UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended September 30, 2008
 - OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 0-25328
 FIRST KEYSTONE FINANCIAL, INC.
  Pennsylvania
    
    23-2576479(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification Number)22 West State Street, Media, Pennsylvania
    
    19063(Address of principal executive office)
    
    (Zip Code)
 Registrants telephone number, including area code: (610) 565-6210
  Title of Each Class
    
    Name of exchange on which registeredSecurities registered under Section 12(g) of the Exchange Act:
 Common Stock (par value $.01 per share)
 o þ
 o þ
 þ o
 þ
  Large accelerated filer
o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company
þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE
  (1)
    
    Portions of the definitive proxy statement for the 2009 Annual Meeting of Stockholders are
incorporated into Part III.




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First Keystone Financial, Inc.
FORM 10-K
For the Fiscal Year Ended September 30, 2008
INDEX
 PagePART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    37Item 1B. Unresolved Staff Comments
    
    
    40Item 2. Properties
    
    
    41Item 3. Legal Proceedings
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42PART IIItem 5. Market for Registrants Common Stock, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    42Item 6. Selected Financial Data
    
    
    43Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    45Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    59Item 8. Financial Statements and Supplementary Data
    
    
    61Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
    
    
    93Item 9A(T). Controls and Procedures
    
    
    93Item 9B. Other Information
    
    
    93PART IIIItem 10. Directors, Executive Officers, and Corporate Governance
    
    
    94Item 11. Executive Compensation
    
    
    94Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    94Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    95Item 14. Principal Accounting Fees and Services
    
    
    95PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    96SIGNATURES
    
    
    98




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Forward-Looking Statements
     
 PART I
 
 Item 1. BUSINESS.
 General
   1




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Business Strategy
    
    
    By providing unique or specialized services and products as in a niche market;
    
    Competing primarily on rate or price and, therefore, relying on volume; or
    
    By being the best service provider within its market area, known for its expertise, integrity and
value.
   Growth of Commercial Real Estate and Business Portfolio
 Providing Delivery Choices through Branch Network, Remote Deposit or Electronic Services
 2




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The Right People
 Manage Expenses While Increasing Lower Costing Deposits
  3




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Market Area and Competition
        4




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Supervisory Agreements
      5




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Lending Activities
 Loan Portfolio Composition.
 September 30,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Real estate loans:Single-family
    
    $
    145,626
    
    
    
    48.53
    %
    
    $
    139,888
    
    
    
    46.40
    %
    
    $
    144,760
    
    
    
    42.76
    %
    
    $
    149,237
    
    
    
    46.64
    %
    
    $
    163,907
    
    
    
    50.87
    %Multi-family and commercial
    
    
    54,419
    
    
    
    18.14
    
    
    
    60,026
    
    
    
    19.91
    
    
    
    70,439
    
    
    
    20.81
    
    
    
    69,704
    
    
    
    21.78
    
    
    
    64,509
    
    
    
    20.02Construction and land
    
    
    27,493
    
    
    
    9.16
    
    
    
    23,501
    
    
    
    7.80
    
    
    
    38,158
    
    
    
    11.27
    
    
    
    36,828
    
    
    
    11.51
    
    
    
    38,078
    
    
    
    11.82Home equity loans and lines of credit
    
    
    55,246
    
    
    
    18.41
    
    
    
    57,808
    
    
    
    19.17
    
    
    
    59,319
    
    
    
    17.52
    
    
    
    46,748
    
    
    
    14.61
    
    
    
    43,621
    
    
    
    13.54Total real estate loans
    
    
    282,784
    
    
    
    94.24
    
    
    
    281,223
    
    
    
    93.28
    
    
    
    312,676
    
    
    
    92.36
    
    
    
    302,517
    
    
    
    94.54
    
    
    
    310,115
    
    
    
    96.25Consumer:Deposit
    
    
    114
    
    
    
    .04
    
    
    
    142
    
    
    
    .05
    
    
    
    170
    
    
    
    .05
    
    
    
    112
    
    
    
    .04
    
    
    
    133
    
    
    
    .04Unsecured personal loans
    
    
    627
    
    
    
    .21
    
    
    
    460
    
    
    
    .15
    
    
    
    538
    
    
    
    .16
    
    
    
    641
    
    
    
    .20
    
    
    
    629
    
    
    
    .20Other (1)
    
    
    589
    
    
    
    .20
    
    
    
    602
    
    
    
    .20
    
    
    
    667
    
    
    
    .20
    
    
    
    623
    
    
    
    .19
    
    
    
    709
    
    
    
    .21Total consumer loans
    
    
    1,330
    
    
    
    .44
    
    
    
    1,204
    
    
    
    .40
    
    
    
    1,375
    
    
    
    .41
    
    
    
    1,376
    
    
    
    .43
    
    
    
    1,471
    
    
    
    .45Commercial business loans
    
    
    15,955
    
    
    
    5.32
    
    
    
    19,044
    
    
    
    6.32
    
    
    
    24,474
    
    
    
    7.23
    
    
    
    16,085
    
    
    
    5.03
    
    
    
    10,624
    
    
    
    3.30Total loans receivable(2)
    
    
    300,069
    
    
    
    100.00
    %
    
    
    301,471
    
    
    
    100.00
    %
    
    
    338,525
    
    
    
    100.00
    %
    
    
    319,978
    
    
    
    100.00
    %
    
    
    322,210
    
    
    
    100.00
    %Less:Loans in process
    
    
    10,802
    
    
    
    
    
    
    
    6,008
    
    
    
    
    
    
    
    12,081
    
    
    
    
    
    
    
    14,614
    
    
    
    
    
    
    
    15,807Deferred loan origination fees and
discounts
    
    
    (292
    )
    
    
    
    
    
    
    (277
    )
    
    
    
    
    
    
    (143
    )
    
    
    
    
    
    
    (90
    )
    
    
    
    
    
    
    116Allowance for loan losses
    
    
    3,453
    
    
    
    
    
    
    
    3,322
    
    
    
    
    
    
    
    3,367
    
    
    
    
    
    
    
    3,475
    
    
    
    
    
    
    
    2,039Total loans receivable, net
    
    $
    286,106
    
    
    
    
    
    
    $
    292,418
    
    
    
    
    
    
    $
    323,220
    
    
    
    
    
    
    $
    301,979
    
    
    
    
    
    
    $
    304,248
 
 (1)
    
    Consists primarily of credit card loans.(2)
    
    Does not include $0, $0, $1.3 million, $41,000 and $172,000 of loans held for
sale at September 30, 2008, 2007, 2006, 2005 and 2004, respectively. 6




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Contractual Principal Repayments
 Real Estate LoansMulti-family
    
    
    
    
    
    
    
    
    
    
    Consumer andand
    
    
    Construction
    
    
    
    
    
    
    CommercialSingle-family (1)
    
    
    Commercial
    
    
    and Land
    
    
    Total
    
    
    Business Loans
    
    
    Total(Dollars in thousands)Amounts due in:One year or less
    
    $
    13,435
    
    
    $
    7,000
    
    
    $
    27,493
    
    
    $
    47,928
    
    
    $
    5,939
    
    
    $
    53,867After one year through three years
    
    
    27,938
    
    
    
    5,763
    
    
    
    
    
    
    
    33,701
    
    
    
    2,025
    
    
    
    35,726After three years through five years
    
    
    26,496
    
    
    
    6,323
    
    
    
    
    
    
    
    32,819
    
    
    
    1,260
    
    
    
    34,079After five years through ten years
    
    
    66,149
    
    
    
    11,625
    
    
    
    
    
    
    
    77,774
    
    
    
    3,094
    
    
    
    80,868After ten years through fifteen years
    
    
    23,623
    
    
    
    11,003
    
    
    
    
    
    
    
    34,626
    
    
    
    2,227
    
    
    
    36,853Over fifteen years
    
    
    43,231
    
    
    
    12,705
    
    
    
    
    
    
    
    55,936
    
    
    
    2,740
    
    
    
    58,676Total (2)
    
    $
    200,872
    
    
    $
    54,419
    
    
    $
    27,493
    
    
    $
    282,784
    
    
    $
    17,285
    
    
    $
    300,069Interest rate terms on amounts
due after one year:Fixed
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    148,026
    
    
    $
    1,998
    
    
    $
    150,024Adjustable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86,829
    
    
    
    9,349
    
    
    
    96,178Total(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    237,755
    
    
    $
    11,347
    
    
    $
    246,202
 
 (1)
    
    Includes home equity loans and lines of credit.(2)
    
    Does not include adjustments relating to loans in process, allowances for loan
losses and deferred fee income and discounts. 7




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Loan Origination, Purchase and Sale Activity
 Year Ended September 30,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Gross loans at beginning of period(1)
    
    $
    301,471
    
    
    $
    339,859
    
    
    $
    320,019Loan originations for investment:Real estate:Residential
    
    
    28,358
    
    
    
    16,838
    
    
    
    16,799Commercial and multi-family
    
    
    6,929
    
    
    
    6,679
    
    
    
    23,068Construction
    
    
    11,948
    
    
    
    11,366
    
    
    
    21,743Home equity and lines of credit
    
    
    22,026
    
    
    
    30,106
    
    
    
    41,592Total real estate loans originated for investment
    
    
    69,261
    
    
    
    64,989
    
    
    
    103,202Consumer
    
    
    3,398
    
    
    
    1,953
    
    
    
    3,265Commercial business
    
    
    12,497
    
    
    
    18,979
    
    
    
    32,424Total loans originated for investment
    
    
    85,156
    
    
    
    85,921
    
    
    
    138,891Loans originated for resale
    
    
    1,444
    
    
    
    271
    
    
    
    6,063Total originations
    
    
    86,600
    
    
    
    86,192
    
    
    
    144,954Deduct:Principal loan repayments and prepayments
    
    
    (86,313
    )
    
    
    (122,505
    )
    
    
    (116,316
    )Transferred to real estate owned
    
    
    
    
    
    
    
    
    
    
    (2,700
    )Charge-offs
    
    
    (245
    )
    
    
    (470
    )
    
    
    (1,328
    )Loans sold in secondary market
    
    
    (1,444
    )
    
    
    (1,605
    )
    
    
    (4,770
    )Subtotal
    
    
    (88,002
    )
    
    
    (124,580
    )
    
    
    (125,114
    )Net (decrease) increase in loans(1)
    
    
    (1,402
    )
    
    
    (38,388
    )
    
    
    19,840Gross loans at end of period(1)
    
    $
    300,069
    
    
    $
    301,471
    
    
    $
    339,859
 
 (1)
    
    Includes loans held for sale of $0, $1.3 million and $41,000, at September 30, 2008,
2007, and 2006, respectively.  8




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Single-Family Residential Loans
   9




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Commercial and Multi-Family Residential Real Estate Loans.
    Construction Loans
  10




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11




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Home Equity Loans and Lines of Credit
 Commercial Business Loans
  Consumer Lending Activities
  Mortgage-Banking Activities
 12




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Loan Origination Fees and Servicing. Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases
   September 30,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Loans originated by the Bank and
serviced for:FNMA
    
    $
    446
    
    
    $
    491
    
    
    $
    544FHLMC
    
    
    42,119
    
    
    
    46,193
    
    
    
    50,290Others
    
    
    278
    
    
    
    295
    
    
    
    311Total loans serviced for others
    
    $
    42,843
    
    
    $
    46,979
    
    
    $
    51,145
  Loans-to-One Borrower Limitations
 13




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Asset Quality
 General
     Delinquent Loans
 At September 30, 2008
    
    
    At September 30, 200730 to 59
    
    
    60 to 89
    
    
    30 to 59
    
    
    60 to 89days
    
    
    days
    
    
    days
    
    
    daysoverdue
    
    
    overdue
    
    
    overdue
    
    
    overdueReal estate loans:Single-family residential
    
    $
    9
    
    
    $
    250
    
    
    $
    159
    
    
    $
    Commercial and
multi-family
    
    
    
    
    
    
    137
    
    
    
    220
    
    
    
    Home equity
    
    
    127
    
    
    
    39
    
    
    
    227
    
    
    
    Construction
    
    
    824
    
    
    
    1,407
    
    
    
    
    
    
    
    Consumer loans
    
    
    4
    
    
    
    
    
    
    
    5
    
    
    
    17Commercial business loans
    
    
    
    
    
    
    267
    
    
    
    881
    
    
    
    1,261Total
    
    $
    964
    
    
    $
    2,100
    
    
    $
    1,492
    
    
    $
    1,278
 14




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Non-performing Assets
 September 30,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands)Non-performing loans:Single-family residential
    
    $
    297
    
    
    $
    174
    
    
    $
    189
    
    
    $
    378
    
    
    $
    623Commercial and multi-family(1)
    
    
    
    
    
    
    1,148
    
    
    
    
    
    
    
    3,337
    (2)
    
    
    Construction(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    770Home equity and lines of credit
    
    
    237
    
    
    
    274
    
    
    
    47
    
    
    
    60
    
    
    
    243Consumer
    
    
    8
    
    
    
    
    
    
    
    4
    
    
    
    5
    
    
    
    6Commercial business
    
    
    443
    
    
    
    26
    
    
    
    26
    
    
    
    500
    (2)
    
    
    Total non-accrual loans
    
    
    985
    
    
    
    1,622
    
    
    
    266
    
    
    
    4,280
    
    
    
    1,642Accruing loans more than 90 days delinquent
(4)
    
    
    1,435
    
    
    
    3,063
    
    
    
    11
    
    
    
    772
    
    
    
    391Total non-performing loans
    
    
    2,420
    
    
    
    4,685
    
    
    
    277
    
    
    
    5,052
    
    
    
    2,033Real estate owned
    
    
    
    
    
    
    
    
    
    
    2,450
    
    
    
    760
    
    
    
    1,229Total non-performing assets
    
    $
    2,420
    
    
    $
    4,685
    
    
    $
    2,727
    
    
    $
    5,812
    
    
    $
    3,262Total non-performing loans
as a percentage of gross loans receivable(5)
    
    
    0.84
    %
    
    
    1.55
    %
    
    
    0.08
    %
    
    
    1.65
    %
    
    
    0.66
    %Total non-performing assets
as a percentage of total assets
    
    
    0.46
    %
    
    
    0.89
    %
    
    
    0.52
    %
    
    
    1.12
    %
    
    
    0.57
    %
 
 (1)
    
    Consisted of two loans to the same borrower at September 30, 2007 and one loan at
September 30, 2005 which became real estate owned during fiscal 2006. The loans to the same
borrower as of September 30, 2007 were repaid in full subsequent to September 30, 2007.(2)
    
    Loans extended to the same borrower. The commercial business loan to the borrower
was charged off in full in connection with the transfer to real estate owned of the property
in 2006. The property was sold during the fiscal year ended September 30, 2007.(3)
    
    Consisted of one single-family residential construction loan at September 30, 2004.(4)
    
    Consisted of 10 loans at September 30, 2008 (see below), 11 loans at September 30,
2007, three credit card accounts at September 30, 2006, four loans at September 30, 2005 of
which a $770,000 construction loan returned to current status subsequent to September 30,
2005, and six loans at September 30, 2004.(5)
    
    Includes loans receivable and loans held for sale, less construction and land loans
in process and deferred loan origination fees and discounts.    15




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Other Classified Assets
  Allowance for Loan Losses
 16




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Year Ending September 30,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands)Allowance for loan losses, beginning of period
    
    $
    3,322
    
    
    $
    3,367
    
    
    $
    3,475
    
    
    $
    2,039
    
    
    $
    1,986Charged-off loans:Single-family residential
    
    
    
    
    
    
    (21
    )
    
    
    (50
    )
    
    
    (26
    )
    
    
    Multi-family and commercial
    
    
    (220
    )
    
    
    
    
    
    
    (637
    )
    
    
    
    
    
    
    (62
    )Consumer and commercial business
    
    
    (25
    )
    
    
    (449
    )
    
    
    (641
    )
    
    
    (318
    )
    
    
    (259
    )Total charged-off loans
    
    
    (245
    )
    
    
    (470
    )
    
    
    (1,328
    )
    
    
    (344
    )
    
    
    (321
    )Recoveries on loans previously charged-off:Single-family residential
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    35Multi-family and commercial
    
    
    57
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    32Consumer and commercial business
    
    
    23
    
    
    
    30
    
    
    
    11
    
    
    
    
    
    
    
    7Total recoveries
    
    
    80
    
    
    
    50
    
    
    
    14
    
    
    
    
    
    
    
    74Net loans charged-off
    
    
    (165
    )
    
    
    (420
    )
    
    
    (1,314
    )
    
    
    (344
    )
    
    
    (247
    )Provision for loan losses
    
    
    296
    
    
    
    375
    
    
    
    1,206
    
    
    
    1,780
    
    
    
    300Allowance for loan losses, end of period
    
    $
    3,453
    
    
    $
    3,322
    
    
    $
    3,367
    
    
    $
    3,475
    
    
    $
    2,039Net loans charged-off to average loans outstanding(1)
    
    
    0.06
    %
    
    
    0.13
    %
    
    
    0.42
    %
    
    
    0.11
    %
    
    
    0.08
    %Allowance for loan losses to adjusted gross loans
receivable(1)
    
    
    1.19
    %
    
    
    1.12
    %
    
    
    1.03
    %
    
    
    1.14
    %
    
    
    0.67
    %Allowance for loan losses to total non-performing loans
    
    
    142.67
    %
    
    
    70.91
    %
    
    
    1,215.61
    %
    
    
    68.79
    %
    
    
    100.30
    %Net loans charged-off to allowance for loan losses
    
    
    4.78
    %
    
    
    12.64
    %
    
    
    39.03
    %
    
    
    9.90
    %
    
    
    12.11
    %Recoveries to charge-offs
    
    
    32.38
    %
    
    
    10.64
    %
    
    
    1.05
    %
    
    
    0.00
    %
    
    
    23.05
    %
 
 (1)
    
    Adjusted gross loans receivable and average loans outstanding include loans
receivable as well as loans held for sale, less construction and land loans in process and
deferred loan origination fees and discounts. 17




---



##### 



September 30,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004% of Loans
    
    
    
    
    
    
    % of Loans
    
    
    
    
    
    
    % of Loans
    
    
    
    
    
    
    % of Loans
    
    
    
    
    
    
    % of Loansin Each
    
    
    
    
    
    
    in Each
    
    
    
    
    
    
    in Each
    
    
    
    
    
    
    in Each
    
    
    
    
    
    
    in EachCategory to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category toAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans(Dollars in thousands)Single-family residential
    
    $
    554
    
    
    
    48.53
    %
    
    $
    329
    
    
    
    46.40
    %
    
    $
    326
    
    
    
    42.76
    %
    
    $
    695
    
    
    
    46.64
    %
    
    $
    700
    
    
    
    50.87
    %Commercial and multi-
family residential
    
    
    970
    
    
    
    18.14
    
    
    
    1,441
    
    
    
    19.91
    
    
    
    1,346
    
    
    
    20.81
    
    
    
    1,888
    
    
    
    21.78
    
    
    
    446
    
    
    
    20.02Construction and land
    
    
    255
    
    
    
    9.16
    
    
    
    104
    
    
    
    7.80
    
    
    
    129
    
    
    
    11.27
    
    
    
    383
    
    
    
    11.51
    
    
    
    467
    
    
    
    11.82Home equity
    
    
    422
    
    
    
    18.41
    
    
    
    216
    
    
    
    19.17
    
    
    
    122
    
    
    
    17.52
    
    
    
    62
    
    
    
    14.61
    
    
    
    57
    
    
    
    13.54Consumer
    
    
    65
    
    
    
    .44
    
    
    
    85
    
    
    
    .40
    
    
    
    85
    
    
    
    .41
    
    
    
    10
    
    
    
    .43
    
    
    
    11
    
    
    
    .45Commercial business
    
    
    1,106
    
    
    
    5.32
    
    
    
    861
    
    
    
    6.32
    
    
    
    1,072
    
    
    
    7.23
    
    
    
    370
    
    
    
    5.03
    
    
    
    70
    
    
    
    3.30Unallocated
    
    
    81
    
    
    
    
    
    
    
    286
    
    
    
    
    
    
    
    287
    
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    288
    
    
    
    Total allowance for
loan losses
    
    $
    3,453
    
    
    
    100.00
    %
    
    $
    3,322
    
    
    
    100.00
    %
    
    $
    3,367
    
    
    
    100.00
    %
    
    $
    3,475
    
    
    
    100.00
    %
    
    $
    2,039
    
    
    
    100.00
    %
 18




---



##### 



Mortgage-Related and Investment Securities
 Mortgage-Related Securities
    19




---



##### 



20




---



##### 



September 30,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Available for sale:Mortgage-backed securities:FHLMC
    
    $
    34,803
    
    
    $
    15,511
    
    
    $
    7,224FNMA
    
    
    42,000
    
    
    
    31,504
    
    
    
    27,597GNMA
    
    
    1,679
    
    
    
    2,181
    
    
    
    2,906Total mortgage-backed securities
    
    
    78,482
    
    
    
    49,196
    
    
    
    37,727Collateralized mortgage obligations:FHLMC
    
    
    3,908
    
    
    
    4,703
    
    
    
    5,582FNMA
    
    
    2,226
    
    
    
    2,709
    
    
    
    3,231Other
    
    
    18,361
    (1)
    
    
    22,570
    (2)
    
    
    23,490
    (3)Total collateralized mortgage obligations
    
    
    24,495
    
    
    
    29,982
    
    
    
    32,303Total mortgage-related securities
    
    $
    102,977
    
    
    $
    79,178
    
    
    $
    70,030Held to maturity:Mortgage-backed securities:FHLMC
    
    $
    9,776
    
    
    $
    11,957
    
    
    $
    14,376FNMA
    
    
    15,582
    
    
    
    19,289
    
    
    
    23,826Total mortgage-backed securities
    
    
    25,358
    
    
    
    31,246
    
    
    
    38,202Collateralized mortgage obligations:FNMA
    
    
    1
    
    
    
    48
    
    
    
    153Total collateralized mortgage obligations
    
    
    1
    
    
    
    48
    
    
    
    153Total mortgage-related securities,
amortized cost
    
    $
    25,359
    
    
    $
    31,294
    
    
    $
    38,355Total fair value(4)
    
    $
    25,204
    
    
    $
    30,511
    
    
    $
    37,163
 
 (1)
    
    Includes AAA rated securities of AMAC, Bank of America, Countrywide
Home Loans, Credit Suisse First Boston, First Horizon Securities, GSR,
MastrAsset, Structured Asset Securities, Washington Mutual and Wells Fargo with
book values of $2.3 million, $195,000, $1.9 million, $1.1 million, $2.5 million,
$811,000, $1.4 million, $157,000, $3.2 million and $5.7 million, respectively,
and fair values of $2.3 million, $197,000, $1.8 million, $1.1 million, $2.4
million, $788,000, $1.3 million, $155,000, $3.0 million and $5.3 million,
respectively, as of September 30, 2008.(2)
    
    Includes AAA rated securities of AMAC, Bank of America, Countrywide
Home Loans, Credit Suisse First Boston, First Horizon Securities, GSR,
MastrAsset, Structured Asset Securities, Washington Mutual and Wells Fargo with
book values of $3.0 million, $312,000, $2.2 million, $1.3 million, $2.8 million,
$1.0 million, $1.6 million, $463,000, $3.9 million and $6.5 million,
respectively, and fair values of $2.9 million, $311,000, $2.1 million, $1.2
million, $2.8 million, $988,000, $1.6 million, $465,000, $3.8 million and $6.4
million, respectively, as of September 30, 2007.(3)
    
    Includes AAA rated securities of AMAC, Bank of America,
Countrywide Home Loans, Credit Suisse First Boston, GSR, MastrAsset, Structured
Asset Securities, Washington Mutual and Wells Fargo with book values of $3.6
million, $429,000, $2.6 million, $1.4 million, $1.2 million, $2.0 million,
$604,000, $4.7 million and $7.5 million, respectively, and fair values of $3.5
million, $426,000, $2.5 million, $1.4 million, $1.2 million, $1.9 million,
$602,000, $4.6 million and $7.3 million, respectively, as of September 30, 2006.(4)
    
    See Note 4 of the Notes to Consolidated Financial Statements
set forth in Item 8 hereof. 21




---



##### 



Year Ended September 30,2008
    
    
    2007
    
    
    2006(Dollars in thousands)Mortgage-related securities, beginning of period(1)(2)
    
    $
    110,472
    
    
    $
    108,385
    
    
    $
    114,181Purchases:Mortgage-backed securities  available for sale
    
    
    41,625
    
    
    
    18,934
    
    
    
    18,353Mortgage-backed securities  held to maturity
    
    
    
    
    
    
    
    
    
    
    CMOs  available for sale
    
    
    
    
    
    
    2,979
    
    
    
    Sales:Mortgage-backed securities  available for sale
    
    
    
    
    
    
    
    
    
    
    CMOs  available for sale
    
    
    
    
    
    
    
    
    
    
    (1,709
    )Repayments and prepayments:Mortgage-backed securities
    
    
    (18,549
    )
    
    
    (14,506
    )
    
    
    (15,510
    )CMOs
    
    
    (5,076
    )
    
    
    (5,563
    )
    
    
    (6,410
    )Decrease in net premium
    
    
    (36
    )
    
    
    (120
    )
    
    
    (241
    )Change in net unrealized loss on mortgage-related
securities available for sale
    
    
    (100
    )
    
    
    363
    
    
    
    (279
    )Net increase (decrease) in mortgage-related securities
    
    
    17,864
    
    
    
    2,087
    
    
    
    (5,796
    )Mortgage-related securities, end of period(1) (2)
    
    $
    128,336
    
    
    $
    110,472
    
    
    $
    108,385
 
 (1)
    
    Includes both mortgage-related securities available for sale and held to
maturity.(2)
    
    Calculated at amortized cost for securities held to maturity and at fair value
for securities available for sale.  22




---



##### 



Investment Securities.
 At September 30,2008
    
    
    2007
    
    
    2006Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value
    
    
    Value
    
    
    Value(Dollars in thousands)FHLB stock
    
    $
    6,995
    
    
    $
    6,995
    
    
    $
    6,338
    
    
    $
    6,338
    
    
    $
    6,233
    
    
    $
    6,233U.S. Government and agency
obligations
    
    
    2,972
    
    
    
    2,972
    
    
    
    5,951
    
    
    
    5,951
    
    
    
    1,976
    
    
    
    1,976Municipal obligations
    
    
    7,238
    
    
    
    7,254
    
    
    
    4,372
    
    
    
    4,382
    
    
    
    13,365
    
    
    
    13,376Corporate bonds
    
    
    10,066
    
    
    
    10,066
    
    
    
    11,237
    
    
    
    11,237
    
    
    
    10,769
    
    
    
    10,769Mutual funds
    
    
    8,571
    
    
    
    8,571
    
    
    
    9,888
    
    
    
    9,888
    
    
    
    8,952
    
    
    
    8,952Other equity investments
    
    
    953
    
    
    
    953
    
    
    
    1,092
    
    
    
    1,092
    
    
    
    1,581
    
    
    
    1,581Total
    
    $
    36,795
    
    
    $
    36,811
    
    
    $
    38,878
    
    
    $
    38,888
    
    
    $
    42,876
    
    
    $
    42,887
    Sources of Funds
 General.
 Deposits.
  23




---



##### 



September 30,2008
    
    
    2007
    
    
    2006Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Passbook
    
    $
    34,796
    
    
    
    10.52
    %
    
    $
    37,369
    
    
    
    10.57
    %
    
    $
    41,708
    
    
    
    11.62
    %MMDA
    
    
    43,572
    
    
    
    13.17
    
    
    
    34,252
    
    
    
    9.68
    
    
    
    40,591
    
    
    
    11.31NOW
    
    
    70,344
    
    
    
    21.26
    
    
    
    75,194
    
    
    
    21.26
    
    
    
    73,356
    
    
    
    20.45Certificates of deposit
    
    
    162,051
    
    
    
    48.98
    
    
    
    188,489
    
    
    
    53.29
    
    
    
    185,929
    
    
    
    51.82Non-interest-bearing
    
    
    20,101
    
    
    
    6.07
    
    
    
    18,404
    
    
    
    5.20
    
    
    
    17,232
    
    
    
    4.80Total deposits
    
    $
    330,864
    
    
    
    100.00
    %
    
    $
    353,708
    
    
    
    100.00
    %
    
    $
    358,816
    
    
    
    100.00
    %
  Year Ended September 30,2008
    
    
    2007
    
    
    2006(Dollars in thousands)(Decrease) increase before interest credited
    
    $
    (30,644
    )
    
    $
    (15,633
    )
    
    $
    1,134Interest credited
    
    
    7,800
    
    
    
    10,525
    
    
    
    7,988Net savings increase (decrease)
    
    $
    (22,844
    )
    
    $
    (5,108
    )
    
    $
    9,122
  September 30,2008
    
    
    2007Three months or less
    
    $
    21,573
    
    
    $
    29,590Over three months through six months
    
    
    12,868
    
    
    
    12,424Over six months through twelve months
    
    
    6,833
    
    
    
    13,542Over twelve months
    
    
    7,916
    
    
    
    5,062$
    49,190
    
    
    $
    60,618
 24




---



##### 



Amounts at September 30, 2008September 30,
    
    
    Maturing WithinCertificates of Deposit
    
    2008
    
    
    2007
    
    
    One Year
    
    
    Two Years
    
    
    Three Years
    
    
    Thereafter(Dollars in thousands)2.0% or less
    
    $
    9,458
    
    
    $
    2
    
    
    $
    6,359
    
    
    $
    3,099
    
    
    $
    
    
    
    $
    2.01% to 3.0%
    
    
    77,027
    
    
    
    516
    
    
    
    71,916
    
    
    
    3,060
    
    
    
    1,388
    
    
    
    6633.01% to 4.0%
    
    
    37,588
    
    
    
    43,602
    
    
    
    14,471
    
    
    
    13,111
    
    
    
    534
    
    
    
    9,4724.01% to 5.0%
    
    
    37,899
    
    
    
    105,961
    
    
    
    33,946
    
    
    
    504
    
    
    
    1,648
    
    
    
    1,8015.01% to 6.0%
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    776.01% to 7.0%
    
    
    2
    
    
    
    38,408
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Total certificate accounts
    
    $
    162,051
    
    
    $
    188,489
    
    
    $
    126,694
    
    
    $
    19,774
    
    
    $
    3,570
    
    
    $
    12,013
  September 30,2008
    
    
    2007
    
    
    2006Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageAverage
    
    
    Rate
    
    
    Average
    
    
    Rate
    
    
    Average
    
    
    RateBalance

    
    
    Paid
    
    
    Balance

    
    
    Paid
    
    
    Balance

    
    
    Paid(Dollars in thousands)Passbook accounts
    
    $
    36,207
    
    
    
    0.94
    %
    
    $
    39,078
    
    
    
    0.93
    %
    
    $
    45,673
    
    
    
    0.94
    %MMDA accounts
    
    
    36,903
    
    
    
    2.60
    
    
    
    37,288
    
    
    
    2.90
    
    
    
    42,966
    
    
    
    2.13Certificates of deposit
    
    
    178,079
    
    
    
    4.04
    
    
    
    190,098
    
    
    
    4.58
    
    
    
    178,878
    
    
    
    3.66NOW accounts
    
    
    74,240
    
    
    
    0.93
    
    
    
    72,983
    
    
    
    1.39
    
    
    
    67,254
    
    
    
    1.03Non-interest-bearing deposits
    
    
    16,051
    
    
    
    
    
    
    
    15,496
    
    
    
    
    
    
    
    17,600
    
    
    
    Total deposits
    
    $
    341,480
    
    
    
    2.69
    %
    
    $
    354,943
    
    
    
    3.16
    %
    
    $
    352,371
    
    
    
    2.43
    %
 25




---



##### 



Borrowings
  September 30,2008
    
    2007(Dollars in thousands)FHLB advancesAverage balance outstanding for the period
    
    $
    2,427
    
    
    $
    6,839Maximum outstanding at any month end
    
    
    33,485
    
    
    
    30,300Balance outstanding at end of the period
    
    
    33,485
    
    
    
    29,000Average interest rate for the period
    
    
    2.51
    %
    
    
    5.11
    %Interest rate at the end of the period
    
    
    2.06
    %
    
    
    5.34
    %
   Subsidiaries
     26




---



##### 



Employees
  Regulation
 General.
 The Company.
 Federal Activities Restrictions.
    Limitations on Transactions with Affiliates.
 27




---



##### 



Restrictions on Acquisitions.
  Federal Securities Laws
 Sarbanes-Oxley Act of 2002.
 
    
    the creation of an independent accounting oversight board;
    
    auditor independence provisions that restrict non-audit services that accountants
may provide to their audit clients;
    
    additional corporate governance and responsibility measures, including the
requirement that the chief executive officer and chief financial officer certify
financial statements;
    
    a requirement that companies establish and maintain a system of internal control
over financial reporting and that a companys management provide an annual report
regarding its assessment of the effectiveness of such internal control over financial
reporting to the companys independent accountants and that such accountants provide an
attestation report with respect to managements assessment of the effectiveness of the
companys internal control over financial reporting;
 28




---



##### 




    
    the forfeiture of bonuses or other incentive-based compensation and profits from the
sale of an issuers securities by directors and senior officers in the twelve month
period following initial publication of any financial statements that later require
restatement;
    
    an increase in the oversight of, and enhancement of certain requirements relating to
audit committees of public companies and how they interact with the companys
independent auditors;
    
    the requirement that audit committee members must be independent and are absolutely
barred from accepting consulting, advisory or other compensatory fees from the issuer;
    
    the requirement that companies disclose whether at least one member of the committee
is a financial expert (as such term is defined by the securities and exchange
commission) and if not, why not;
    
    expanded disclosure requirements for corporate insiders, including accelerated
reporting of stock transactions by insiders and a prohibition on insider trading during
pension blackout periods;
    
    a prohibition on personal loans to directors and officers, except certain loans made
by insured financial institutions;
    
    disclosure of a code of ethics and the requirement of filing of a Form 8K for a
change or waiver of such code;
    
    a prohibition on insider trading during pension blackout periods; and
    
    a range of enhanced penalties for fraud and other violations.
  The Bank.
  Emergency
Economic Stabilization Act of 2008.
 29




---



##### 



Insurance of Accounts.
    Deposit Insurance Reform.
 30




---



##### 



Regulatory Capital Requirements.
     31




---



##### 



September 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2006Tangible
    
    
    Core
    
    
    Risk-based
    
    
    Tangible
    
    
    Core
    
    
    Risk-based
    
    
    Tangible
    
    
    Core
    
    
    Risk-basedCapital
    
    
    Capital
    
    
    Capital
    
    
    Capital
    
    
    Capital
    
    
    Capital
    
    
    Capital
    
    
    Capital
    
    
    Capital(Dollars in thousands)GAAP equity
    
    $
    44,167
    
    
    $
    44,234
    
    
    $
    44,234
    
    
    $
    49,126
    
    
    $
    49,207
    
    
    $
    49,207
    
    
    $
    47,771
    
    
    $
    47,771
    
    
    $
    47,771General valuation allowances
    
    
    
    
    
    
    
    
    
    
    3,083
    
    
    
    
    
    
    
    
    
    
    
    3,322
    
    
    
    
    
    
    
    
    
    
    
    3,367Unrealized gains on equity
securities
    
    
    N/A
    
    
    
    N/A
    
    
    
    5
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    Total regulatory capital
    
    
    44,167
    
    
    
    44,234
    
    
    
    47,322
    
    
    
    49,126
    
    
    
    49,207
    
    
    
    52,529
    
    
    
    47,771
    
    
    
    47,771
    
    
    
    51,138Minimum capital requirement
    
    
    7,841
    
    
    
    20,911
    
    
    
    25,247
    
    
    
    7,864
    
    
    
    20,975
    
    
    
    25,491
    
    
    
    7,829
    
    
    
    20,819
    
    
    
    27,385Excess
    
    $
    36,326
    
    
    $
    23,323
    
    
    $
    22,075
    
    
    $
    41,262
    
    
    $
    28,232
    
    
    $
    27,038
    
    
    $
    39,942
    
    
    $
    26,952
    
    
    $
    23,753
  32




---



##### 



Prompt Corrective Action.
  Qualified Thrift Lender Test (the QTL).
  33




---



##### 



Capital Distribution.
 Community Reinvestment Act and the Fair Lending Laws.
 Branching by Federal Saving Institutions
 34




---



##### 



Anti-Money Laundering
 Federal Home Loan Bank System.
   Federal Reserve System.
  Safety and Soundness Guidelines.
 Federal and State Taxation
 General.
 35




---



##### 



Fiscal Year.
 Method of Accounting.
 Bad Debt Reserves.
  Minimum Tax
 Net Operating Loss Carryovers.
 Audit by IRS
 State Taxation
   36




---



##### 



Item 1A. Risk Factors.
 Our operations are subject to interest rate risk and variations in interest rates may negatively
affect financial performance.
  
    
    our ability to originate loans and obtain deposits;
    
    the fair value of our financial assets and liabilities; and
    
    the average duration of our securities portfolio.
  The operating restrictions imposed by the OTS in the supervisory agreements limit our ability to
grow, which may adversely affect our ability to successfully implement our business strategy.
  We may be unable to successfully implement our business strategy.
  We are subject to lending risk and could suffer losses in our loan portfolio despite our
underwriting practices.
  37




---



##### 



Our loan portfolio includes commercial and multi-family real estate, commercial business and
construction loans which have a generally higher risk of loss than single-family residential loans.
  Adverse economic and business conditions in our primary market area could cause an increase in loan
delinquencies and non-performing assets which could adversely affect our financial condition and
results of operations.
  Our allowance for losses on loans may be insufficient to cover actual losses on loans.
  38




---



##### 



The fair value of our investment securities held to maturity is less than the carrying value of
such securities.
   We operate in a highly competitive industry and market area with other financial institutions
offering products and services similar to those we offer.
  We are subject to extensive government regulation and supervision which could adversely affect our
operations.
  Our Deposit Insurance Premium Could Be Substantially Higher in the Future Which Would have an
Adverse Effect on Our Future Earnings.
  39




---



##### 



The Actions of the U.S. Government for the Purpose of Stabilizing the Financial Markets, or Market
Response to those Actions, May Not Achieve the Intended Effect, and our Results of Operations Could
Be Adversely Affected.
    
 Item 1B. Unresolved Staff Comments.
 Not applicable.
 40




---



##### 



Item 2. Properties.
   Net Book Value
    
    
    Amount ofDescription/Address
    
    Leased/Owned
    
    
    of Property
    
    
    Deposits(Dollars in thousands)Executive Offices:22 West State Street
Media, Pennsylvania 19063
    
    Owned(1)
    
    $
    1,598
    
    
    $
    72,448Branch Offices:3218 Edgmont Avenue
Brookhaven, Pennsylvania 19015
    
    Owned
    
    
    218
    
    
    
    67,095Routes 1 and 100
Chadds Ford, Pennsylvania 19317
    
    Leased(2)
    
    
    21
    
    
    
    25,98323 East Fifth Street
Chester, Pennsylvania 19013
    
    Leased(3)
    
    
    33
    
    
    
    26,92231 Baltimore Pike
Chester Heights, Pennsylvania 19017
    
    Leased(4)
    
    
    415
    
    
    
    42,852106 East Street Road
Kennett Square, Pennsylvania 19348
    
    Leased(5)
    
    
    380
    
    
    
    18,4095000 Pennell Road
Aston, Pennsylvania 19014
    
    Leased(6)
    
    
    708
    
    
    
    22,203330 Dartmouth Avenue
Swarthmore, Pennsylvania 19081
    
    Owned
    
    
    85
    
    
    
    54,952Total
    
    
    
    
    
    $
    3,458
    
    
    $
    330,864
 
 (1)
    
    Also a branch office.(2)
    
    Lease expiration date is September 30, 2010. The Bank has one five-year renewal
option.(3)
    
    Lease expiration date is December 31, 2015.(4)
    
    Lease expiration date is December 31, 2028. The Bank has options to cancel
on the 15th, 20thand 25th year of the lease.(5)
    
    Lease expiration date is September 30, 2034. The Bank has one six-year
renewal option followed by a five-year renewal option.(6)
    
    Lease expiration date is December 31, 2033. The Bank has options to cancel on the
15th, 20th and 25th year of the lease. 41




---



##### 



Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 PART II
 
 Item 5.
    
    Market for Registrants Common Equity, and Related Stockholder Matters and
Issuer Purchases of Equity Securities.
   Year EndedSeptember 30, 2008
    
    September 30, 2007High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    14.01
    
    
    $
    9.35
    
    
    $
    19.75
    
    
    $
    18.48Second Quarter
    
    $
    13.90
    
    
    $
    8.50
    
    
    $
    20.61
    
    
    $
    19.00Third Quarter
    
    $
    10.54
    
    
    $
    8.11
    
    
    $
    20.25
    
    
    $
    18.87Fourth Quarter
    
    $
    10.79
    
    
    $
    7.33
    
    
    $
    19.90
    
    
    $
    12.55
  Year Ended September 30,2008
    
    2007First Quarter
    
    $
    
    
    
    $
    Second Quarter
    
    
    
    
    
    
    Third Quarter
    
    
    
    
    
    
    Fourth Quarter
    
    
    
    
    
    
    
     42




---



##### 



Item 6. Selected Financial Data.
  At or For the Year Ended September 30,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands, except per share data)Selected Financial Data:Total assets
    
    $
    522,056
    
    
    $
    524,881
    
    
    $
    522,960
    
    
    $
    518,124
    
    
    $
    571,919Loans receivable, net
    
    
    286,106
    
    
    
    292,418
    
    
    
    323,220
    
    
    
    301,979
    
    
    
    304,248Mortgage-related securities held to maturity
    
    
    25,359
    
    
    
    31,294
    
    
    
    38,355
    
    
    
    46,654
    
    
    
    37,363Investment securities held to maturity
    
    
    3,255
    
    
    
    3,256
    
    
    
    3,257
    
    
    
    4,267
    
    
    
    5,287Assets held for sale:Mortgage-related securities
    
    
    102,977
    
    
    
    79,178
    
    
    
    70,030
    
    
    
    67,527
    
    
    
    97,620Investment securities
    
    
    26,545
    
    
    
    29,284
    
    
    
    33,386
    
    
    
    37,019
    
    
    
    63,615Loans
    
    
    
    
    
    
    
    
    
    
    1,334
    
    
    
    41
    
    
    
    172Real estate owned
    
    
    
    
    
    
    
    
    
    
    2,450
    
    
    
    760
    
    
    
    1,229Deposits
    
    
    330,864
    
    
    
    353,708
    
    
    
    358,816
    
    
    
    349,694
    
    
    
    344,880Borrowings
    
    
    141,159
    
    
    
    115,384
    
    
    
    107,241
    
    
    
    113,303
    
    
    
    171,149Junior subordinated debentures
    
    
    11,639
    
    
    
    15,264
    
    
    
    21,483
    
    
    
    21,520
    
    
    
    21,557Stockholders equity
    
    
    32,296
    
    
    
    34,694
    
    
    
    28,659
    
    
    
    28,193
    
    
    
    29,698Non-performing assets
    
    
    2,420
    
    
    
    4,685
    
    
    
    2,727
    
    
    
    5,812
    
    
    
    3,262Selected Operations Data:Interest income
    
    $
    26,377
    
    
    $
    28,381
    
    
    $
    27,493
    
    
    $
    27,076
    
    
    $
    26,143Interest expense
    
    
    15,976
    
    
    
    18,225
    
    
    
    16,415
    
    
    
    15,768
    
    
    
    14,712Net interest income
    
    
    10,401
    
    
    
    10,156
    
    
    
    11,078
    
    
    
    11,308
    
    
    
    11,431Provision for loan losses
    
    
    296
    
    
    
    375
    
    
    
    1,206
    
    
    
    1,780
    
    
    
    300Net interest income
after provision for loan losses
    
    
    10,105
    
    
    
    9,781
    
    
    
    9,872
    
    
    
    9,528
    
    
    
    11,131Service charges and other fees
    
    
    1,642
    
    
    
    1,661
    
    
    
    1,560
    
    
    
    1,577
    
    
    
    1,235Net gain (loss) on sales of interest-earning
assets
    
    
    (1,911
    )
    
    
    283
    
    
    
    338
    
    
    
    802
    
    
    
    968Other non-interest income
    
    
    1,192
    
    
    
    1,069
    
    
    
    1,614
    
    
    
    1,210
    
    
    
    1,696Non-interest expense
    
    
    12,307
    
    
    
    12,549
    
    
    
    12,708
    
    
    
    12,820
    
    
    
    12,501Income (loss) before income taxes
    
    
    (1,279
    )
    
    
    245
    
    
    
    676
    
    
    
    297
    
    
    
    2,529Income tax (benefit) expense
    
    
    (271
    )
    
    
    (220
    )
    
    
    (359
    )
    
    
    (313
    )
    
    
    326Net income (loss)
    
    $
    (1,008
    )
    
    $
    465
    
    
    $
    1,035
    
    
    $
    610
    
    
    $
    2,203Per Share Data:Basic earnings (loss) per share
    
    $
    (0.43
    )
    
    $
    0.21
    
    
    $
    0.55
    
    
    $
    0.33
    
    
    $
    1.21Diluted earnings (loss) per share
    
    
    (0.43
    )
    
    
    0.21
    
    
    
    0.54
    
    
    
    0.33
    
    
    
    1.14Cash dividends per share
    
    
    
    
    
    
    
    
    
    
    0.11
    
    
    
    0.44
    
    
    
    0.44
 43




---



##### 



At or For the Year Ended September 30,2008
    
    2007
    
    2006
    
    2005
    
    2004(Dollars in thousands, except per share data)Selected Operating Ratios:Average yield earned on interest-earning assets
    
    
    5.63
    %
    
    
    6.01
    %
    
    
    5.72
    %
    
    
    5.06
    %
    
    
    4.94
    %Average rate paid on interest-bearing liabilities
    
    
    3.46
    
    
    
    3.90
    
    
    
    3.40
    
    
    
    2.96
    
    
    
    2.80Average interest rate spread
    
    
    2.16
    
    
    
    2.11
    
    
    
    2.32
    
    
    
    2.10
    
    
    
    2.14Net interest margin
    
    
    2.22
    
    
    
    2.15
    
    
    
    2.30
    
    
    
    2.11
    
    
    
    2.16Ratio of interest-earning assets to interest-
bearing liabilities
    
    
    101.58
    
    
    
    101.05
    
    
    
    99.67
    
    
    
    100.52
    
    
    
    100.69Efficiency ratio (1)
    
    
    108.68
    
    
    
    95.29
    
    
    
    87.10
    
    
    
    86.06
    
    
    
    81.55Non-interest expense as a percent
of average assets
    
    
    2.44
    
    
    
    2.47
    
    
    
    2.46
    
    
    
    2.26
    
    
    
    2.23Return on average assets
    
    
    (0.20
    )
    
    
    0.09
    
    
    
    0.20
    
    
    
    0.11
    
    
    
    0.39Return on average equity
    
    
    (2.89
    )
    
    
    1.40
    
    
    
    3.73
    
    
    
    2.08
    
    
    
    7.13Ratio of average equity to average assets
    
    
    6.92
    
    
    
    6.53
    
    
    
    5.37
    
    
    
    5.18
    
    
    
    5.50Full-service offices at end of period
    
    
    8
    
    
    
    8
    
    
    
    8
    
    
    
    8
    
    
    
    7Asset Quality Ratios:(2)Non-performing loans as a
percent of gross loans receivable
    
    
    0.84
    %
    
    
    1.55
    %
    
    
    0.08
    %
    
    
    1.65
    %
    
    
    0.66
    %Non-performing assets as a
percent of total assets
    
    
    0.46
    
    
    
    0.89
    
    
    
    0.52
    
    
    
    1.12
    
    
    
    0.57Allowance for loan losses as a
percent of adjusted gross loans receivable (3)
    
    
    1.19
    
    
    
    1.12
    
    
    
    1.03
    
    
    
    1.14
    
    
    
    0.67Allowance for loan losses as a
percent of non-performing loans
    
    
    142.67
    
    
    
    70.91
    
    
    
    1,215.61
    
    
    
    68.79
    
    
    
    100.30Net loans charged-off to average
loans receivable
    
    
    0.06
    
    
    
    0.13
    
    
    
    0.42
    
    
    
    0.11
    
    
    
    0.08Capital Ratios:(2) (4)Tangible capital ratio
    
    
    8.45
    %
    
    
    9.37
    %
    
    
    9.15
    %
    
    
    8.85
    %
    
    
    8.21
    %Core capital ratio
    
    
    8.46
    
    
    
    9.38
    
    
    
    9.15
    
    
    
    8.85
    
    
    
    8.21Risk-based capital ratio
    
    
    14.99
    
    
    
    16.49
    
    
    
    14.94
    
    
    
    15.13
    
    
    
    14.56
 
 (1)
    
    Reflects non-interest expense as a percent of the aggregate of net interest income and non-interest income.(2)
    
    Asset Quality Ratios and Capital Ratios are end of period ratios except for the ratio of loan charge-offs to average loans. With the exception of end of period ratios, all
ratios are based on average daily balances during the indicated periods. Gross loans receivable are net of loans in process.(3)
    
    Gross loans receivable includes loans receivable as well as loans held for sale, less construction and land loans in process and deferred loan origination fees and
discounts.(4)
    
    Reflects regulatory capital ratios of the Companys wholly owned subsidiary, First Keystone Bank. 44




---



##### 



Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 General
    Critical Accounting Policies
  Allowance for loan losses
  Other-Than-Temporary Impairment of Securities
 45




---



##### 



Deferred Income Taxes
 Accounting for Uncertainty in Income Taxes
 Supervisory Agreements
    46




---



##### 



47




---



##### 



Asset and Liability Management
      48




---



##### 



More Than
    
    
    More ThanSix to
    
    
    One Year to
    
    
    ThreeWithin Six
    
    
    Twelve
    
    
    Three
    
    
    Years to
    
    
    Over FiveMonths
    
    
    Months
    
    
    Years
    
    
    Five Years
    
    
    Years
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans receivable, net(1)
    
    $
    63,059
    
    
    $
    25,433
    
    
    $
    59,492
    
    
    $
    41,050
    
    
    $
    96,087
    
    
    $
    285,121Mortgage-related securities
    
    
    10,023
    
    
    
    12,346
    
    
    
    41,217
    
    
    
    25,539
    
    
    
    39,211
    
    
    
    128,336Investment securities(2)
    
    
    12,227
    
    
    
    
    
    
    
    724
    
    
    
    2,539
    
    
    
    21,305
    
    
    
    36,795Interest-earning deposits
    
    
    34,980
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,980Total interest-earning assets
    
    $
    120,289
    
    
    $
    37,779
    
    
    $
    101,433
    
    
    $
    69,128
    
    
    $
    156,603
    
    
    $
    485,232Interest-bearing liabilities:Deposits
    
    $
    129,157
    
    
    $
    47,570
    
    
    $
    83,210
    
    
    $
    60,985
    
    
    $
    9,942
    
    
    $
    330,864Borrowed funds
    
    
    38,491
    
    
    
    6
    
    
    
    75,500
    
    
    
    16,000
    
    
    
    11,162
    
    
    
    141,159Junior subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,639
    
    
    
    11,639Total interest-bearing liabilities
    
    $
    167,648
    
    
    $
    47,576
    
    
    $
    158,710
    
    
    $
    76,985
    
    
    $
    32,743
    
    
    $
    483,662Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities
    
    $
    (47,359
    )
    
    $
    (9,797
    )
    
    $
    (57,277
    )
    
    $
    (7,857
    )
    
    $
    123,860
    
    
    $
    1,570Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities
    
    $
    (47,359
    )
    
    $
    (57,144
    )
    
    $
    (114,421
    )
    
    $
    (122,278
    )
    
    $
    1,570Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percentage of total assets
    
    
    (9.02
    )%
    
    
    (10.89
    )%
    
    
    (21.80
    )%
    
    
    (23,30
    )%
    
    
    0.30
    %
 
 (1)
    
    Balances have been reduced for non-accruing loans, which amounted to $985,000 at
September 30, 2008.(2)
    
    Balance includes FHLB stock.   49




---



##### 



Net Portfolio ValueNet Portfolio Value
    
    as a % of AssetsChanges in Rates
    
    
    
    
    
    Dollar
    
    Percentage
    
    NPVin Basis Points
    
    Amount
    
    Change
    
    Change
    
    Ratio
    
    Change300
    
    $
    38,631
    
    
    $
    (20,780
    )
    
    
    (35
    )%
    
    
    7.56
    %
    
    (347) bp200
    
    
    46,035
    
    
    
    (13,376
    )
    
    
    (23
    )
    
    
    8.84
    
    
    
    (218
    )100
    
    
    53,251
    
    
    
    (6,160
    )
    
    
    (10
    )
    
    
    10.05
    
    
    
    (98
    )50
    
    
    56,478
    
    
    
    (2,933
    )
    
    
    (5
    )
    
    
    10.56
    
    
    
    (46
    )0
    
    
    59,411
    
    
    
    
    
    
    
    
    
    
    
    11.02
    
    
    
    (50)
    
    
    61,306
    
    
    
    1,895
    
    
    
    3
    
    
    
    11.30
    
    
    
    28(100)
    
    
    62,995
    
    
    
    3,584
    
    
    
    6
    
    
    
    11.54
    
    
    
    52
     50




---



##### 



Changes in Financial Condition
 General
 Cash and Cash Equivalents
 Investment Securities Held to Maturity and Investment Securities Available for Sale
 Mortgage-Related Securities Held to Maturity and Mortgage-Related Securities Available For
Sale
 Loans Held for Sale.
 Loans Receivable, Net.
 Non-Performing Assets.
 51




---



##### 



Deposits
 Borrowings.
 Junior Subordinated Debentures.
 Equity.
 52




---



##### 



Average Balances, Net Interest Income and Yields Earned and Rates Paid .
 Year Ended September 30,Yield/Cost
    
    
    2008
    
    
    2007
    
    
    2006at
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    AverageSept. 30,
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/2008
    
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in thousands)Interest-earning assets:Loans receivable(1) (2)(3)
    
    
    6.07
    %
    
    $
    282,627
    
    
    $
    17,659
    
    
    
    6.25
    %
    
    $
    310,318
    
    
    $
    20,674
    
    
    
    6.66
    %
    
    $
    312,778
    
    
    $
    19,956
    
    
    
    6.38
    %Mortgage-related securities(3)
    
    
    4.96
    
    
    
    128,799
    
    
    
    6,284
    
    
    
    4.88
    
    
    
    107,913
    
    
    
    4,989
    
    
    
    4.62
    
    
    
    113,995
    
    
    
    5,054
    
    
    
    4.43Investment securities(3)
    
    
    4.72
    
    
    
    39,040
    
    
    
    1,986
    
    
    
    5.08
    
    
    
    39,786
    
    
    
    2,185
    
    
    
    5.49
    
    
    
    45,478
    
    
    
    2,286
    
    
    
    5.03Other interest-earning assets
    
    
    1.50
    
    
    
    18,365
    
    
    
    448
    
    
    
    2.44
    
    
    
    14,528
    
    
    
    533
    
    
    
    3.67
    
    
    
    8,632
    
    
    
    197
    
    
    
    2.28Total interest-earning assets
    
    
    5.31
    
    
    
    468,831
    
    
    
    26,377
    
    
    
    5.63
    
    
    
    472,545
    
    
    
    28,381
    
    
    
    6.01
    
    
    
    480,883
    
    
    
    27,493
    
    
    
    5.72Non-interest-earning assets
    
    
    
    
    
    
    35,084
    
    
    
    
    
    
    
    
    
    
    
    35,751
    
    
    
    
    
    
    
    
    
    
    
    35,885Total assets
    
    
    
    
    
    $
    503,915
    
    
    
    
    
    
    
    
    
    
    $
    508,296
    
    
    
    
    
    
    
    
    
    
    $
    516,768Interest-bearing liabilities:Deposits
    
    
    2.16
    
    
    $
    341,480
    
    
    
    9,186
    
    
    
    2.69
    
    
    $
    354,943
    
    
    
    11,208
    
    
    
    3.16
    
    
    $
    352,371
    
    
    
    8,547
    
    
    
    2.43FHLB advances and other borrowings
    
    
    4.27
    
    
    
    105,856
    
    
    
    5,419
    
    
    
    5.12
    
    
    
    93,190
    
    
    
    5,189
    
    
    
    5.57
    
    
    
    108,603
    
    
    
    5,914
    
    
    
    5.45Junior subordinated debentures
    
    
    9.70
    
    
    
    14,199
    
    
    
    1,371
    
    
    
    9.66
    
    
    
    19,518
    
    
    
    1,828
    
    
    
    9.37
    
    
    
    21,503
    
    
    
    1,954
    
    
    
    9.09Total interest-bearing liabilities
    
    
    2.96
    
    
    
    461,535
    
    
    
    15,976
    
    
    
    3.46
    
    
    
    467,651
    
    
    
    18,225
    
    
    
    3.90
    
    
    
    482,477
    
    
    
    16,415
    
    
    
    3.40Interest rate spread
    
    
    2.35
    %
    
    
    
    
    
    
    
    
    
    
    2.16
    %
    
    
    
    
    
    
    
    
    
    
    2.11
    %
    
    
    
    
    
    
    
    
    
    
    2.32
    %Non-interest-bearing liabilities
    
    
    
    
    
    
    7,496
    
    
    
    
    
    
    
    
    
    
    
    7,444
    
    
    
    
    
    
    
    
    
    
    
    6,517Total liabilities
    
    
    
    
    
    
    469,031
    
    
    
    
    
    
    
    
    
    
    
    475,095
    
    
    
    
    
    
    
    
    
    
    
    488,994Stockholders equity34,884
    
    
    
    
    
    
    
    
    
    
    
    33,201
    
    
    
    
    
    
    
    
    
    
    
    27,774Total liabilities and stockholders equity
    
    
    
    
    
    $
    503,915
    
    
    
    
    
    
    
    
    
    
    $
    508,296
    
    
    
    
    
    
    
    
    
    
    $
    516,768Net interest-earning assets (liabilities)
    
    
    
    
    
    $
    7,296
    
    
    
    
    
    
    
    
    
    
    $
    4,894
    
    
    
    
    
    
    
    
    
    
    $
    (1,594
    )Net interest income
    
    
    
    
    
    
    
    
    
    $
    10,401
    
    
    
    
    
    
    
    
    
    
    $
    10,156
    
    
    
    
    
    
    
    
    
    
    $
    11,078Net interest margin(4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.22
    %
    
    
    
    
    
    
    
    
    
    
    2.15
    %
    
    
    
    
    
    
    
    
    
    
    2.30
    %Ratio of average interest-earning assets
to average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101.58
    %
    
    
    
    
    
    
    
    
    
    
    101.05
    %
    
    
    
    
    
    
    
    
    
    
    99.67
    %
 
 (1)
    
    Includes non-accrual loans.(2)
    
    Loan fees are included in interest income and the amounts are not material for this
analysis.(3)
    
    Includes assets classified as either available for sale, held to maturity or held
for sale.(4)
    
    Net interest income divided by interest-earning assets. 53




---



##### 



Rate/Volume Analysis
 Year Ended September 30,2008 vs. 2007
    
    
    2007 vs. 2006Increase (Decrease) Due To
    
    
    Increase (Decrease) Due ToTotal
    
    
    
    
    
    
    
    
    
    
    TotalIncrease
    
    
    
    
    
    
    
    
    
    
    IncreaseRate
    
    
    Volume
    
    
    (Decrease)
    
    
    Rate
    
    
    Volume
    
    
    (Decrease)Interest-earnings assets:Loans receivable(1)
    
    $
    (1,238
    )
    
    $
    (1,777
    )
    
    $
    (3,015
    )
    
    $
    873
    
    
    $
    (155
    )
    
    $
    718Mortgage-related securities(1)
    
    
    288
    
    
    
    1,007
    
    
    
    1,295
    
    
    
    265
    
    
    
    (330
    )
    
    
    (65
    )Investment securities(1)
    
    
    (158
    )
    
    
    (41
    )
    
    
    (199
    )
    
    
    285
    
    
    
    (386
    )
    
    
    (101
    )Other interest-earning assets
    
    
    (394
    )
    
    
    309
    
    
    
    (85
    )
    
    
    159
    
    
    
    177
    
    
    
    336Total interest-earning assets
    
    
    (1,502
    )
    
    
    (502
    )
    
    
    (2,004
    )
    
    
    1,582
    
    
    
    (694
    )
    
    
    888Interest-bearing liabilities:Deposits
    
    
    (1,610
    )
    
    
    (412
    )
    
    
    (2,022
    )
    
    
    2,599
    
    
    
    62
    
    
    
    2,661FHLB advances and other borrowings
    
    
    (335
    )
    
    
    565
    
    
    
    230
    
    
    
    137
    
    
    
    (862
    )
    
    
    (725
    )Junior subordinated debentures
    
    
    59
    
    
    
    (516
    )
    
    
    (457
    )
    
    
    63
    
    
    
    (189
    )
    
    
    (126
    )Total interest-bearing liabilities
    
    
    (1,886
    )
    
    
    (363
    )
    
    
    (2,249
    )
    
    
    2,799
    
    
    
    (989
    )
    
    
    1,810Increase (decrease) in net interest income
    
    $
    384
    
    
    $
    (139
    )
    
    $
    245
    
    
    $
    (1,217
    )
    
    $
    295
    
    
    $
    (922
    )
 
 (1)
    
    Includes assets classified as either available for sale, held to maturity or held
for sale. Results of Operations
 General.
  Net Interest Income
 54




---



##### 



Interest Income
 Interest Expense
 Provisions for Loan Losses
  55




---



##### 



Non-interest Income
 Non-interest Expense
  Income Taxes
 56




---



##### 



Liquidity and Capital Resources
     57




---



##### 



Derivative Financial Instruments, Contractual Obligations and Other Commitments
    Payments Due by Period:Less Than
    
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years(dollars in thousands)FHLB borrowings
    
    $
    137,574
    
    
    $
    34,921
    
    
    $
    75,520
    
    
    $
    16,022
    
    
    $
    11,111Junior subordinated debentures
    
    
    11,639
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,639Repurchase agreements
    
    
    3,585
    
    
    
    3,585
    
    
    
    
    
    
    
    
    
    
    
    Certificates of deposit
    
    
    162,051
    
    
    
    126,694
    
    
    
    23,344
    
    
    
    12,013
    
    
    
    Operating leases
    
    
    3,157
    
    
    
    343
    
    
    
    459
    
    
    
    302
    
    
    
    2,053Total obligations
    
    $
    318,006
    
    
    $
    165,543
    
    
    $
    99,323
    
    
    $
    28,337
    
    
    $
    24,803
 Off-Balance-Sheet Obligations
   Less Than
    
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years(dollars in thousands)Lines of credit(1)
    
    $
    33,264
    
    
    $
    9,984
    
    
    $
    605
    
    
    $
    4,930
    
    
    $
    17,745Letters of credit
    
    
    495
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    395Other commitments to originate loans
    
    
    2,777
    
    
    
    2,777
    
    
    
    
    
    
    
    
    
    
    
    Undisbursed portions of construction loans
    
    
    10,572
    
    
    
    6,572
    
    
    
    4,000
    
    
    
    
    
    
    
    Total
    
    $
    47,108
    
    
    $
    19,433
    
    
    $
    4,605
    
    
    $
    4,930
    
    
    $
    18,140
 
 (1)
    
    Includes lines of credit for commercial real estate, commercial loans and home
equity loans. Recent Accounting Pronouncements
  58




---



##### 



Impact of Inflation and Changing Prices
   
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
  59




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 Board of Directors and Stockholders
First Keystone Financial, Inc.
     
 
 60




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
 September 30,2008
    
    
    2007ASSETSCash and amounts due from depository institutions
    
    $
    4,340
    
    
    $
    4,642Interest-bearing deposits with depository institutions
    
    
    34,980
    
    
    
    48,293Total cash and cash equivalents
    
    
    39,320
    
    
    
    52,935Investment securities available for sale
    
    
    26,545
    
    
    
    29,284Mortgage-related securities available for sale
    
    
    102,977
    
    
    
    79,178Investment securities held to maturity  at amortized cost (approximate fair
value of $3,271 and $3,266 at September 30, 2008 and 2007, respectively)
    
    
    3,255
    
    
    
    3,256Mortgage-related securities held to maturity  at amortized cost
(approximate fair value of $25,204 and $30,511 at September 30, 2008
and 2007, respectively)
    
    
    25,359
    
    
    
    31,294Loans receivable (net of allowance for loan losses of $3,453 and $3,322
at September 30, 2008 and 2007, respectively)
    
    
    286,106
    
    
    
    292,418Accrued interest receivable
    
    
    2,452
    
    
    
    2,702FHLBank stock, at cost
    
    
    6,995
    
    
    
    6,338Office properties and equipment, net
    
    
    4,386
    
    
    
    4,762Deferred income taxes
    
    
    4,323
    
    
    
    3,216Cash surrender value of life insurance
    
    
    17,941
    
    
    
    17,234Prepaid expenses and other assets
    
    
    2,397
    
    
    
    2,264Total Assets
    
    $
    522,056
    
    
    $
    524,881LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:DepositsNon-interest-bearing
    
    $
    20,101
    
    
    $
    18,404Interest-bearing
    
    
    310,763
    
    
    
    335,304Total deposits
    
    
    330,864
    
    
    
    353,708Advances from FHLBank and other borrowings
    
    
    141,159
    
    
    
    115,384Junior subordinated debentures
    
    
    11,639
    
    
    
    15,264Accrued interest payable
    
    
    1,886
    
    
    
    2,324Advances from borrowers for taxes and insurance
    
    
    974
    
    
    
    870Accounts payable and accrued expenses
    
    
    3,238
    
    
    
    2,637Total Liabilities
    
    
    489,760
    
    
    
    490,187Commitments and contingencies (see Note 13)
    
    
    
    
    
    
    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 September 30, 2008 and 2007, 2,432,998 shares
    
    
    27
    
    
    
    27Additional paid-in capital
    
    
    12,586
    
    
    
    12,598Employee stock ownership plan
    
    
    (2,872
    )
    
    
    (2,985
    )Treasury stock at cost: 279,558 shares at September 30, 2008 and 2007
    
    
    (4,244
    )
    
    
    (4,244
    )Accumulated other comprehensive loss
    
    
    (2,714
    )
    
    
    (1,223
    )Retained earnings-partially restricted
    
    
    29,513
    
    
    
    30,521Total Stockholders Equity
    
    
    32,296
    
    
    
    34,694Total Liabilities and Stockholders Equity
    
    $
    522,056
    
    
    $
    524,881
 See notes to consolidated financial statements.
 61




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
 Year Ended September 30,2008
    
    
    2007INTEREST INCOME:Interest and fees on loans
    
    $
    17,659
    
    
    $
    20,674Interest and dividends on:Mortgage-related securities
    
    
    6,284
    
    
    
    4,989Investment securities:Taxable
    
    
    1,560
    
    
    
    1,394Tax-exempt
    
    
    168
    
    
    
    386Dividends
    
    
    258
    
    
    
    405Interest-bearing deposits
    
    
    448
    
    
    
    533Total interest income
    
    
    26,377
    
    
    
    28,381INTEREST EXPENSE:Interest on:Deposits
    
    
    9,186
    
    
    
    11,208FHLBank advances and other borrowings
    
    
    5,419
    
    
    
    5,189Junior subordinated debentures
    
    
    1,371
    
    
    
    1,828Total interest expense
    
    
    15,976
    
    
    
    18,225Net interest income
    
    
    10,401
    
    
    
    10,156Provision for loan losses
    
    
    296
    
    
    
    375Net interest income after provision for loan losses
    
    
    10,105
    
    
    
    9,781NON-INTEREST INCOME:Service charges and other fees
    
    
    1,642
    
    
    
    1,661Net gain (loss) on:Investments and mortgage-related securities
    
    
    (1,920
    )
    
    
    120Loans held for sale
    
    
    9
    
    
    
    163Real estate owned
    
    
    
    
    
    
    71Increase in cash surrender value of life insurance
    
    
    707
    
    
    
    610Other income
    
    
    485
    
    
    
    388Total non-interest income
    
    
    923
    
    
    
    3,013NON-INTEREST EXPENSE:Salaries and employee benefits
    
    
    5,823
    
    
    
    5,865Occupancy and equipment
    
    
    1,617
    
    
    
    1,623Professional fees
    
    
    1,243
    
    
    
    1,447Federal deposit insurance premium
    
    
    201
    
    
    
    220Operations of real estate owned
    
    
    1
    
    
    
    72Data processing
    
    
    572
    
    
    
    564Advertising
    
    
    395
    
    
    
    440Deposit processing
    
    
    591
    
    
    
    589Other
    
    
    1,864
    
    
    
    1,729Total non-interest expense
    
    
    12,307
    
    
    
    12,549Income (loss) before income tax benefit
    
    
    (1,279
    )
    
    
    245Income tax benefit
    
    
    (271
    )
    
    
    (220
    )Net income (loss)
    
    $
    (1,008
    )
    
    $
    465Earnings (loss) per common share:Basic
    
    $
    (0.43
    )
    
    $
    0.21Diluted
    
    $
    (0.43
    )
    
    $
    0.21Weighted average shares  basic
    
    
    2,318,166
    
    
    
    2,228,400Weighted average shares  diluted
    
    
    2,318,246
    
    
    
    2,241,779Dividends per share
    
    $
    
    
    
    $
    
 See notes to consolidated financial statements.
 62




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Dollars in thousands)
 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
    
    
    $
    28,659Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    465
    
    
    
    465Other comprehensive loss, net of tax benefit:Net unrealized loss on securitiesNet of reclassification adjustment(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (436
    )
    
    
    
    
    
    
    (436
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29ESOP stock committed to be released
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104Excess of fair value above cost of ESOP
shares committed to be released
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38Exercise of stock options
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    62Share-based compensation
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33Release of treasury shares for equity offering
    
    
    
    
    
    
    (431
    )
    
    
    
    
    
    
    6,200
    
    
    
    
    
    
    
    
    
    
    
    5,769Balance at September 30, 2007
    
    $
    27
    
    
    $
    12,598
    
    
    $
    (2,985
    )
    
    $
    (4,244
    )
    
    $
    (1,223
    )
    
    $
    30,521
    
    
    $
    34,694Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,008
    )
    
    
    (1,008
    )Other comprehensive loss, net of tax benefit:Net unrealized loss on securitiesNet of reclassification adjustment(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,491
    )
    
    
    
    
    
    
    (1,491
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,499
    )ESOP stock committed to be released
    
    
    
    
    
    
    
    
    
    
    113
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113Excess of fair value below cost of ESOP
shares committed to be released
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Balance at September 30, 2008
    
    $
    27
    
    
    $
    12,586
    
    
    $
    (2,872
    )
    
    $
    (4,244
    )
    
    $
    (2,714
    )
    
    $
    29,513
    
    
    $
    32,296
 
 (1)
    
    Components of other comprehensive loss: 2008
    
    
    2007Change in net unrealized loss on investment securities available for sale
    
    $
    (2,758
    )
    
    $
    (357
    )Realized loss (gain) included in net income (loss) net of tax (benefit)
expense of $(653) and $41, respectively
    
    
    1,267
    
    
    
    (79
    )Net unrealized loss on securities
    
    $
    (1,491
    )
    
    $
    (436
    )
 See notes to consolidated financial statements.
 63




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 Year Ended September 30,2008
    
    
    2007OPERATING ACTIVITIES:Net income (loss)
    
    $
    (1,008
    )
    
    $
    465Adjustments to reconcile net income (loss) to net cash provided by operating activities:Provision for depreciation and amortization
    
    
    569
    
    
    
    557Amortization of premiums and discounts
    
    
    44
    
    
    
    159Increase in cash surrender value of life insurance
    
    
    (707
    )
    
    
    (610
    )(Gain) loss on sales of:Loans held for sale
    
    
    (9
    )
    
    
    (163
    )Investment securities available for sale
    
    
    15
    
    
    
    (120
    )Real estate owned
    
    
    
    
    
    
    (71
    )Other-than-temporary impairment of investment securities
    
    
    1,905
    
    
    
    Provision for loan losses
    
    
    296
    
    
    
    375Amortization of ESOP
    
    
    101
    
    
    
    142Deferred income taxes
    
    
    (337
    )
    
    
    (215
    )Share-based compensation
    
    
    
    
    
    
    33Changes in assets and liabilities which provided (used) cash:Origination of loans held for sale
    
    
    (1,444
    )
    
    
    (271
    )Loans sold in the secondary market
    
    
    1,453
    
    
    
    1,605Accrued interest receivable
    
    
    250
    
    
    
    (35
    )Prepaid expenses and other assets
    
    
    (196
    )
    
    
    3,240Accrued interest payable
    
    
    (438
    )
    
    
    160Accrued expenses
    
    
    601
    
    
    
    (1,590
    )Net cash provided by operating activities
    
    
    1,095
    
    
    
    3,661INVESTING ACTIVITIES:Loans originated
    
    
    (80,223
    )
    
    
    (91,913
    )Purchases of:Investment securities available for sale
    
    
    (5,119
    )
    
    
    (6,005
    )Mortgage-related securities available for sale
    
    
    (41,625
    )
    
    
    (21,913
    )Redemption of FHLBank stock
    
    
    2,726
    
    
    
    3,056Purchase of FHLBank stock
    
    
    (3,383
    )
    
    
    (3,161
    )Proceeds from sales of investment and mortgage-related securities available for sale
    
    
    556
    
    
    
    7,912Proceeds from sales of real estate owned
    
    
    
    
    
    
    2,521Return of investment in First Keystone Capital Trust II
    
    
    63
    
    
    
    189Principal collected on loans
    
    
    86,313
    
    
    
    122,505Proceeds from maturities, calls or repayments of:Investment securities available for sale
    
    
    3,142
    
    
    
    1,218Mortgage-related securities available for sale
    
    
    17,750
    
    
    
    13,101Mortgage-related securities held to maturity
    
    
    5,875
    
    
    
    6,969Purchase of property and equipment
    
    
    (193
    )
    
    
    (676
    )Net cash provided by (used in) investing activities
    
    
    (14,118
    )
    
    
    33,803FINANCING ACTIVITIES:Net decrease in deposit accounts
    
    
    (22,844
    )
    
    
    (5,108
    )FHLBank advances and other borrowings  repayments
    
    
    (120,611
    )
    
    
    (95,157
    )FHLBank advances and other borrowings  draws
    
    
    146,386
    
    
    
    103,300Net increase in advances from borrowers for taxes and insurance
    
    
    104
    
    
    
    4Proceeds from exercise of stock options
    
    
    
    
    
    
    62Net proceeds from equity offering
    
    
    
    
    
    
    5,769Purchase of trust preferred securities
    
    
    (1,565
    )
    
    
    Retirement of junior subordinated debentures
    
    
    (2,062
    )
    
    
    (6,186
    )Net cash provided by financing activities
    
    
    592
    
    
    
    2,684Increase (decrease) in cash and cash equivalents
    
    
    (13,615
    )
    
    
    40,148Cash and cash equivalents at beginning of year
    
    
    52,935
    
    
    
    12,787Cash and cash equivalents at end of year
    
    $
    39,320
    
    
    $
    52,935SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:Cash payments for interest on deposits and borrowings
    
    $
    16,414
    
    
    $
    18,065Cash payments of income taxes
    
    
    200
    
    
    
    Transfers of loans receivable into real estate owned
    
    
    
    
    
    
    2,700
 See notes to consolidated financial statements.
 64




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 1. Nature of Operations and Organization Structure
   2. Summary of Significant Accounting Policies
 Principles of Consolidation
    Segment Accounting
 Disclosure about Segments of an Enterprise and Related Information
 Use of Estimates in the Preparation of Financial Statements
  Securities Held to Maturity and Securities Available for Sale
  65




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 Other-Than-Temporary Impairment of Securities
  Allowance for Loan Losses
    66




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 Mortgage Banking Activities
    Transfers of Financial Assets
  Income Recognition on Loans
  Real Estate Owned
  Office Properties and Equipment
  67




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 Cash Surrender Value of Life Insurance
  Interest Rate Risk
  Earnings Per Share
  Year Ended September 30,2008
    
    2007Average common shares outstanding
    
    
    2,318,166
    
    
    
    2,228,400Increase in shares due to dilutive options
    
    
    80
    
    
    
    13,379Adjusted shares outstanding  diluted
    
    
    2,318,246
    
    
    
    2,241,779
  Income Taxes
  Accounting for Stock Options
 Share-Based Payment Accounting for Stock Issued to Employees
 68




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 Other Comprehensive Income (Loss)
  Accounting for Derivative Instruments
 Amendment of Statement No.133 on
Derivative Instruments and Hedging Activities, Accounting for Derivative Instruments and Hedging Activities,
 69




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 Statement of Cash Flows
  Recent Accounting Pronouncements
     70




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
       71




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
   Reclassifications
  72




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 3. Investment Securities
  September 30, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:U.S. Government bondsOver 10 years
    
    $
    2,965
    
    
    $
    7
    
    
    $
    
    
    
    $
    2,972Municipal obligations5 to 10 years
    
    
    2,901
    
    
    
    55
    
    
    
    (22
    )
    
    
    2,934Over 10 years
    
    
    997
    
    
    
    52
    
    
    
    
    
    
    
    1,049Corporate bondsLess the 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
    )
    
    $
    26,545Held to Maturity:Municipal obligations1 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
    )
  73




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
   September 30, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    ApproximateCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAvailable for Sale:U.S. Government bonds1 to 5 years
    
    $
    2,000
    
    
    $
    
    
    
    $
    
    
    
    $
    2,000Over 10 years
    
    
    3,950
    
    
    
    10
    
    
    
    (9
    )
    
    
    3,951Municipal obligations5 to 10 years
    
    
    1,130
    
    
    
    
    
    
    
    (14
    )
    
    
    1,116Corporate bonds1 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 obligations5 to 10 years
    
    $
    3,256
    
    
    $
    10
    
    
    $
    
    
    
    $
    3,266
  Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalApproximate
    
    
    Unrealized
    
    
    Approximate
    
    
    Unrealized
    
    
    Approximate
    
    
    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 obligations
    
    
    
    
    
    
    
    
    
    
    986
    
    
    
    (14
    )
    
    
    986
    
    
    
    (14
    )Mutual funds
    
    
    
    
    
    
    
    
    
    
    9,374
    
    
    
    (322
    )
    
    
    9,374
    
    
    
    (322
    )Other equity investments
    
    
    327
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    327
    
    
    
    (8
    )Total
    
    $
    3,281
    
    
    $
    (17
    )
    
    $
    13,780
    
    
    $
    (938
    )
    
    $
    17,061
    
    
    $
    (955
    )
 74




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
  4. Mortgage-Related Securities
  September 30, 2008Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    ApproximateAmortized Cost
    
    
    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
  Loss Position
    
    
    Loss PositionLess than 12 Months
    
    
    12 Months or Longer
    
    
    TotalApproximate
    
    
    Unrealized
    
    
    Approximate
    
    
    Unrealized
    
    
    Approximate
    
    
    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
    )
  75




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
  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
    
    
    TotalApproximate
    
    
    Unrealized
    
    
    Approximate
    
    
    Unrealized
    
    
    Approximate
    
    
    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
    )
    76




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 5. Accrued Interest Receivable
  September 30,2008
    
    
    2007Loans
    
    $
    1,415
    
    
    $
    1,701Mortgage-related securities
    
    
    535
    
    
    
    450Investment securities
    
    
    502
    
    
    
    551Total
    
    $
    2,452
    
    
    $
    2,702
 6. Loans Receivable
  September 30,2008
    
    
    2007Single-family
    
    $
    145,626
    
    
    $
    139,888Construction and land
    
    
    27,493
    
    
    
    23,501Multi-family and commercial
    
    
    54,419
    
    
    
    60,026Home equity and lines of credit
    
    
    55,246
    
    
    
    57,808Consumer loans
    
    
    1,330
    
    
    
    1,204Commercial loans
    
    
    15,955
    
    
    
    19,044Total loans
    
    
    300,069
    
    
    
    301,471Loans in process
    
    
    (10,802
    )
    
    
    (6,008
    )Allowance for loan losses
    
    
    (3,453
    )
    
    
    (3,322
    )Deferred loan costs
    
    
    292
    
    
    
    277Loans receivable net
    
    $
    286,106
    
    
    $
    292,418
     77




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
  Fixed-RateTerm to Maturity
    
    Book Value1 month to 1 year
    
    $
    7,3241 year to 3 years
    
    
    13,2323 years to 5 years
    
    
    9,7755 years to 10 years
    
    
    86,347Over 10 years
    
    
    167,798Total
    
    $
    284,476
 Adjustable-RateTerm to Rate Adjustment
    
    Book Value1 month to 1 year
    
    $
    75,3951 year to 3 years
    
    
    39,0093 years to 5 years
    
    
    23,0825 years to 10 years
    
    
    6,443Total
    
    $
    143,929
  2008
    
    
    2007Beginning balance
    
    $
    3,322
    
    
    $
    3,367Provisions charged to income
    
    
    296
    
    
    
    375Charge-offs
    
    
    (245
    )
    
    
    (470
    )Recoveries
    
    
    80
    
    
    
    50Total
    
    $
    3,453
    
    
    $
    3,322
   September 30,2008
    
    
    2007Impaired loans with related allowance for loan losses
under SFAS No. 114
    
    $
    817
    
    
    $
    1,148Impaired loans with no related allowance for loan losses
under SFAS No. 114
    
    
    
    
    
    
    25Total impaired loans
    
    $
    817
    
    
    $
    1,173Valuation allowance related to impaired loans
    
    $
    370
    
    
    $
    271
 78




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
  7. Office Properties and Equipment
  September 30,2008
    
    
    2007Land and buildings
    
    $
    7,908
    
    
    $
    7,875Furniture, fixtures and equipment
    
    
    4,051
    
    
    
    3,965Total
    
    
    11,959
    
    
    
    11,840Accumulated depreciation and amortization
    
    
    (7,573
    )
    
    
    (7,078
    )Net
    
    $
    4,386
    
    
    $
    4,762
  September 30,2009
    
    $
    3432010
    
    
    3162011
    
    
    1432012
    
    
    1492013
    
    
    153Thereafter
    
    
    950Total minimum future rental payments
    
    $
    2,054
   8. Deposits
  September 30,2008
    
    
    2007Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentNon-interest-bearing
    
    $
    20,101
    
    
    
    6.0
    %
    
    $
    18,404
    
    
    
    5.2
    %NOW
    
    
    70,344
    
    
    
    21.3
    
    
    
    75,194
    
    
    
    21.2Passbook
    
    
    34,796
    
    
    
    10.5
    
    
    
    37,369
    
    
    
    10.6Money market
    
    
    43,572
    
    
    
    13.2
    
    
    
    34,252
    
    
    
    9.7Certificates of deposit
    
    
    162,051
    
    
    
    49.0
    
    
    
    188,489
    
    
    
    53.3Total
    
    $
    330,864
    
    
    
    100.0
    %
    
    $
    353,708
    
    
    
    100.0
    %
  79




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
    September 30,2008
    
    
    2007Within one year
    
    $
    126,694
    
    
    $
    164,200One to two years
    
    
    19,774
    
    
    
    15,729Two to three years
    
    
    3,570
    
    
    
    4,213Thereafter
    
    
    12,013
    
    
    
    4,347Total
    
    $
    162,051
    
    
    $
    188,489
  Year Ended September 30,2008
    
    
    2007NOW
    
    $
    692
    
    
    $
    1,016Passbook
    
    
    340
    
    
    
    365Money market
    
    
    961
    
    
    
    1,082Certificates of deposit
    
    
    7,193
    
    
    
    8,745Total
    
    $
    9,186
    
    
    $
    11,208
 9. Advances from FHLBank and Other Borrowings
   September 30,2008
    
    
    2007FHLB overnight borrowings
    
    $
    29,900
    
    
    $
    29,000Repurchase agreements
    
    
    3,585
    
    
    
    Total short-term borrowings
    
    $
    33,485
    
    
    $
    29,000
  September 30,2008
    
    2007Balance at year-end
    
    $
    33,485
    
    
    $
    29,000Maximum amount outstanding at any month-end
    
    
    33,485
    
    
    
    30,300Average balance outstanding during the year
    
    
    2,427
    
    
    
    6,839Weighted-average interest rate:As of year-end
    
    
    2.06
    %
    
    
    5.34
    %Paid during the year
    
    
    2.51
    %
    
    
    5.11
    %
 80




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
   September 30,2008
    
    
    2007Within one year
    
    $
    5,009
    
    
    $
    5,672Over one year through five years
    
    
    91,554
    
    
    
    80,589Over five years through ten years
    
    
    11,111
    
    
    
    123Over 10 years
    
    
    
    
    
    
    $
    107,674
    
    
    $
    86,384
  WeightedMaturity range
    
    
    average
    
    
    Stated interest rate
    
    
    September 30,Description
    
    from
    
    
    to
    
    
    interest rate
    
    
    from
    
    
    to
    
    
    2008
    
    
    2007Fixed
    
    
    12/29/15
    
    
    
    12/29/15
    
    
    
    6.43
    %
    
    
    6.43
    %
    
    
    6.43
    %
    
    $
    174
    
    
    $
    384Convertible
    
    
    12/18/08
    
    
    
    2/26/18
    
    
    
    4.94
    %
    
    
    2.98
    %
    
    
    6.10
    %
    
    
    107,500
    
    
    
    86,000$
    107,674
    
    
    $
    86,384
 .
  10. Income Taxes
    Year Ended September 30,2008
    
    
    2007Federal:Current
    
    $
    63
    
    
    $
    (5
    )Deferred
    
    
    (338
    )
    
    
    (215
    )State
    
    
    4
    
    
    
    Total
    
    $
    (271
    )
    
    $
    (220
    )
 81




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
  September 30,2008
    
    
    2007Deferred tax assets:Accelerated depreciation
    
    $
    436
    
    
    $
    406Allowance for loan losses
    
    
    1,174
    
    
    
    1,129Unrealized loss on available for sale securities
    
    
    1,399
    
    
    
    630Other-than-temporary impairments
    
    
    647
    
    
    
    Net operating loss carryforwards
    
    
    523
    
    
    
    619Alternative minimum tax credits
    
    
    366
    
    
    
    182Accrued expenses
    
    
    668
    
    
    
    627Total gross deferred tax assets
    
    
    5,213
    
    
    $
    3,593Valuation allowance
    
    
    (498
    )
    
    
    Total net deferred tax assets
    
    $
    4,715
    
    
    $
    3,593Deferred tax liabilities:Deferred loan fees
    
    $
    (314
    )
    
    $
    (311
    )Other
    
    
    (78
    )
    
    
    (66
    )Total gross deferred tax liabilities
    
    
    (392
    )
    
    
    (377
    )Net deferred tax assets
    
    $
    4,323
    
    
    $
    3,216
    Year Ended September 30,2008
    
    
    2007Percentage
    
    
    
    
    
    
    Percentageof Pretax
    
    
    
    
    
    
    of PretaxAmount
    
    
    Income
    
    
    Amount
    
    
    IncomeTax at statutory rate
    
    $
    (435
    )
    
    
    (34.0
    )%
    
    $
    83
    
    
    
    34.0
    %Increase (decrease) in taxes resulting from:Valuation allowance
    
    
    498
    
    
    
    39.0
    
    
    
    
    
    
    
    Tax exempt interest, net
    
    
    (50
    )
    
    
    (3.9
    )
    
    
    (119
    )
    
    
    (48.6
    )Increase in cash surrender value
    
    
    (241
    )
    
    
    (18.9
    )
    
    
    (193
    )
    
    
    (78.8
    )Dividend received deduction
    
    
    (6
    )
    
    
    (0.5
    )
    
    
    (7
    )
    
    
    (2.9
    )Other
    
    
    (37
    )
    
    
    (2.9
    )
    
    
    16
    
    
    
    6.5Total
    
    $
    (271
    )
    
    
    (21.2
    )%
    
    $
    (220
    )
    
    
    (89.8)
    %
 82




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 Accounting for Uncertainty in Income Taxes
 11. Regulatory Capital Requirements
    Required for
    
    Well CapitalizedCapital Adequacy
    
    Under PromptActual
    
    Purpose
    
    Corrective ActionAmount
    
    Percentage
    
    Amount
    
    Percentage
    
    Amount
    
    PercentageAt 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
    
    
    
    25,247
    
    
    
    8.0
    
    
    
    31,559
    
    
    
    10.0Tangible Capital (to Tangible Assets)
    
    
    44,167
    
    
    
    8.45
    
    
    
    7,841
    
    
    
    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
  83




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
   At September 30,2008
    
    
    2007Total equity capital
    
    $
    41,577
    
    
    $
    48,161Accumulated other comprehensive loss
    
    
    2,657
    
    
    
    1,046Tier 1 and core capital
    
    
    44,234
    
    
    
    49,207Less: Disallowed servicing rights
    
    
    (67
    )
    
    
    (81
    )Tangible capital
    
    
    44,167
    
    
    
    49,126Tier 1 and core capital
    
    
    44,234
    
    
    
    49,207Allowance for loan and lease losses
    
    
    3,083
    
    
    
    3,322Unrealized gains on equity securities
    
    
    5
    
    
    
    Total risk-based capital
    
    $
    47,322
    
    
    $
    52,529
   84




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 12. Employee Benefits
 4 01(k) Profit Sharing Plan
  Employee Stock Ownership Plan
 Employers Accounting for Employee Stock Ownership Plans
 Recognition and Retention Plan
  Stock Option Plans
  85




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
  Weighted AverageNumber of
    
    
    Exercise
    
    
    Exercise Price perOption Shares
    
    
    Price Range
    
    
    shareOutstanding at October 1, 2006
    
    
    61,447
    
    
    $
    10.13  21.89
    
    
    $
    13.17Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (5,070
    )
    
    
    10.13  14.25
    
    
    
    12.25Cancelled
    
    
    (1,694
    )
    
    
    19.75  21.89
    
    
    
    20.06Forfeited
    
    
    (3,727
    )
    
    
    14.25  21.89
    
    
    
    15.12Outstanding at September 30, 2007
    
    
    50,956
    
    
    $
    10.13  16.15
    
    
    $
    12.89Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (8,390
    )
    
    
    10.13  12.88
    
    
    
    12.29Outstanding at September 30, 2008
    
    
    42,566
    
    
    $
    10.13  16.15
    
    
    $
    13.00
  Weighted Average
    
    
    WeightedNumber of
    
    
    Exercise Price
    
    
    Remaining
    
    
    Average ExerciseOption Shares
    
    
    Range
    
    
    Contractual Life
    
    
    Price per Share2,500
    
    
    $
    10.00  12.00
    
    
    
    1.99
    
    
    $
    10.1328,600
    
    
    
    12.00  14.00
    
    
    
    0.99
    
    
    
    12.132,866
    
    
    
    14.00  16.00
    
    
    
    3.98
    
    
    
    14.848,600
    
    
    
    16.00  18.00
    
    
    
    3.93
    
    
    
    16.1542,566
    
    
    $
    10.13  16.15
    
    
    
    1.84
    
    
    $
    13.00
  Supplemental Retirement Benefits
     86




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 13. Commitments and Contingencies
  September 30,2008
    
    
    2007Fixed-rate (ranging from 5.88% to 7.50%)
    
    $
    1,030
    
    
    $
    1,275Adjustable-rate
    
    
    1,747
    
    
    
    664Total
    
    $
    2,777
    
    
    $
    1,939
     14. Related Party Transactions
   15. Fair Value of Financial Instruments
  87




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 September 30,2008
    
    2007Carrying/
    
    Estimated
    
    Carrying/
    
    EstimatedNotional
    
    Fair
    
    Notional
    
    FairAmount
    
    Value
    
    Amount
    
    ValueAssets:Cash and cash equivalents
    
    $
    39,320
    
    
    $
    39,320
    
    
    $
    52,935
    
    
    $
    52,935Investment securities
    
    
    29,800
    
    
    
    29,816
    
    
    
    32,540
    
    
    
    32,550Loans
    
    
    286,106
    
    
    
    288,993
    
    
    
    292,418
    
    
    
    283,255Mortgage-related securities
    
    
    128,336
    
    
    
    128,181
    
    
    
    110,472
    
    
    
    109,689FHLB stock
    
    
    6,995
    
    
    
    6,995
    
    
    
    6,338
    
    
    
    6,338Liabilities:Passbook deposits
    
    
    34,796
    
    
    
    34,796
    
    
    
    37,369
    
    
    
    37,369NOW and money market deposits
    
    
    113,916
    
    
    
    113,916
    
    
    
    127,850
    
    
    
    127,850Certificates of deposit
    
    
    162,051
    
    
    
    163,076
    
    
    
    188,489
    
    
    
    188,880Borrowings
    
    
    141,159
    
    
    
    144,864
    
    
    
    115,384
    
    
    
    117,974
     88




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 16. Capital Securities
     89




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 17. Parent Company Only Financial Information
  Condensed Statements of Financial Condition
 September 30,2008
    
    
    2007Assets:Interest-bearing deposits
    
    $
    1,222
    
    
    $
    541Investment securities available for sale
    
    
    953
    
    
    
    1,092Investment in subsidiaries
    
    
    42,433
    
    
    
    49,048Other assets
    
    
    138
    
    
    
    146Total assets
    
    $
    44,746
    
    
    $
    50,827Liabilities and Stockholders Equity:Junior subordinated debentures
    
    $
    11,639
    
    
    $
    15,264Other liabilities
    
    
    811
    
    
    
    869Total liabilities
    
    
    12,450
    
    
    
    16,133Stockholders equity
    
    
    32,296
    
    
    
    34,694Total liabilities and stockholders equity
    
    $
    44,746
    
    
    $
    50,827
 Condensed Statements of Operations
 Year Ended September 30,2008
    
    
    2007Interest and dividend income:Dividends from subsidiary
    
    $
    4,903
    
    
    $
    12Loans to ESOP
    
    
    217
    
    
    
    226Interest and dividends on investments
    
    
    36
    
    
    
    208Interest on deposits
    
    
    17
    
    
    
    17Total interest and dividend income
    
    
    5,173
    
    
    
    463Interest on debt and other borrowed money
    
    
    1,371
    
    
    
    1,828Other income
    
    
    67
    
    
    
    7Operating expenses
    
    
    96
    
    
    
    189Equity in earnings of subsidiaries
    
    
    (5,153
    )
    
    
    1,497(Loss) income before income tax benefit
    
    
    (1,380
    )
    
    
    (50
    )Income tax benefit
    
    
    372
    
    
    
    515Net income (loss)
    
    $
    (1,008
    )
    
    $
    465
 90




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 Condensed Statements of Cash Flows
 Year Ended September 30,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (1,008
    )
    
    $
    465Adjustment to reconcile net income (loss) to cash used in operations:Equity in earnings of subsidiaries
    
    
    5,153
    
    
    
    (1,497
    )Shared-based compensation
    
    
    
    
    
    
    33Amortization of ESOP
    
    
    101
    
    
    
    142Gain on sales of investment securities available for sale
    
    
    (57
    )
    
    
    Amortization (accretion) of premiums and discounts
    
    
    2
    
    
    
    (33
    )Decrease in other assets
    
    
    55
    
    
    
    131Increase in other liabilities
    
    
    (58
    )
    
    
    (336
    )Net cash used in operating activities
    
    
    4,188
    
    
    
    (1,095
    )Cash flows from investing activities:Return of investment in First Keystone Capital Trust II
    
    
    63
    
    
    
    189Proceeds from sale of investments available for sale
    
    
    57
    
    
    
    Net cash provided by (used in) investing activities
    
    
    120
    
    
    
    189Cash flows from financing activities:Net proceeds from equity offering
    
    
    
    
    
    
    5,769Purchase of trust preferred securities
    
    
    (1,565
    )
    
    
    Retirement of junior subordinated debentures
    
    
    (2,062
    )
    
    
    (6,186
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    62Net cash used in financing activities
    
    
    (3,627
    )
    
    
    (355
    )(Decrease) increase in cash
    
    
    681
    
    
    
    (1,261
    )Cash at beginning of year
    
    
    541
    
    
    
    1,802Cash at end of year
    
    $
    1,222
    
    
    $
    541
 91




---



##### 



FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except per share data)
 18. Quarterly Financial Data (Unaudited)
  2008
    
    
    20071st
    
    
    2nd
    
    
    3rd
    
    
    4th
    
    
    1st
    
    
    2nd
    
    
    3rd
    
    
    4thQTR
    
    
    QTR
    
    
    QTR
    
    
    QTR
    
    
    QTR
    
    
    QTR
    
    
    QTR
    
    
    QTRInterest income
    
    $
    6,736
    
    
    $
    6,662
    
    
    $
    6,529
    
    
    $
    6,450
    
    
    $
    7,173
    
    
    $
    7,198
    
    
    $
    7,045
    
    
    $
    6,967Interest expense
    
    
    4,270
    
    
    
    4,162
    
    
    
    3,931
    
    
    
    3,612
    
    
    
    4,711
    
    
    
    4,579
    
    
    
    4,540
    
    
    
    4,396Net interest income
    
    
    2,466
    
    
    
    2,500
    
    
    
    2,598
    
    
    
    2,838
    
    
    
    2,462
    
    
    
    2,619
    
    
    
    2,505
    
    
    
    2,571Provision for loan
losses
    
    
    42
    
    
    
    14
    
    
    
    
    
    
    
    240
    
    
    
    75
    
    
    
    100
    
    
    
    100
    
    
    
    100Net interest income
after provision
for loan
losses
    
    
    2,424
    
    
    
    2,486
    
    
    
    2,598
    
    
    
    2,598
    
    
    
    2,387
    
    
    
    2,519
    
    
    
    2,405
    
    
    
    2,471Non-interest income
    
    
    762
    
    
    
    708
    
    
    
    703
    
    
    
    (1,250
    )
    
    
    747
    
    
    
    853
    
    
    
    726
    
    
    
    687Non-interest expense
    
    
    2,941
    
    
    
    2,982
    
    
    
    3,037
    
    
    
    3,347
    
    
    
    3,137
    
    
    
    3,253
    
    
    
    3,046
    
    
    
    3,113Income (loss)
before income tax
expense (benefit)
    
    
    245
    
    
    
    212
    
    
    
    264
    
    
    
    (1,999
    )
    
    
    (3
    )
    
    
    119
    
    
    
    85
    
    
    
    45Income tax expense
(benefit)
    
    
    13
    
    
    
    5
    
    
    
    21
    
    
    
    (309
    )
    
    
    (91
    )
    
    
    (48
    )
    
    
    (30
    )
    
    
    (50
    )Net income
    
    $
    232
    
    
    $
    207
    
    
    $
    243
    
    
    $
    (1,690
    )
    
    $
    88
    
    
    $
    167
    
    
    $
    115
    
    
    $
    95Per Share:Earnings (loss)
per share 
basic
    
    $
    0.10
    
    
    $
    0.09
    
    
    $
    0.10
    
    
    $
    (0.73
    )
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.04Earnings (loss)
per share 
diluted
    
    $
    0.10
    
    
    $
    0.09
    
    
    $
    0.10
    
    
    $
    (0.73
    )
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.04Dividend per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   92




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures.
  
 Item 9A(T). Controls and Procedures.
 (a)
    
    Under the supervision and with the participation of the Companys management, including
its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the
effectiveness of the design and operation of its disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2008.
Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer
have concluded that these controls and procedures are designed to ensure that the
information required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and regulations and are operating in an effective
manner.(b)
    
    Managements Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The
Companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Companys assets that could have a
material effect on the financial statements.Internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
prepared for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.Under the supervision and with the participation of management, including our principal
executive officer and principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the framework in
Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on our evaluation under the framework in Internal Control 
Integrated Framework, management concluded that our internal control over financial reporting
was effective as of September 30, 2008.This Annual Report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was
not subject to attestation by the Companys registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the Company to provide
only managements report in this Annual Report.(c)
    
    No change in the Companys internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d- 15(f) under the Exchange Act) occurred during the fourth fiscal
quarter of fiscal 2007 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
 
 Item 9B. Other Information.
  93




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PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
   
 Item 11. Executive Compensation.
  
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
 Security Ownership of Certain Beneficial Owners and Management
 Equity Compensation Plan Information.
 Number of Shares to be Issued Upon
    
    
    Weighted Average
    
    
    Number of Shares Remaining Availablethe Exercise of Outstanding Options,
    
    
    Exercise Price of
    
    
    for Future Issuance (Excluding SharesPlan Category
    
    Warrants and Rights
    
    

Outstanding Options
    
    
    Reflected in the First Column)Equity Compensation Plans
Approved by Security
Holders
    
    
    42,566
    (1)
    
    $
    13.00
    (1)
    
    
    29,623Equity Compensation
Plans Not
Approved by Security
Holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    42,566
    
    
    $
    13.00
    
    
    
    29,623
 94




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##### 



Item 13. Certain Relationships, Related Transactions and Director Independence.
  
 Item 14. Principal Accounting Fees and Services.
  95




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##### 



PART IV.
 
 Item 15. Exhibits, Financial Statement Schedules.
  (1)
    
    The following documents are filed as part of this report and are
incorporated herein by reference from Item 8 hereof.Reports of Independent Registered Public Accounting FirmConsolidated Statements of Financial Condition at September 30, 2008 and 2007.Consolidated Statements of Operations for the Years Ended September 30, 2008 and
2007Consolidated Statements of Changes in Stockholders Equity for the Years Ended
September 30, 2008 and 2007Consolidated Statements of Cash Flows for the Years Ended September 30, 2008 and
2007Notes to the Consolidated Financial Statements.(2)
    
    All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because they are not applicable or
the required information is included in the Consolidated Financial Statements or
notes thereto.(3)
    
    The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.
 No
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of First Keystone Financial, Inc. 13.2
    
    Amended and Restated Bylaws of First Keystone Financial, Inc. 14.1
    
    Specimen Stock Certificate of First Keystone Financial, Inc. 24.2
    
    Instrument defining the rights of security holders **10.1
    
    Form of Amended and Restated Severance Agreement between
First Keystone Financial, Inc. and Carol Walsh 3,*10.2
    
    Amended and Restated 1995 Stock Option Plan 3, *10.3
    
    Amended and Restated 1995 Recognition and Retention Plan
and Trust Agreement 3,*10.4
    
    Amended and Restated 1998 Stock Option Plan 3, *10.5
    
    Form of Amended and Restated Severance Agreement between
First Keystone Bank and Carol Walsh 3, *10.6
    
    Amended and Restated First Keystone Bank Supplemental
Executive Retirement Plan 4,*10.7
    
    Amended and Restated Transition, Consulting,
Noncompetition and Retirement Agreement by and between First Keystone
Financial, Inc., First Keystone Bank and Donald S. Guthrie 3,*10.8
    
    Severance and Release Agreement by and among First
Keystone Financial, Inc., First Keystone Bank and Thomas M. Kelly 5,*10.9
    
    Letter dated December 11, 2006 with respect to
appointment to Board 610.10
    
    Form of Registration Rights Agreement 711
    
    Statement re: computation of per share earnings. See
Note 2 to the Consolidated Financial Statements included in Item 8 hereof.23.1
    
    Consent of S.R. Snodgrass, A.C.31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer
 96




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##### 



No
    
    Description32.1
    
    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 to the like-numbered exhibit included
in the Form 8-K filed by the Registrant with the SEC on February 12, 2008.(2)
    
    Incorporated by reference from the Registration Statement on
Form S-1 (Registration No. 33-84824) filed by the Registrant with the SEC on
October 6, 1994, as amended.(3)
    
    Incorporated by reference from Exhibits 10.1, 10.4, 10.6, 10.5,
10.2 and 10.3 respectively, in the Form 8-K filed by the Registrant with the
SEC on December 1, 2008 (File No. 000-25328).(4)
    
    Incorporated by reference from Exhibit 10.1 in the Form 8-K
filed by the Registrant with SEC on July 2, 2007 (File No. 000-25328).(5)
    
    Incorporated by reference from Exhibit 10.1 in the Form 8-K
filed by the Registrant with the SEC on August 19, 2008.(6)
    
    Incorporated by reference from Exhibit 10.1 in the Form 8-K
filed by the Registrant with the SEC on December 20, 2006.(7)
    
    Incorporated by reference from the Form 10-K filed by the
Registrant with the SEC on December 29, 2006(8)
    
    Incorporated by reference from the Form 10-Q for the quarter
ended December 31, 2005 filed by the Registrant with the SEC on February 14,
2006.(*)
    
    Consists of a management contract or compensatory plan(**)
    
    The Company has no instruments defining the rights of holders
of long-term debt where the amount of securities authorized under such
instrument exceeds 10% of the total assets of the Company and its subsidiaries
on a consolidated basis. The Company hereby agrees to furnish a copy of any
such instrument to the SEC upon request.    97




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##### 



SIGNATURES
  First Keystone Financial, Inc.By:
    
    /s/ Donald S. GuthrieDonald S. Guthrie
Chairman of the Board and interim Chief Executive Officer
  /s/ Donald S. Guthrie
    
    December 22, 2008Donald S. GuthrieChairman of the Board and interim Chief Executive Officer/s/ Edmund Jones

Edmund Jones
    
    December 22, 2008Director/s/ Donald G. Hosier, Jr.

Donald G. Hosier, Jr.
    
    December 22, 2008Director/s/ Marshall J. Soss

Marshall J. Soss
    
    December 22, 2008Director/s/ William J. ODonnell

William J. ODonnell
    
    December 22, 2008Director/s/ Bruce C. Hendrixson

Bruce C. Hendrixson
    
    December 22, 2008Director/s/ Jerry A. Naessens

Jerry A. Naessens
    
    December 22, 2008Director/s/ Nedret E. Vidinli

Nedret E. Vidinli
    
    December 22, 2008Director/s/ Hugh J. Garchinsky

Hugh J. Garchinsky
    
    December 22, 2008Senior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 98