    162,051
    
    
    
    49.0Total
    
    $
    322,162
    
    
    
    100.0
    %
    
    $
    330,864
    
    
    
    100.0
    %
 7.
    
    EARNINGS PER SHAREBasic net income (loss) per share is based upon the weighted average number of common shares
outstanding, while diluted net income (loss) per share is based upon the weighted average
number of common shares outstanding and common share equivalents that would arise from the
exercise of dilutive securities. All dilutive shares consist of options the exercise price
of which is lower than the market price of the common stock covered thereby at the dates
presented. At December 31, 2008 and 2007, anti-dilutive shares consisted of options covering
58,566 and 50,956 shares, respectively.The calculation of basic and diluted earnings per share (EPS) is as follows:
 Three Months EndedDecember 31,2008
    
    
    2007Numerator
    
    $
    (63
    )
    
    $
    232Denominators:Basic shares outstanding
    
    
    2,323,596
    
    
    
    2,314,908Effect of dilutive securities
    
    
    
    
    
    
    Dilutive shares outstanding
    
    
    2,323,596
    
    
    
    2,314,908Earnings per share:Basic
    
    $
    (0.03
    )
    
    $
    0.10Diluted
    
    $
    (0.03
    )
    
    $
    0.10
 - 12 -




---



##### 



8.
    
    REGULATORY CAPITAL REQUIREMENTSThe Bank is subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum regulatory capital requirements can result in
certain mandatory, and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Companys financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures of the Banks
assets, liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Banks capital amounts and classification are also subject to
qualitative judgments by regulators about components, risk weightings, and other factors.Quantitative measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth below) of tangible and core capital (as
defined in the regulations) to adjusted assets (as defined), and of Tier I and total capital
(as defined) to average assets (as defined). Management believes, as of December 31, 2008,
that the Bank met all regulatory capital adequacy requirements to which it was subject.The Banks actual capital amounts and ratios are presented in the following table.
 Required for
    
    Well CapitalizedCapital Adequacy
    
    Under PromptActual
    
    Purpose
    
    Corrective ActionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAt December 31, 2008:Core Capital (to Adjusted Tangible
Assets)
    
    $
    44,326
    
    
    
    8.50
    %
    
    $
    20,852
    
    
    
    4.0
    %
    
    $
    26,065
    
    
    
    5.0
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    44,326
    
    
    
    14.31
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    18,586
    
    
    
    6.0Total Capital (to Risk-Weighted Assets)
    
    
    46,976
    
    
    
    15.17
    
    
    
    24,781
    
    
    
    8.0
    
    
    
    30,977
    
    
    
    10.0Tangible Capital (to Tangible Assets)
    
    
    44,262
    
    
    
    8.49
    
    
    
    7,819
    
    
    
    1.5
    
    
    
    N/A
    
    
    
    N/AAt September 30, 2008:Core Capital (to Adjusted Tangible
Assets)
    
    $
    44,234
    
    
    
    8.46
    %
    
    $
    20,911
    
    
    
    4.0
    %
    
    $
    26,139
    
    
    
    5.0
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    44,234
    
    
    
    14.02
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    18,935
    
    
    
    6.0Total Capital (to Risk-Weighted Assets)
    
    
    47,322
    
    
    
    14.99
    
    
    
    24,247
    
    
    
    8.0
    
    
    
    31,559
    
    
    
    10.0Tangible Capital (to Tangible Assets)
    
    
    44,167
    
    
    
    8.45
    
    
    
    7,841
    
    
    
    1.5
    
    
    
    N/A
    
    
    
    N/A
 On February 13, 2006, the Bank entered into a supervisory agreement with the Office of
Thrift Supervision (OTS). The supervisory agreement requires the Bank, among other
things, to maintain minimum core capital and total risk-based capital ratios of 7.5% and
12.5%, respectively. At December 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.
 - 13 -




---



##### 



9.
    
    RECENT ACCOUNTING PRONOUNCEMENTSIn December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS No. 141(R)), which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in an acquiree, including the
recognition and measurement of goodwill acquired in a business combination. SFAS No.
141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier
adoption is prohibited. The Company is evaluating the impact of this pronouncement but does
not expect that the guidance will have a material effect on the Companys financial position
or results of operations.In September 2006, the FASB issued FAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and
132(R). This Statement requires that employers measure plan assets and obligations as of the
balance sheet date. This requirement is effective for fiscal years ending after December
15, 2008. The other provisions of the Statement were effective 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). SFAS No. 160 amends
ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary, which is sometimes referred to as minority
interest, is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. Among other requirements, this statement
requires consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. It also requires
disclosure, on the face of the consolidated income statement, of the amounts of consolidated
net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 is
effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is
prohibited. The adoption of this standard is not expected to have a material effect on the
Companys results of operations or financial position.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities,(SFAS No. 161) to require enhanced disclosures about derivative
instruments and hedging activities. The new standard has revised financial reporting for
derivative instruments and hedging activities by requiring more transparency about how and
why an entity uses derivative instruments, how derivative instruments and related hedged
items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities,and how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows. SFAS No. 161 requires
disclosure of the fair values of derivative instruments and their gains and losses in a
tabular format. It also requires entities to provide more information about their liquidity
by requiring disclosure of derivative features that are credit risk-related. Further, it
requires cross-referencing within footnotes to enable financial statement users to locate
important information about derivative instruments. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The Company has determined that the adoption of this
standard does not have a material effect on the Companys results of operations or 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 does not expect the adoption
of FSP 142-3 to have a material effect on its results of operations or financial position.In February 2007, the FASB issued FSP No. FAS 158-1, Conforming Amendments to the
Illustrations in
 - 14 -




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##### 



FASB Statements No. 87, No. 88, and No. 106 and to the Related Staff Implementation Guides.
This FSP provides conforming amendments to the illustrations in FAS Statements No. 87, 88,
and 106 and to related staff implementation guides as a result of the issuance of FAS
Statement No. 158. The conforming amendments made by this FSP are effective as of the
effective dates of Statement No. 158. The unaffected guidance that this FSP codifies into
Statements No. 87, 88, and 106 does not contain new requirements and therefore does not
require a separate effective date or transition method. The Company is currently evaluating
the impact the adoption of the FSP will have on the Companys results of operations.In February 2008, the FASB issued FSP No. FAS 140-3, Accounting for Transfers of Financial
Assets and Repurchase Financing Transactions. This FSP concludes that a transferor and
transferee should not separately account for a transfer of a financial asset and a related
repurchase financing unless (a) the two transactions have a valid and distinct business or
economic purpose for being entered into separately and (b) the repurchase financing does not
result in the initial transferor regaining control over the financial asset. The FSP is
effective for financial statements issued for fiscal years beginning on or after November
15, 2008, and interim periods within those fiscal years. The Company is currently evaluating
the impact the adoption of the FSP will have on the Companys results of operations.In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement.) This FSP
provides guidance on the accounting for certain types of convertible debt instruments that
may be settled in cash upon conversion. Additionally, this FSP specifies that issuers of
such instruments should separately account for the liability and equity components in a
manner that will reflect the entitys nonconvertible debt borrowing rate when interest cost
is recognized in subsequent periods. The FSP is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within those fiscal
years. The Company is currently evaluating the impact the adoption of the FSP will have on
the Companys results of operations.In June 2008, the FASB ratified EITF Issue No. 08-4, Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjusted Conversion Ratios. This Issue
provides transition guidance for conforming changes made to EITF Issue No. 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently Adjusted
Conversion Ratios, that resulted from EITF Issue No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, and FAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity. The conforming changes are
effective for financial statements issued for fiscal years ending after December 15, 2008,
with earlier application permitted. The Company is currently evaluating the impact the
adoption of the FSP will have on the Companys results of operations.In June 2008, the FASB issued 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.In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets. FSP FAS 132(R)-1 requires more detailed
disclosures about employers plan assets in a defined benefit pension or other
postretirement plan, including employers investment strategies, major categories of plan
assets, concentrations of risk within plan assets, and inputs and valuation techniques used
to measure the fair value of plan assets. FSP FAS 132(R)-1 also requires, for fair value
measurements using significant unobservable inputs (Level 3), disclosure of the effect of
the
 - 15 -




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##### 



measurements on changes in plan assets for the period. The disclosures about plan assets
required by FSP FAS 132(R)-1 must be provided for fiscal years ending after December 15,
2009. As this pronouncement is only disclosure-related, it will not have an impact on the
financial position and results of operations.
 
 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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Comparison of Financial Condition at December 31, 2008 and September 30, 2008
   Comparison of Results of Operations for the Three Months Ended December 31, 2008 and 2007
 Net Income (Loss).
 Net Interest Income.
  - 18 -




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##### 



For the three months endedDecember 31, 2008
    
    
    December 31, 2007Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    CostInterest-earning assets:Loans receivable(1)
    
    $
    286,042
    
    
    $
    4,260
    
    
    
    5.96
    %
    
    $
    286,475
    
    
    $
    4,671
    
    
    
    6.52
    %Mortgage-related securities(2)
    
    
    123,230
    
    
    
    1,553
    
    
    
    5.04
    
    
    
    114,775
    
    
    
    1,380
    
    
    
    4.81Investment securities(2)
    
    
    33,917
    
    
    
    395
    
    
    
    4.66
    
    
    
    38,034
    
    
    
    523
    
    
    
    5.50Other interest-earning assets
    
    
    16,182
    
    
    
    16
    
    
    
    0.40
    
    
    
    17,806
    
    
    
    162
    
    
    
    3.64Total interest-earning assets
    
    
    459,371
    
    
    
    6,224
    
    
    
    5.42
    
    
    
    457,090
    
    
    
    6,736
    
    
    
    5.90Non-interest-earning assets
    
    
    34,635
    
    
    
    
    
    
    
    
    
    
    
    34,602Total assets
    
    $
    494,006
    
    
    
    
    
    
    
    
    
    
    $
    491,692Interest-bearing liabilities:Deposits
    
    $
    322,433
    
    
    
    1,727
    
    
    
    2.14
    
    
    $
    347,017
    
    
    
    2,678
    
    
    
    3.09FHLB advances and other borrowings
    
    
    120,791
    
    
    
    1,390
    
    
    
    4.60
    
    
    
    87,704
    
    
    
    1,225
    
    
    
    5.59Junior subordinated debentures
    
    
    11,639
    
    
    
    286
    
    
    
    9.83
    
    
    
    15,264
    
    
    
    367
    
    
    
    9.64Total interest-bearing liabilities
    
    
    455,043
    
    
    
    3,403
    
    
    
    2.99
    
    
    
    449,985
    
    
    
    4,270
    
    
    
    3.80Interest rate spread(3)
    
    
    
    
    
    
    
    
    
    
    2.43
    %
    
    
    
    
    
    
    
    
    
    
    2.10
    %Non-interest-bearing liabilities
    
    
    7,026
    
    
    
    
    
    
    
    
    
    
    
    6,671Total liabilities
    
    
    462,069
    
    
    
    
    
    
    
    
    
    
    
    456,656Stockholders equity
    
    
    31,937
    
    
    
    
    
    
    
    
    
    
    
    35,036Total liabilities and stockholders equity
    
    $
    494,006
    
    
    
    
    
    
    
    
    
    
    $
    491,692Net interest-earning assets
    
    $
    4,328
    
    
    
    
    
    
    
    
    
    
    $
    7,105Net interest income
    
    
    
    
    
    $
    2,821
    
    
    
    
    
    
    
    
    
    
    $
    2,466Net interest margin(3)
    
    
    
    
    
    
    
    
    
    
    2.46
    %
    
    
    
    
    
    
    
    
    
    
    2.16
    %Ratio of average interest-earning assets
to average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    100.95
    %
    
    
    
    
    
    
    
    
    
    
    101.58
    %
 
 (1)
    
    Includes non-accrual loans.(2)
    
    Includes assets classified as either available for sale or held to maturity.(3)
    
    Net interest income divided by average interest-earning assets. - 19 -




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##### 



Provision for Loan Losses.
    Non-interest Income.
 Non-interest Expense.
 Income Tax Expense.
 - 20 -




---



##### 



Liquidity and Capital Resources
    Impact of Inflation and Changing Prices
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  - 21 -




---



##### 



Net Portfolio Value(Dollars in thousands)Changes in
    
    
    
    
    
    
    
    
    
    
    
    
    
    NetRates in
    
    
    
    
    
    Dollar
    
    Percentage
    
    Portfolio Value AsBasis Points
    
    Amount
    
    Change
    
    Change
    
    a % of Assets
    
    Change300
    
    $
    36,349
    
    
    $
    (12,966
    )
    
    
    (26
    )%
    
    
    7.06
    %
    
    (213) bp200
    
    
    42,492
    
    
    
    (6,853
    )
    
    
    (14
    )
    
    
    8.11
    
    
    (108) bp100
    
    
    46,938
    
    
    
    (2,407
    )
    
    
    ( 5
    )
    
    
    8.84
    
    
    (35) bp50
    
    
    48,249
    
    
    
    (1,096
    )
    
    
    (2
    )
    
    
    9.03
    
    
    (16) bp0
    
    
    49,345
    
    
    
    
    
    
    
    
    
    
    
    9.19
    
    
      bp(50)
    
    
    49,067
    
    
    
    (278
    )
    
    
    (1
    )
    
    
    9.11
    
    
    (8) bp(100)
    
    
    48,603
    
    
    
    (742
    )
    
    
    (2
    )
    
    
    9.01
    
    
    (18) bp
   
 Item 4T. Controls and Procedures
  - 22 -




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##### 



- 23 -




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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
   - 24 -




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##### 



Exhibits
  ExhibitNo
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of First Keystone Financial, Inc. 13.2
    
    Amended and Restated Bylaws of First Keystone Financial, Inc. 14.1
    
    Specimen Stock Certificate of First Keystone Financial, Inc. 24.2
    
    Instrument defining the rights of security holders **10.1
    
    Form of Amended and Restated Severance Agreement between First Keystone
Financial, Inc. and Carol Walsh 3,*10.2
    
    Amended and Restated 1995 Stock Option Plan 3, *10.3
    
    Amended and Restated 1995 Recognition and Retention Plan and Trust Agreement 3,*10.4
    
    Amended and Restated 1998 Stock Option Plan 3, *10.5
    
    Form of Amended and Restated Severance Agreement between First Keystone
Bank and Carol Walsh 3, *10.6
    
    Amended and Restated First Keystone Bank Supplemental Executive Retirement
Plan 4,*10.7
    
    Form of Amended and Restated Transition, Consulting, Noncompetition and
Retirement Agreement by and between First Keystone Financial, Inc., First Keystone
Bank and Donald S. Guthrie 3,*10.8
    
    Severance and Release Agreement by and among First Keystone Financial,
Inc., First Keystone Bank and Thomas M. Kelly 5,*10.9
    
    Letter dated December 11, 2006 with respect to appointment to Board 610.10
    
    Form of Registration Rights Agreement 711
    
    Statement re: computation of per share earnings. See Note 2 to the
Consolidated Financial Statements included in Item 8 hereof.31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 200299.2
    
    Supervisory Agreement between First Keystone Financial, Inc. and the Office
of Thrift Supervision dated February 13, 2006. 899.3
    
    Supervisory Agreement between First Keystone Bank and the Office of Thrift
Supervision dated February 13, 2006. 8
 
 (1)
    
    Incorporated by reference from Exhibit 3.1(with respect to the
Articles) and Exhibit 3.2 (with respect to the Bylaws) on Form 8-K filed by the
Registrant with the SEC on February 12, 2008.(2)
    
    Incorporated by reference from the Registration Statement on
Form S-1 (Registration No. 33-84824) filed by the Registrant with the SEC on
October 6, 1994, as amended.(4)
    
    Incorporated by reference from Exhibit 10.1 in the Form 8-K
filed by the Registrant with SEC on July 2, 2007 (File No. 000-25328).(5)
    
    Incorporated by reference from Exhibit 10.1 in the Form 8-K
filed by the Registrant with the SEC on August 19, 2008.(6)
    
    Incorporated by reference from Exhibit 10.1 in the Form 8-K
filed by the Registrant with the SEC on December 20, 2006. - 25 -




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##### 



(7)
    
    Incorporated by reference from the Form 10-K filed by the
Registrant with the SEC on December 29, 2006(8)
    
    Incorporated by reference from the Form 10-Q for the quarter
ended December 31, 2005 filed by the Registrant with the SEC on February 14,
2006.(*)
    
    Consists of a management contract or compensatory plan(**)
    
    The Company has no instruments defining the rights of holders
of long-term debt where the amount of securities authorized under such
instrument exceeds 10% of the total assets of the Company and its subsidiaries
on a consolidated basis. The Company hereby agrees to furnish a copy of any
such instrument to the SEC upon request. - 26 -




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##### 



SIGNATURES
  FIRST KEYSTONE FINANCIAL, INC.Date:  February 17, 2009
    By:
    /s/ Hugh J. GarchinskyHugh J. GarchinskyPresident and Chief Executive Officer

(principal executive officer and principal financial officer) - 27 -