Overview

The Company reported net income of $841,000 or $0.28 per share on a diluted basis for fiscal 2008 compared to $3.7 million or $1.22 per share on a diluted basis (including an extraordinary gain of $89,000, net of tax or $.03 per diluted share) for fiscal 2007. Income from continuing operations for the year ended September 30, 2008 was $841,000 ($0.28 per diluted share) compared to $3.6 million ($1.19 per diluted share) for the prior fiscal year. The $2.9 million decrease in fiscal 2008 net income primarily reflects charges of $3.6 million for other-than-temporary impairment ("OTTI") on certain investment securities. Excluding the impairment charges of $3.6 million, net income would have been $4.2 million or $1.37 per share (diluted).

Return on average equity was 1.83% (9.03% excluding the OTTI charges) and 8.13% for fiscal years 2008 and 2007, respectively. Return on average assets was 0.12% (0.57% excluding the OTTI charges) and 0.51% for fiscal 2008 and 2007, respectively. The ratio of other expenses to average assets for fiscal 2008 was 1.77% compared to 1.73% in fiscal 2007.

Total assets of the Company totaled $727.2 million at September 30, 2008, compared to $726.6 million at September 30, 2007. Increases were noted in held to maturity securities, loans receivable, Federal Home Loan Bank stock, office premises and equipment, and other assets, partially offset by decreases in cash and cash equivalents and available for sale securities.

The operating results of the Company depend primarily upon its net interest income, which is the difference between the yield earned on its interest earning assets and the rates paid on its interest bearing liabilities (interest-rate spread) and also the relative amounts of its interest earning assets and interest bearing liabilities. For the fiscal year ended September 30, 2008, the tax-equivalent interest-rate spread increased to 2.14%, as compared to 1.82% in fiscal 2007. The ratio of average interest earning assets to average interest bearing liabilities increased to 108.91% in fiscal 2008, from 108.52% in fiscal 2007. The increase in the spread for fiscal 2008 is attributed to the average rate paid on interest-bearing liabilities decreasing more than the average yield on interest-earning assets. The Company's operating results are also affected to varying degrees by, among other things, service charges and fees, gains and losses on sales of securities and loans, impairment charges on securities, provision for loan losses, other operating income, operating expenses, and income taxes.

Critical Accounting Policies, Judgments and Estimates

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. These policies are contained in Note 1 to the consolidated financial statements.

Our accounting and reporting policies conform with U.S. generally accepted accounting principles and general practices within the financial services industry. Recent accounting pronouncements are contained in Note 1 to the consolidated financial statements. The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurances that actual results will not differ from those estimates. If actual results are different than management's judgments and estimates, the Company's financial results could change, and such change could be material.

Allowance for Loan Losses. The Company considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The

balance in the allowance for loan losses is determined based on management's review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management's assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management's estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.

Valuation of Goodwill. The Company assesses the impairment of goodwill at least annually, and whenever events or significant changes in circumstances indicate that the carrying value may not be recoverable. Factors that the Company considers important in determining whether to perform an impairment review include significant underperformance relative to forecasted operating results and significant negative industry or economic trends. If the Company determines that the carrying value of goodwill may not be recoverable, then the Company will assess impairment based on a projection of undiscounted future cash flows and measure the amount of impairment based on fair value.

Accounting for Stock Options. The Company adopted SFAS No. 123R as of October 1, 2005 and stock based compensation expense is reported in net income. Stock based compensation expense is reported in net income utilizing the fair-value-based method set forth in SFAS No. 123R. The fair value of each option award is estimated at the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in Note 13. Expected volatilities are based on the historical volatility of the Company's stock. The Company uses historical data to estimate option exercise and employee and director terminations within the model, as well as the expected term of options granted, which represents the period of time that options granted are expected to be outstanding. Separate groups of employees and directors that have similar historical exercise behavior are considered separately for valuation purposes. Ranges result from certain groups of employees and directors exhibiting different behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. All of these assumptions may be susceptible to change and would impact earnings in future periods.

Securities. Securities for which the Company has the positive intent and ability to hold to maturity are reported at cost adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Declines in the fair value of individual securities below their amortized cost that are other than temporary result in writedowns of the individual securities to their estimated fair value. Such writedowns are included in earnings as realized losses. For a discussion on the determination of an other than temporary decline, please refer to Note 1 of the consolidated financial statements. The Company recognized other than temporary writedowns of $3.6 million in fiscal 2008. There were no writedowns in fiscal 2007.

Liquidity and Capital Resources

The Company has no operating business other than that of the Bank. The Company's principal liquidity needs are for the payment of dividends and the payment of interest on its outstanding subordinated debt. The Company's principal sources of liquidity are earnings on its investment securities portfolio and dividends received from the Bank. The Bank is subject to various regulatory restrictions on the payment of dividends. At September 30, 2008, the Bank could pay approximately $1.9 million in dividends to the Company without prior approval from regulators.

The Bank's primary sources of funds have historically consisted of deposits, amortization and prepayments of outstanding loans and mortgage-backed securities, borrowings from the FHLB of Pittsburgh and other sources, including repurchase agreements and sales of investments. During fiscal 2008, the Bank used its capital resources primarily to meet its ongoing commitments to fund maturing savings certificates and savings withdrawals, fund existing and continuing loan commitments, and to maintain its liquidity. At September 30, 2008 the total of approved loan commitments amounted to $5.4 million and the Company had $11.3 million of undisbursed loan funds. Unfunded commitments under lines and letters of credit amounted to $64.7 million at September 30, 2008. The amount of savings certificates which are scheduled to mature in the twelve-month period ended September 30, 2009 is $142.3 million. Management believes that, by evaluation of competitive instruments and pricing in its market area, it can, in most circumstances, manage and control maturing deposits so that a substantial amount of such deposits are redeposited in the Company.

Off-Balance Sheet Arrangements

The Company is also party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. The Company is not party to any off-balance sheet arrangements that are reasonably likely to have a material current or future effect on the Company's financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or resources.

Capital

At September 30, 2008, the Company had capital in excess of all applicable regulatory capital requirements. At September 30, 2008, the ratio of the Company's Tier 1 capital to average assets was 7.16%. The Company's ratio of Tier 1 capital to risk-weighted assets was 10.63% and its ratio of total capital to risk-weighted assets was 11.33%.

The Bank currently exceeds all regulatory capital requirements, having a leverage ratio of Tier 1 capital to total average assets of 6.52%, a ratio of Tier 1 capital to risk-weighted assets of 9.68%, and a ratio of qualifying total capital to risk-weighted assets and off-balance sheet items of 10.38% at September 30, 2008. As a result, management does not anticipate regulatory capital requirements will have a material impact on operations.

Financial Condition

The Company's assets were $727.2 million at September 30, 2008, an increase of $633,000 or 0.09% from assets at September 30, 2007. Increases were noted in held to maturity securities, loans receivable, Federal Home Loan Bank stock, office premises and equipment, and other assets, partially offset by decreases in cash and cash equivalents and available for sale securities.

Loan Portfolio

Net loans receivable increased $1.9 million or 0.4% to $460.8 million at September 30, 2008 from $458.9 million at September 30, 2007. Loans originated totaled $163.0 million in fiscal 2008, including amounts disbursed under lines of credit, versus $147.0 million in fiscal 2007. Mortgage loans originated amounted to $68.2 million, including $12.5 million originated for sale, compared to $74.7 million, including $8.3 million originated for sale, in fiscal 2008 and 2007, respectively. The Bank did not purchase any mortgage loans in fiscal 2008 or fiscal 2007. The decrease in the level of mortgage loan originations in fiscal 2008 primarily reflects a decrease in customer demand for this product in the Bank's market area. The origination of adjustable rate mortgages (ARM's) increased to $15.6 million in fiscal 2008 from $14.3 million in fiscal 2007. During fiscal 2008, the Bank continued to emphasize ARM's, since they would perform better in a rising rate environment. Primarily for asset/liability management purposes, the Company initiated a program in fiscal 2001 in which a portion of the fixed rate, single-family mortgage loans originated were sold. Gains of $143,000 were realized on these sales in fiscal 2008. Principal repayments on outstanding mortgage loans increased to $58.7 million in fiscal 2008 as compared to $51.2 million in fiscal 2007. The combination of the above factors resulted in an overall decrease in mortgage loans receivable to $335.2 million at September 30, 2008 from $339.1 million at September 30, 2007.

Other loan originations, including installment loans, commercial business loans, and disbursements under lines of credit totaled $94.8 million in fiscal 2008 versus $72.3 million in fiscal 2007. During fiscal 2008, the Bank continued to emphasize other loans, particularly home equity loans, home equity lines of credit, and commercial business loans, since they generally have shorter terms than mortgage loans and would perform better in a rising rate environment. Installment loan originations and consumer lines of credit disbursements were $22.8 million in fiscal 2008 compared to $22.3 million in fiscal 2007. Commercial business loan originations and business line of credit disbursements were $72.0 million in fiscal 2008 compared to $50.0 million in fiscal 2007. Principal repayments on other loans were $91.2 million in fiscal 2008 compared to $67.2 million in 2007. The net result of the above factors caused the balance of installment loans to decrease to $94.7 million at September 30, 2008, as compared to $95.6 million at September 30, 2007. Commercial business loans and leases were $45.5 million at September 30, 2008 versus $41.0 million at September 30, 2007.

Non-Performing Assets

The following table sets forth information regarding non-accrual loans and foreclosed real estate at the dates indicated. The table does not include $653,000 and $150,000 in loans at September 30, 2008 and 2007, respectively, that were more than 90 days past maturity but were otherwise performing in accordance with their terms. These loans represent commercial business lines of credit, which have reached their maturity dates and are in the process of renewing. The Bank did not have any loans, which were classified as troubled debt restructurings at the dates presented.

                                                                     September 30,
                                                                 2008             2007
                                                                (Dollars in Thousands)
Non-accrual residential real estate loans (one-to-four
family)                                                      $        701     $        831
Non-accrual construction, multi-family residential and
commercial real estate loans                                        2,993            5,628
Non-accrual installment loans                                         676              340
Non-accrual commercial business and lease loans                     1,357            1,947

Total non-performing loans                                   $      5,727     $      8,746

Total non-performing loans as a percent of net loans
receivable                                                          1.24%            1.91%

Total foreclosed real estate, net of related reserves        $        170     $         52

Total non-performing loans and foreclosed real estate as
a percent of total assets                                           0.81%            1.21%

Nonperforming loans decreased to $5.7 million (1.24% of net loans receivable) at September 30, 2008 compared to $8.7 million (1.91% of net loans receivable) at September 30, 2007. The decrease in nonperforming loans is due to one commercial real estate loan that totaled $2.6 million at September 30, 2007, which was considered to be non-performing for fiscal 2007 but was subsequently cured via sale in fiscal 2008. At September 30, 2008, non-accrual loans consisted of ten 1-4 family residential real estate loans totaling $701,000, three commercial real estate loans totaling $3.0 million, twenty three installment loans totaling $676,000, and eight commercial business loans totaling $1.4 million. The largest individual non-accrual loan is a commercial real estate loan for $2.6 million.

Management has evaluated these loans and is satisfied that the allowance for loan losses at September 30, 2008 is adequate. The allowance for loan losses was $3.4 million at September 30, 2008 and $3.0 million at September 30, 2007. The balance at September 30, 2008, at 0.74% of net loans receivable and 59.8% of non-performing loans, is considered reasonable by management.

Foreclosed real estate at September 30, 2008 consists of three single-family residential real estate loans, which are located in the Bank's market area. Management believes that the carrying values of the properties at September 30, 2008 approximate their fair values less costs to sell. However, while management uses the best information available to make such determinations, future adjustments may become necessary.

Securities Available for Sale

Securities available for sale decreased $5.5 million or 3.6% to $146.7 million at September 30, 2008 from $152.2 million at September 30, 2007. These securities may be held for indefinite periods of time and are generally used as part of the Bank's asset/liability management strategy. These securities may be sold in response to changes in interest rates, prepayment rates or to meet liquidity needs. These securities consist of mortgage-backed securities, collateralized mortgage obligations, U.S. Government and Agency securities, tax-exempt municipal obligations, mutual funds, Federal Home Loan Mortgage Corporation stock, corporate obligations, trust preferred securities, and other equity securities. During fiscal 2008, the Company purchased $50.8 million of these securities and sold $6.4 million. Sales of these securities in fiscal 2008 resulted in a net pretax gain of $26,000. The Company does not have any collateralized debt obligations or subprime mortgage-backed securities.

Securities Held to Maturity

Securities held to maturity increased $851,000 or 1.1% to $75.4 million at September 30, 2008, compared to $74.6 million at September 30, 2007. These investments are comprised of mortgage-backed securities, collateralized mortgage obligations, U.S. Government and Agency securities, tax-exempt municipal securities and corporate obligations. During fiscal 2008, the Bank purchased $26.9 million of these securities.

Deposits

Deposits decreased $17.1 million during fiscal 2008 to $416.4 million at September 30, 2008 compared to $433.6 million at September 30, 2007. The decrease in deposits in primarily attributed to decreases in money market accounts and time deposits, partially offset by increases in checking accounts and passbook accounts.

The decrease in money market accounts and time deposits is a result of competitive market pressures. Customers seek the best rate in town for these products. The increase in checking accounts reflects the increased emphasis management has placed on attracting and retaining such accounts.

Securities Sold Under Agreements To Repurchase

Securities sold under agreements to repurchase represents retail agreements and wholesale structured borrowings. Securities sold under agreement to repurchase decreased $1.5 million or 1.5% to $104.0 million at September 30, 2008, from $105.5 million at September 30, 2007. The decrease is the result of a decrease in retail agreements. During fiscal 2008 and 2007 the Company had $9.0 million and $10.5 million of retail agreements outstanding, respectively. During fiscal 2008 and 2007 the Company had $95.0 million of structured borrowings outstanding.

Short-Term Borrowings

Short-term borrowings include Federal Home Loan Bank "RepoPlus" advances, a Federal Home Loan Bank revolving line of credit, federal funds purchased, and to a much lesser extent, treasury, tax and loan notes. These borrowings increased $8.6 million to $32.3 million at September 30, 2008, from $23.6 million at September 30, 2007. The increase was a result of a decrease in deposits and an increase in loans receivable. The Bank continues to utilize short-term borrowings as both a short-term funding source and as an effective means to structure borrowings to complement asset/liability management goals.

Long-Term Debt

Long-term debt represents FHLB advances, including fixed-rate advances and "Convertible Select" advances. Long-term debt increased $14.8 million or 14.2% to $118.8 million at September 30, 2008, from $104.1 million at September 30, 2007. As noted above, the increase was a result of a decrease in deposits and an increase in loans receivable.

Subordinated Debt

Subordinated debt represents debt issued by the Company to FB Capital Statutory Trust III in conjunction with the issuance of trust preferred securities by the Trust. The debt is unsecured and ranks subordinated and junior in right of payment to all indebtedness, liabilities, and obligations of the Company. The debt is due concurrently with the trust preferred securities. Subordinated debt was $7.7 million at September 30, 2008 and 2007.

Stockholders' Equity

Stockholders' equity decreased $4.3 million or 9.3% to $42.2 million at September 30, 2008 compared to September 30, 2007. This result reflects common stock cash dividends paid of $1.7 million, and an increase in the accumulated other comprehensive loss of $4.1 million. These decreases were offset by net income of $841,000, stock options exercised of $310,000, and a related tax benefit of $27,000, stock issued under the Dividend Reinvestment Plan of $143,000, and stock based compensation of $113,000.

Certain Ratios



                                                Year Ended September 30,
                                               2008        2007       2006
            Return on average assets             0.12%      0.51%      0.59%
            Return on average equity             1.83%      8.13%      9.89%
            Average equity to assets ratio       6.33%      6.28%      5.96%
            Dividend payout ratio              200.00%     45.90%     39.13%
            Book value per share             $   13.92   $  15.55   $  14.93

Results of Operations

Comparison of Fiscal Years Ended September 30, 2008 and 2007

Net income was $841,000 ($0.28 per diluted share) for the year ended September 30, 2008 compared to $3.7 million ($1.22 per diluted share) for fiscal 2007. Fiscal 2007 results include an extraordinary gain of $89,000 ($0.03 per diluted share). The gain was related to insurance proceeds received from the destructive fire at the Bank's Carnegie Branch location in October 2005. While the insurance proceeds were reinvested in the construction of the new Carnegie Branch location, the proceeds, net of the book value of the associated assets at the time of the fire, were recorded as a gain in accordance with accounting literature. There were no extraordinary items recorded in fiscal 2008. Income from continuing operations for the fiscal year ended September 30, 2008 was $841,000 ($0.28 per diluted share) compared to $3.6 million ($1.19 per diluted share) for the fiscal year ended September 30, 2007. The $2.8 million decrease in fiscal 2008 income from continuing operations primarily reflects charges of $3.6 million for other-than-temporary impairment ("OTTI") charges on certain investment securities. Excluding the impairment charges of $3.6 million, income from continuing operations would have been $4.2 million or $1.37 per share (diluted). Other factors contributing to the decrease in income from continuing operations from fiscal 2007 include, an increase in the provision for loan losses of $685,000, an increase in other expenses of $213,000, or 1.7%, and an increase in the income tax provision of $524,000, which offset an increase in net interest income of $2.1 million or 14.5%, and an increase in other income (excluding OTTI charges) of $149,000, or 4.3%.

Average Balance Sheet and Analysis of Net Interest Income

The following table presents for the periods indicated the total dollar amount of interest from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. The average balance of loans receivable includes non-accrual loans. Average balances are based on month-end balances. The Company does not believe that the use of month-end balances has a material impact on the information presented. Interest income on tax exempt investments has been adjusted for federal income tax purposes using an assumed rate of 34%.

                                                                                   Year Ended September 30,
                                                     2008                                    2007                                    2006
                                      Average                   Average       Average                   Average       Average                   Average
                                      Balance     Interest     Yield/Cost     Balance     Interest     Yield/Cost     Balance     Interest     Yield/Cost
                                                                                    (Dollars in thousands)
Interest-earning assets:
Mortgage loans                       $ 325,084    $  19,361         5.96%    $ 320,415    $  19,611         6.12%    $ 280,211    $  16,470         5.88%
Installment loans                       93,998        5,982          6.36       94,206        6,072          6.45       85,778        5,360          6.25
Commercial business and lease
loans                                   43,476        2,889          6.64       41,096        3,116          7.58       30,555        2,609          8.54
Mortgage-backed securities              90,828        4,058          4.47       93,385        4,131          4.42      116,770        5,054          4.33
Investment securities and FHLB
stock:
Taxable                                108,352        5,411          4.99      112,778        5,930          5.26      122,056        5,795          4.75
Tax-exempt(1)                           37,452        2,399          6.40       39,631        2,523          6.37       45,431        2,938          6.47
Interest-earning deposits                1,274           29          2.25          643           33          5.12          404           35          8.66

Total interest-earning assets          700,464       40,129          5.73      702,154       41,416          5.90      681,205       38,261          5.62

Non-interest-earning assets             28,425                                  27,538                                  28,167

Total assets                         $ 728,889                               $ 729,692                               $ 709,372

Interest-bearing liabilities:
Deposits                             $ 387,484    $  11,750         3.03%    $ 387,318    $  13,440         3.47%    $ 363,924    $  10,894         2.99%
. . .