<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

                      FOR THE YEAR ENDED SEPTEMBER 30, 1998

                                       OR

[ ] 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.
             (Exact name of registrant as specified in its charter)

              Pennsylvania                                     23-0469351 
     (State or other jurisdiction                          (I.R.S. Employer
   of 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

           Securities registered pursuant to Section 12(b) of the Act:
                                 NOT APPLICABLE

           Securities registered pursuant to Section 12(g) of the Act:

                     COMMON STOCK (PAR VALUE $.01 PER SHARE)

Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X

As of December 15, 1998 the aggregate value of the 1,784,090 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
485,126 shares held by all directors and officers of the Registrant as a group,
was approximately $26.3 million. This figure is based on the last known trade
price of $14.75 per share of the Registrant's Common stock on December 15, 1998.

Number of shares of Common Stock outstanding as of December 15, 1998: 2,269,216

                       DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:

(1)      Portions of the Annual Report to Stockholders for the fiscal year ended
         September 30, 1998 are incorporated into Parts II and III.

(2)      Portions of the definitive proxy statement for the Annual Meeting of
         Stockholders are incorporated into Part III.


<PAGE>   2
PART I.

Item 1.  BUSINESS

GENERAL

     First Keystone Financial, Inc. (the "Company") is a Pennsylvania
corporation and sole shareholder of First Keystone Federal Savings Bank (the
"Bank") which converted to the stock form of organization in January 1995. The
only significant assets of the Company are the capital stock of the Bank, the
Company's loans to its employee stock ownership plan, and various equity and
other investments. See Note 20 of the Notes to Consolidated Financial Statements
in the Annual Report to stockholders for the year ended September 30, 1998
setforth as Exhibit 13 hereto ("Annual Report"). The business of the Company
primarily consists of the business of the Bank.

     The Bank is a traditional, community oriented federal savings bank
emphasizing customer service and convenience. The Bank's primary business is to
attract deposits from the general public and investing those funds together with
other available sources of funds, such as borrowings, to originate loans. A
substantial portion of the Bank's deposits are comprised of core deposits which
amounted to $90.5 million or 36.6% of the Bank's total deposits at September 30,
1998. The Bank's primary lending emphasis has been, and continues to be, loans
secured by first and second liens on single-family (one-to-four units)
residences located in Delaware and Chester Counties, Pennsylvania and to a
lesser degree, Montgomery County, Pennsylvania and New Castle County, Delaware.
The Bank originates single-family residences secured by first mortgages with
respect to non-conforming jumbo loans and loans to credit impaired borrowers for
sale in the secondary market. The Bank also originates, due to their shorter
terms, adjustable or variable interest rates, higher yields, and as a result of
the Bank's analysis that the markets have become more stable, loans secured by
commercial real estate properties as well as residential construction loans
located in the Bank's market area. The Bank originates mortgage loans for resale
into the secondary market while retaining for its portfolio adjustable-rate
mortgage loans and fixed-rate loans that complement the Bank's asset/liability
strategies. The Bank also originates and sells, servicing released, certain
non-conforming loans. Although the Bank has not purchased either whole loans or
loan participation interests in the past, depending on market conditions and
portfolio needs, the Bank may consider purchasing loans and participation
interests in the future. The Bank's originations of commercial real estate and
multi-family residential loans has continued to increase as a direct result of
the Bank's emphasis on developing business loan products. Commercial real estate
and multi-family residential loans amounted to $20.6 million or 9.9% of the
total loan portfolio at September 30, 1998 as compared to $18.3 million or 9.3%
at September 30, 1997.

     To a lesser extent, the Bank also originates consumer loans (consisting
almost entirely of home equity loans and lines of credit), loans secured by
commercial real estate and multi-family (over four units) residential
properties, construction and land loans, commercial business and other mortgage
loans.

     In addition to its deposit gathering and lending activities, the Bank
invests in mortgage-related securities, substantially all of which are issued or
guaranteed by U.S. Government agencies and government sponsored enterprises, as
well as U.S. Treasury and federal government agency obligations and municipal
obligations. At September 30, 1998, the Bank's mortgage-related securities
(including mortgage-related securities available for sale) amounted to $135.3
million, or 32.3% of the Company's total assets, and investment securities
(including investment securities available for sale) amounted to $40.6 million,
or 9.8% of total assets.
<PAGE>   3
MARKET AREA

     The Bank's primary market area consists of Delaware and Southern Chester
Counties and to a lesser extent the contiguous counties of Montgomery and
Northern Chester Counties, Pennsylvania and New Castle County, Delaware.
Delaware County is part of the Philadelphia Primary Metropolitan Statistical
Area ("PMSA") which includes besides Delaware County, Bucks, Chester, Montgomery
and Philadelphia Counties (as well as four counties in New Jersey). The
Philadelphia area economy is typical of many large northeast and midwest cities
where the traditional manufacturing based economy has declined to a certain
degree and has been replaced with service sector and specialty area growth. As a
result of such growth, the Philadelphia PMSA's economic diversity has broadened
and employment in the area is derived from a number of different employment
sectors. In particular, Delaware County has experienced the development of
companies providing products and services for the health care market such as
Crozer/Keystone Health System, Wyeth-Ayerst Labs, Inc. and Mercy Health Corp.

     Philadelphia's central location in the northeast corridor, its
well-educated and skilled population base, infrastructure and other factors has
made the Bank's market area attractive to many large corporate employers. Such
employers include Comcast Corp., Boeing, State Farm Insurance, Unisys Corp.,,
ARCO Chemical Company, PECO Energy, SAP America, Inc., and many others. There
are over seventy-five Fortune 1,000 companies maintaining a presence here and
approximately twenty Fortune 500 companies headquartered in the region
surrounding the Philadelphia PMSA including CIGNA Corp., E.I. duPont de Nemours,
Bethlehem Steel, Ikon Office Solutions, Sun Company, Crown Cork & Seal and
others.

     Delaware County has experienced slower population growth than the
Philadelphia PMSA, although the growth rates in the outlying areas of Delaware
County have been growing at a rate above that of the Philadelphia PMSA. Since
1990, there has been no population growth in Delaware County and it is expected
to increase by less than 1 percent over the next 20 years. Chester County, on
the other hand, has grown over 11 percent since 1990 and expected to increase
further through the millennium. By comparison, median household income in
Delaware County and Chester County is approximately $40,500 and $48,000,
respectively, both of which are near or over the Philadelphia PMSA median of
approximately $41,000 (1996 estimates). Likewise, median home values in Delaware
and Chester Counties were approximately $113,200 and $155,900, respectively, as
compared to approximately $112,000 for the Philadelphia PMSA in 1990.
Unemployment rates in Delaware County have been below those experienced by the
Philadelphia PMSA but higher than some of the other counties comprising the
PMSA. The average annual unemployment rate (not seasonally adjusted) for 1998
through October was 4.0% in Delaware County and 2.8% in Chester County as
compared to 4.4% for the Philadelphia PMSA.


                                        2
<PAGE>   4
     Lending Activities

     Loan Portfolio Composition. The following table sets forth the composition
of the Bank's loan portfolio by type of loan at the dates indicated (excluding
loans held for sale).

<TABLE>
<CAPTION>
                                                                               September 30,
                                          ----------------------------------------------------------------------------------------
                                                1998               1997            1996               1995              1994
                                          ---------------    ---------------   --------------    --------------    ---------------
                                           Amount    %       Amount      %     Amount     %      Amount      %     Amount    %
                                           ------  -----     ------     ----   ------    ----    ------    ----    ------   ------
                                                                 (Dollars in thousands)
<S>                                      <C>        <C>     <C>        <C>    <C>        <C>    <C>        <C>    <C>        <C>  
Real estate loans:
  Single-family                          $148,088   71.34%  $135,168   68.53% $122,270   68.68% $115,225   69.01% $105,728   69.77%
  Multi-family and commercial              20,563    9.91     18,305    9.28    11,129    6.25    11,789    7.06    12,700    8.38
  Construction and land                    15,858    7.64     16,400    8.31    17,682    9.93    16,343    9.79    13,805    9.11
                                          =======  ======    =======  ======   =======  ======   =======    ====   =======   =====
      Total real estate loans             184,509   88.89    169,873   86.12   151,081   84.86   143,357   85.86   132,233   87.26
                                          -------  ------    -------  ------   -------  ------   -------  ------   -------   -----

Consumer:

  Home equity loans and lines of credit    19,609    9.45     22,964   11.64    20,444   11.48    18,229   10.92    15,603   10.30
  Deposit                                     181     .09        348     .18       457     .26       350     .21       374     .25
  Education                                   449     .21        365     .19       917     .52     1,010     .60       697     .46
  Other (1)                                 1,429     .69      1,690     .86     2,212    1.24     1,491     .89       332     .22
                                          -------  ------    -------  ------   -------  ------   -------  ------   -------   -----
      Total consumer loans                 21,668   10.44     25,367   12.87    24,030   13.50    21,080   12.62    17,006   11.23
                                          -------  ------    -------  ------   -------  ------   -------  ------   -------   -----
Commercial business loans                   1,390     .67      2,000    1.01     2,923    1.64     2,533    1.52     2,288    1.51
                                          -------  ------    -------  ------   -------  ------   -------  ------   -------  ------
      Total loans receivable (2)          207,567  100.00%   197,240  100.00%  178,034  100.00%  166,970  100.00%  151,527  100.00%
                                          -------  ======    -------  ======   -------  ======   -------  ======   -------  ======

Less:

  Loans in process (construction                                                                                           
    and land)                               5,781              5,670             6,368             6,070             6,698
  Deferred loan origination fees
    and discounts                           1,705              1,653             1,512             1,411             1,063
  Allowance for loan losses                 1,738              1,628             2,624             1,487             1,540
                                          -------            -------           -------           -------           -------
                                            9,224              8,951            10,504             8,968             9,301
                                         --------            -------           -------           -------           -------
      Total loans receivable, net        $198,343           $188,289          $167,530          $158,002          $142,226
                                          =======            =======           =======           =======           =======
</TABLE>


-----------------------------

(1)      Consists primarily of purchased consumer lease receivables.

(2)      Does not include $2.8 million, $4.6 million, $2.4 million, $57,000, and
         $168,000 of loans held for sale at September 30, 1998, 1997, 1996, 1995
         and 1994, respectively.


                                        3
<PAGE>   5
     Contractual Principal Repayments. The following table sets forth the
scheduled contractual maturities of the Bank's loans held to maturity at
September 30, 1998. Demand loans, loans having no stated schedule of repayments
and no stated maturity and overdraft loans are reported as due in one year or
less. The amounts shown for each period do not take into account loan
prepayments and normal amortization of the Bank's loan portfolio held to
maturity.

<TABLE>
<CAPTION>
                                                              Real Estate Loans
                                          ------------------------------------------------------
                                                           Multi-family                               Consumer and
                                                               and       Construction                  Commercial
                                          Single-family     Commercial     and Land       Total      Business Loans      Total
                                          -------------    -----------   ------------   ---------    --------------     -------
                                                                     (In thousands)
<S>                                         <C>            <C>             <C>          <C>              <C>           <C>     
Amounts due in:
  One year or less                          $  7,461       $   1,161       $15,858      $  24,480        $ 6,469       $ 30,949
  After one year through three years          10,814           2,642                       13,456          5,602         19,058
  After three years through five years         9,563           3,136                       12,699          3,456         16,155
  After five years through ten years          20,537          10,651                       31,188          5,214         36,402
  After ten years through twenty
    years                                     57,674           2,973                       60,647          2,317         62,964
  Over twenty years                           42,039                                       42,039                        42,039
                                             -------       ---------       -------      ---------        -------       --------
    Total(1)                                $148,088       $  20,563       $15,858      $ 184,509        $23,058       $207,567
                                             =======       ---======       -======      --=======        -======       -=======

Interest rate terms on amounts 
  due after one year:
  Fixed                                                                                 $ 121,562        $15,697       $137,259
  Adjustable                                                                               38,467            892         39,359
                                                                                        ---------        -------       --------
    Total(1)                                                                            $ 160,029        $16,589       $176,618
                                                                                        --=======        -======       -=======
</TABLE>


-----------------------------
(1)      Does not include adjustments relating to loans in process, allowances
         for loan losses and deferred fee income.


                                        4
<PAGE>   6
     Scheduled contractual amortization of loans does not reflect the expected
term of the Bank's loan portfolio. The average life of loans is substantially
less than their contractual terms because of prepayments and due-on-sale
clauses, which give the Bank the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase when current mortgage loan
rates are higher than rates on existing mortgage loans and, conversely, decrease
when rates on existing mortgage loans are lower than current mortgage loan rates
(due to refinancings of adjustable-rate and fixed-rate loans at lower rates).
Under the latter circumstances, the weighted average yield on loans decreases as
higher yielding loans are repaid or refinanced at lower rates.

     Loan Origination, Purchase and Sales Activity. The following table shows
the loan origination, purchase and sale activity of the Bank during the periods
indicated.

<TABLE>
<CAPTION>
                                                                     Year Ended September 30,
                                                         -------------------------------------------------
                                                           1998                 1997                1996
                                                           ----                 ----                ----
                                                                           (In thousands)
<S>                                                      <C>                  <C>                 <C>     
Gross loans at beginning of period(1)                    $201,817             $180,491            $167,027
                                                          -------              -------             -------
Loan originations for investment:
  Real estate:
    Residential                                            39,226               18,016              23,766
    Commercial and multi-family                             3,578                8,458                 399
    Construction                                           14,662               16,298              15,875
                                                          -------              -------             -------
      Total real estate loans originated
        for investment                                     57,466               42,772              40,040
   Consumer                                                 4,819                8,859               9,738
   Commercial business                                      4,231                2,755                 875
                                                         --------             --------             -------
      Total loans originated for
        investment                                         66,516               54,386              50,653
Loans originated for resale                                56,398               37,209              30,239
                                                          -------              -------             -------
      Total originations                                  122,914               91,595              80,892
                                                          -------              -------             -------
Deduct:
  Principal loan repayments and
    prepayments                                           (55,982)             (34,779)            (37,821)
  Transferred to real estate owned                           (207)                (411)             (1,768)
  Loans sold in secondary market                          (58,176)             (35,079)            (27,839)
                                                          -------              -------             -------
      Subtotal                                            114,365               70,269             (67,438)
                                                         --------              -------             -------
Net increase  in loans(1)                                   8,549               21,326              13,454
                                                          -------              -------             -------
Gross loans at end of period(1)                          $210,366             $201,817            $180,481
                                                          =======              =======             =======
</TABLE>


------------------------------

(1)      Includes loans held for sale of $2.8 million, $4.6 million, and $2.4
         million at September 30, 1998, 1997 and 1996, respectively.


                                        5
<PAGE>   7
     The lending activities of the Bank are subject to written underwriting
standards and loan origination procedures established by the Bank's Board of
Directors and management. Applications for all types of loans are taken at all
of the Bank's branch offices by the branch manager or other designated loan
officers. Applications for single-family residential mortgage loans for
portfolio retention also are obtained through loan originators who are employees
of the Bank. The Bank's loan originators will take loan applications outside of
the Bank's offices at the customer's convenience and are compensated on a
commission basis. The Mortgage Lending Department supervises the process of
obtaining credit reports, appraisals and other documentation involved with a
loan. The Bank generally requires that a property appraisal be obtained in
connection with all new mortgage loans. Property appraisals generally are
performed by an independent appraiser from a list approved by the Bank's Board
of Directors. The Bank requires that title insurance (other than with respect to
home equity loans) and hazard insurance be maintained on all security properties
and that flood insurance be maintained if the property is within a designated
flood plain.

     Residential mortgage loan applications are primarily developed from
referrals from real estate brokers and builders, existing customers and walk-in
customers. Residential mortgage loans also are originated through
correspondents. Commercial and multi-family real estate loan applications are
obtained primarily from previous borrowers, direct solicitations by Bank
personnel, as well as referrals. Consumer loans originated by the Bank are
obtained primarily through existing and walk-in customers who have been made
aware of the Bank's programs by advertising and other means.

     Applications for residential mortgage loans which are originated for resale
in the secondary market or loans designated for portfolio retention that conform
to the requirements for resale into the secondary market and do not exceed
Fannie Mae ("FNMA")/ Freddie Mac ("FHLMC") limits are approved by the Bank's
Chief Lending Officer or in his absence, by the Senior Loan Underwriter or Loan
Committee (a committee comprised of three directors and the Bank's Chief Lending
Officer). All other first mortgage loans (commercial and multi-family
residential real estate and construction loans) and residential mortgage loans
in excess of FNMA/FHLMC maximum amounts (currently $227,150) but less than $1.0
million must be approved by the Loan Committee. All first mortgage loans in
excess of $1.0 million must be approved by the Bank's Board of Directors or the
Executive Committee thereof. All mortgage loans which do not require approval by
the Board of Directors are submitted to the Board at its next meeting for review
and ratification. Home equity loans and lines of credit up to $100,000 can be
approved by the Chief Lending Officer, the Vice President of Construction Loans
or the Administrative Vice President of mortgage lending. Loans in excess of
such amount must be approved by the Loan Committee.

     Applications for non-conforming residential real estate loans, submitted by
correspondents and sold servicing released into the secondary market, are
packaged and submitted for pre-approval to the buyer prior to closing. The Bank,
on occasion will originate non-conforming loans in accordance with the buyers'
underwriting standards and sells them in bulk to such buyers. See "-Mortgage
Banking Activities."

     Single-Family Residential Loans. Substantially all of the Bank's
single-family residential mortgage loans consist of conventional loans.
Conventional loans are loans that are neither insured by the Federal Housing
Administration or partially guaranteed by the Department of Veterans Affairs.
The vast majority of the Bank's single-family residential mortgage loans are
secured by properties located in Pennsylvania, primarily in Delaware and Chester
Counties, and are originated under terms and documentation which permit their
sale to the FHLMC or FNMA. The Bank, consistent with its asset/liability
management strategies, sells some of its newly originated longer term fixed-rate
residential mortgage loans and to a limited degree, existing longer term
fixed-rate residential mortgage loans while retaining adjustable-rate mortgage
loans and shorter term fixed-rate residential mortgage loans. See "-
Mortgage-Banking Activities."

     The single-family residential mortgage loans offered by the Bank currently
consist of fixed-rate loans, including bi-weekly and balloon loans, and
adjustable-rate loans. Fixed-rate loans generally have maturities ranging from
15 to 30 years and are fully amortizing with monthly loan payments sufficient to
repay the total amount of the loan with interest by the end of the loan term.
The Bank's fixed-rate loans are originated under terms, conditions and
documentation which permit them to be sold to U.S. Government-sponsored
agencies, such as the FHLMC and the FNMA, and other investors in the secondary
mortgage market. The Bank also offers bi-weekly loans under the terms of which
the borrower makes payments every two weeks. Although such loans have a 30 year
amortization schedule, due to the bi-weekly payment schedule, such loans repay
substantially more rapidly than a standard monthly


                                        6
<PAGE>   8
amortizing 30-year fixed-rate loan. The Bank also offers five and seven year
balloon loans which provide that the borrower can conditionally renew the loan
at a to-be-determined rate for the remaining 25 or 23 years, respectively, of
the amortization period. At September 30, 1998, $104.8 million, or 70.8%, of the
Bank's single-family residential mortgage loans held in portfolio were
fixed-rate loans, including $29.8 million of bi-weekly fixed-rate residential
mortgage loans.

     The adjustable-rate loans currently offered by the Bank have interest rates
which adjust every one or three years in accordance with a designated index,
such as U.S. Treasury obligations, adjusted to a constant maturity ("CMT"), plus
a stipulated margin. The Bank's adjustable-rate single-family residential real
estate loans generally have a cap of 2% on any increase or decrease in the
interest rate at any adjustment date, and a cap of 6% over the life of the loan.
In order to increase acceptance of adjustable-rate loans, the Bank recently has
been originating loans which are fixed for a period of three to ten years after
which converts to one-year adjustable-rate loan. The Bank's adjustable-rate
loans require that any payment adjustment resulting from a change in the
interest rate of an adjustable-rate loan be sufficient to result in full
amortization of the loan by the end of the loan term and, thus, do not permit
any of the increased payment to be added to the principal amount of the loan, or
so-called negative amortization. Although the Bank does offer adjustable-rate
loans with initial rates below the fully indexed rate, such loans are
underwritten using methods approved by FHLMC and FNMA which allow borrowers to
be qualified at 2% above the discounted loan rate. At September 30, 1998, $43.3
million or 29.2% of the Bank's single-family residential mortgage loans held for
portfolio were adjustable-rate loans.

     Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
increase the loan payment by the borrower increases to the extent permitted by
the terms of the loan, thereby increasing the potential for default. Moreover,
as with fixed-rate loans, as interest rates increase, the marketability of the
underlying collateral property may be adversely affected by higher interest
rates. The Bank believes that these risks, which have not had a material adverse
effect on the Bank to date because of the generally stable interest rate
environment in recent years, generally are less than the risks associated with
holding fixed-rate loans in an increasing interest rate environment.

     For conventional residential mortgage loans held in portfolio and also for
those loans originated for sale in the secondary market, the Bank's maximum
loan-to-value ratio is 95%, and is based on the lesser of sales price or
appraised value. On all loans with a loan-to-value ratio of over 80%, private
mortgage insurance is required to be obtained.

     Commercial and Multi-Family Residential Real Estate Loans. The Bank has
moderately increased its investment in commercial and multi-family lending. Such
loans are being extended primarily to small and medium-sized businesses located
in the Bank's primary market area, a portion of the market that the Bank
believes has been underserved in recent years. Loans secured by commercial and
multi-family real estate amounted to $20.6 million, or 9.9%, of the Bank's total
loan portfolio, at September 30, 1998. The Bank's commercial and multi-family
residential real estate loans are secured primarily by professional office
buildings, small retail establishments, warehouses and apartment buildings (with
36 units or less) located in the Bank's primary market area.

     The Bank's adjustable-rate multi-family residential and commercial real
estate loans generally are either one-year or three-year adjustable-rate loans
indexed to the CMT plus a margin. In addition, depending on collateral value and
strength of the borrower, fixed-rate balloon loans and longer term fixed-rate
loans are also originated. Generally, fees of 1% to 3% of the principal loan
balance are charged to the borrower upon closing. Although terms for
multi-family residential and commercial real estate loans may vary, the Bank's
underwriting standards generally provide for terms of up to 25 years with
amortization of principal over the term of the loan and loan-to-value ratios of
not more than 75%. Generally, the Bank obtains personal guarantees of the
principals of the borrower as additional security for any commercial real estate
and multi-family residential loans and requires that the borrower have at least
a 25% equity investment in any such property.

     The Bank evaluates various aspects of commercial and multi-family
residential real estate loan transactions in an effort to mitigate risk to the
extent possible. In underwriting these loans, consideration is given to the
stability of the property's cash flow history, future operating projections,
current and projected occupancy, position in the market, location and physical
condition. In recent periods, the Bank has also generally imposed a debt
coverage ratio


                                        7
<PAGE>   9
(the ratio of net cash from operations before payment of debt service to debt
service) of not less than 110%. The underwriting analysis also includes credit
checks and a review of the financial condition of the borrower and guarantor, if
applicable. An appraisal report is prepared by a state-licensed and certified
appraiser (generally Member of the Appraisal Institute ("MAI") qualified)
commissioned by the Bank to substantiate property values for every commercial
real estate and multi-family loan transaction. All appraisal reports are
reviewed by the Bank prior to the closing of the loan.

     Multi-family residential and commercial real estate lending entails
different and significant risks when compared to single-family residential
lending because such loans often involve large loan balances to single borrowers
and because the payment experience on such loans is typically dependent on the
successful operation of the project or the borrower's business. These risks can
also be significantly affected by supply and demand conditions in the local
market for apartments, offices, warehouses or other commercial space. The Bank
attempts to minimize its risk exposure by limiting such lending to proven
developers/owners, only considering properties with existing operating
performance which can be analyzed, requiring conservative debt coverage ratios,
and periodically monitoring the operation and physical condition of the
collateral.

     Construction Loans. Substantially all of the Bank's construction loans have
consisted of loans to construct single-family properties extended either to
individuals or to selected developers with whom the Bank is familiar to build
such properties on a pre-sold or limited speculative basis. With respect to
loans to individuals, such loans have a maximum term of six months, have
variable rates of interest based upon the prime rate published in the Wall
Street Journal ("Prime Rate") plus a margin, have loan-to-value ratios of 80% or
less of the appraised value upon completion and generally do not require the
amortization of principal during the term. Upon completion of construction, the
loans convert to permanent residential mortgage loans.

     The Bank also provides construction loans and lines of credit to
developers. The majority of such loans consist of loans to selected local
developers with whom the Bank is familiar to build single-family dwellings on a
pre-sold or, to a significantly lesser extent, on a speculative basis. The Bank
generally limits to two the number of unsold units which a developer may have
under construction in a project. Such loans generally have terms of 24 months or
less, have maximum loan-to-value ratios of 75% of the appraised value upon
completion and generally do not require the amortization of the principal during
the term. The loans are made with floating rates of interest based on the Prime
Rate plus a margin adjusted on a monthly basis. The Bank also receives
origination fees, which generally range from 1.0% to 3.0% of the commitment. The
borrower is required to fund a portion of the project's costs, the exact amount
being determined on a case-by-case basis. Loan proceeds are disbursed in stages
after inspections of the project indicate that such disbursements are for costs
already incurred and which have added to the value of the project. Only interest
payments are due during the construction phase and the Bank may provide the
borrower with an interest reserve from which it can pay the stated interest due
thereon. The Bank's construction loans include loans to the developers to
acquire the necessary land, develop the site and construct the residential units
("ADC loans"). At September 30, 1998, net residential construction loans
totalled $8.0 million, or 3.9%, of the total loan portfolio, which primarily
consisted of construction loans to developers.

     Loans to developers include both secured and unsecured lines of credit with
outstanding commitments totalling $2.4 million. All have personal guaranties of
the principals and are cross-collateralized with existing loans. Loans
outstanding under builder lines of credit totalled $536,000 at September 30,
1998. The majority of the loans are secured by real estate and the unsecured
lines, given only to the Bank's most creditworthy and long standing customers,
totalled $391,000, or .19% of the total loan portfolio.

     The Bank also will originate ground or land loans, both to individuals to
purchase a building lot on which he intends to build his primary residence, as
well as to developers to purchase lots to build speculative homes at a later
date. Such loans have terms of 36 months or less with a maximum loan-to-value
ratio of 75% of the lower of appraised value or sale price with respect to loans
to individuals and 65% of the lower of appraised value or sales price with
respect to loans to developers. The loans are made with floating rates based on
the Prime Rate plus a margin. The Bank also receives origination fees, which
generally range between 1.0% and 3.0% of the loan amount. At September 30, 1998,
land loans (including loans to acquire and develop land) totalled $3.4 million
or 1.6% of the total loan portfolio.


                                        8
<PAGE>   10
     Prior to making a commitment to fund a construction loan, the Bank requires
an appraisal of the property by an independent state-licensed and qualified
appraiser approved by the Board of Directors. In addition, during the term of
the construction loan, the project is inspected by an independent inspector.

     Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of value proves to be inaccurate, the
Bank may be confronted, at or prior to the maturity of the loan, with a project,
when completed, having a value which is insufficient to assure full repayment.
Loans on lots may run the risk of adverse zoning changes, environmental or other
restrictions on future use.

     Consumer Lending Activities. The Bank offers consumer loans in order to
provide a full range of retail financial services to its customers. At September
30, 1998, $21.7 million, or 10.4%, of the Bank's total loan portfolio was
comprised of consumer loans. The Bank originates substantially all of such loans
in its primary market area.

     The largest component of the Bank's consumer loan portfolio consists of
home equity loans and home equity lines of credit (a form of revolving credit),
both of which are secured by the underlying equity in the borrower's primary
residence. Home equity loans are amortizing loans with fixed interest rates and
maximum terms of 15 years while equity lines of credit have adjustable interest
rates indexed to the Prime Rate. Generally home equity loans or home equity
lines do not exceed $100,000. The Bank's home equity loans and lines of credit
generally require combined loan-to-value ratios of 80% or less. At September 30,
1998, home equity loans and lines of credit amounted to $19.6 million, or 9.4%,
of the Bank's total loan portfolio.

     At September 30, 1998, the remaining portion of the Bank's consumer loan
portfolio was comprised of education, deposit and other consumer loans. At
September 30, 1998, the Bank had $449,000 or .21% of education loans, all of
which were underwritten to conform with the standards of the Pennsylvania Higher
Education Agency. Deposit loans and other consumer loans (including credit card
loans) totalled $1.6 million, or .78%, of the Bank's total loan portfolio at
September 30, 1998. In April 1995, the Bank introduced its own credit card
program. The credit cards were offered to only the Bank's most creditworthy
customers. At September 30, 1998, these loans totalled $584,000 or .28% of the
total loan portfolio. Consumer loans also included certain consumer leases
totalling $745,000 purchased from a leasing company.

     Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. These risks are not as prevalent in the case of the
Bank's consumer loan portfolio, however, because a high percentage of the
portfolio is comprised of home equity loans and home equity lines of credit
which are secured by real estate and underwritten in a manner such that they
result in a lending risk which is substantially similar to single-family
residential loans.

     Commercial Business Loans. At September 30, 1998, commercial business loans
amounted to $1.4 million or .67% of the Bank's total loan portfolio. The
majority of commercial business loans consist of a limited number of commercial
lines of credit secured by real estate and, to a lesser extent, unsecured lines
of credit.

     Mortgage-Banking Activities. Due to customer preference for fixed-rate
loans, especially during the declining mortgage interest rate environment in
1998 and the stable rate environment in 1997, the Bank has continued to
originate fixed-rate loans. Long-term, generally 30 years, fixed-rate loans not
taken into portfolio for asset/liability purposes are sold into the secondary
market. In addition, the Bank has developed for sale in the secondary market
non-conforming (loans not conforming to FHLMC/FNMA underwriting guidelines) and
impaired credit loans. The Bank has substantially increased the origination and
sales of non-conforming mortgage loans during fiscal 1998, 1997 and 1996. The
Bank's net gain on sales of mortgage loans amounted to $526,000, $285,000, and
$209,000 during the years ended September 30, 1998, 1997 and 1996, respectively.
The Bank had $2.8 million and $4.6 million of mortgage loans held for sale at
September 30, 1998 and 1997, respectively.


                                        9
<PAGE>   11
     The Bank's conforming mortgage loans sold to others are sold, generally
with servicing retained, on a loan-by-loan basis primarily to the FHLMC and the
FNMA. A period of less than five days generally lapses between the closing of
the loan by the Bank and its purchase by the investor. Mortgages with
established interest rates generally will decrease in value during periods of
increasing interest rates. Accordingly, fluctuations in prevailing interest
rates may result in a gain or loss to the Bank as a result of adjustments to the
carrying value of loans held for sale or upon sale of loans. The Bank attempts
to protect itself from these market fluctuations through the use of forward
commitments at the time of the commitment by the Bank of a loan rate to the
borrower. These commitments are mandatory delivery contracts with FHLMC and FNMA
within a certain time frame and within certain dollar amounts by a price
determined at the commitment date. Market risk does exist as non-refundable
points paid by the borrower may not be sufficient to offset fees associated with
closing the forward commitment contract. Non-conforming mortgage loans sold to
others are sold, servicing released, on a loan-by-loan basis and are generally
pre-approved by the buyer prior to closing.

     Borrowers are generally charged an origination fee, which is a percentage
of the principal balance of the loan. In accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases," the various fees received by the Bank in
connection with the origination of loans are deferred and amortized as a yield
adjustment over the lives of the related loans using the interest method.
However, when such loans are sold, the remaining unamortized fees (which is all
or substantially all of such fees due to the relatively short period during
which such loans are held) are recognized on the sale of loans held for sale.

     The Bank, for conforming loan products, generally retains the servicing on
all loans sold to others. In addition, the Bank services substantially all of
the loans which it retains in portfolio. Loan servicing includes collecting and
remitting loan payments, accounting for principal and interest, making advances
to cover delinquent payments, making inspections as required of mortgaged
premises, contacting delinquent mortgagors, supervising foreclosures and
property dispositions in the event of unremedied defaults and generally
administering the loans. Funds that have been escrowed by borrowers for the
payment of mortgage-related expenses, such as property taxes and hazard and
mortgage insurance premiums, are maintained in noninterest-bearing accounts at
the Bank.

     The following table presents information regarding the loans serviced by
the Bank for others at the dates indicated. Substantially all the loans were
secured by properties in Pennsylvania. A small percentage of the loans are
secured by properties located in Delaware, Maryland or New Jersey.

<TABLE>
<CAPTION>
                                                                    September 30,
                                                  ------------------------------------------------
                                                    1998                1997                1996
                                                  --------            --------            --------
                                                                   (In thousands)
<S>                                               <C>                 <C>                 <C>      
Loans originated by the Bank 
and serviced for:
  FNMA                                            $  3,796            $  5,228            $  5,817
  FHLMC                                             92,065             108,895             121,029
  Others                                               414                 431                 383
                                                  --------            --------            --------
    Total loans serviced for others               $ 96,275            $114,554            $127,229
                                                  -=======            -=======            -=======
</TABLE>

     The Bank receives fees for servicing mortgage loans, which generally amount
to 0.25% per annum on the declining principal balance of mortgage loans. Such
fees serve to compensate the Bank for the costs of performing the servicing
function. Other sources of loan servicing revenues include late charges. For
years ended September 30, 1998, 1997 and 1996, the Bank earned gross fees of
$246,000, $293,000 and $331,000, respectively, from loan servicing. The Bank
retains a portion of funds received from borrowers on the loans it services for
others in payment of its servicing fees received on loans serviced for others.


                                       10
<PAGE>   12
     Loans-to-One Borrower Limitations. Regulations impose limitations on the
aggregate amount of loans that a savings institution could make to any one
borrower, including related entities. Under such regulations, the permissible
amount of loans-to-one borrower follows the national bank standard for all loans
made by savings institutions, which generally does not permit loans-to-one
borrower to exceed 15% of unimpaired capital and surplus. Loans in an amount
equal to an additional 10% of unimpaired capital and surplus also may be made to
a borrower if the loans are fully secured by readily marketable securities. At
September 30, 1998, the Bank's five largest loans or groups of loans-to-one
borrower, including related entities, ranged from an aggregate of $1.9 million
to $2.6 million, and the Bank's loans-to-one borrower limit was $4.9 million at
such date.

ASSET QUALITY

     General. As a part of the Bank's efforts to improve its asset quality, it
has developed and implemented an asset classification system. All of the Bank's
assets are subject to review under the classification system, but particular
emphasis is placed on the review of multi-family residential and commercial real
estate loans, construction loans and commercial business loans. All assets of
the Bank are periodically reviewed and the classification recommendations
submitted to the Asset Classification Committee at least monthly. The Asset
Classification Committee is composed of the President and Chief Executive
Officer, the Chief Financial Officer, the Chief Lending Officer, the Vice
President of Loan Administration, the Internal Auditor and the Vice President of
Construction Lending. All assets are placed into one of the four following
categories: Pass, Substandard, Doubtful and Loss. The criteria used to review
and establish each asset's classification are substantially identical to the
asset classification system used by the Office of Thrift Supervision (the "OTS")
in connection with the examination process. As of September 30, 1998, the Bank
did not have any assets which it had classified as doubtful, however, the Bank
has classified $250,000 as loss. See "- Non-Performing Assets" and "- Other
Classified Assets" for a discussion of certain of the Bank's assets which have
been classified as substandard and regulatory classification standards
generally.

     When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking payment.
Contacts are generally made 30 days after a payment is due. In most cases,
deficiencies are cured promptly. If a delinquency continues, late charges are
assessed and additional efforts are made to collect the loan. While the Bank
generally prefers to work with borrowers to resolve such problems, when the
account becomes 90 days delinquent, the Bank institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.

     Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. As a matter of
policy, the Bank does not accrue interest on loans past due 90 days or more. See
Note 2 of the Notes to Consolidated Financial Statements included in the
Company's Annual Report.

     Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold. Real
estate owned is initially recorded at the lower of fair value less estimated
costs to sell the property, or cost (generally the balance of the loan on the
property at the date of acquisition). After the date of acquisition, all costs
incurred in maintaining the property are expenses and costs incurred for the
improvement or development of such property are capitalized up to the extent of
their net realizable value.

     Under generally accepted accounting principles ("GAAP"), the Bank is
required to account for certain loan modifications or restructuring as "troubled
debt restructuring." In general, the modification or restructuring of a debt
constitutes a troubled debt restructuring if the Bank, for economic or legal
reasons related to the borrower's financial difficulties, grants a concession to
the borrower that the Bank would not otherwise consider under current market
conditions. Debt restructuring or loan modifications for a borrower do not
necessarily always constitute troubled debt restructuring, however, and troubled
debt restructuring do not necessarily result in non-accrual loans.


                                       11
<PAGE>   13
     Delinquent Loans. The following table sets forth information concerning
delinquent loans at the dates indicated, in dollar amounts and as a percentage
of each category of the Bank's loan portfolio. The amounts presented represent
the total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due.

<TABLE>
<CAPTION>
                                         September 30, 1998                           September 30, 1997
                            -------------------------------------------    ------------------------------------------
                                 30-59 Days            60-89 Days               30-59 Days            60-89 Days
                            --------------------  ---------------------    --------------------  --------------------
                                       Percent                Percent                 Percent               Percent
                                          of                     of                     of                    of
                                         Loan                   Loan                   Loan                  Loan
                            Amount     Category   Amount      Category     Amount    Category    Amount    Category
                            --------   ---------  ---------   ---------    --------  ----------  --------  ----------
                                                              (Dollars in thousands)
<S>                         <C>        <C>        <C>         <C>          <C>       <C>         <C>       <C> 
Real estate loans:
  Single-family
    residential              $557        .38%       $98         .07%        $401       .30%        $62        .05%
  Construction                 86        .54%        39         .25                                287       1.80
  Consumer loans                1                    10         .05           15       .06          33        .13
  Commercial
   business loans               1        .07                                   2       .10                 
                             ----                  ----                     ----                  ----
Total                        $645        .31%      $147         .07%        $418       .21%       $382        .19%
                             -===        ===       -===         ===         -===       ===        -===        ===
</TABLE>


                                       12
<PAGE>   14
         Non-Performing Assets. The following table sets forth the amounts and
categories of the Bank's non-performing assets and troubled debt restructurings
at the dates indicated.

<TABLE>
<CAPTION>
                                                                             September 30,
                                       ------------------------------------------------------------------------------------
                                             1998              1997              1996             1995             1994
                                       --------------     --------------     -------------     ----------       -----------
                                                                         (Dollars in thousands)
<S>                                       <C>                <C>                 <C>             <C>              <C>   
Non-performing loans:
  Single-family residential               $ 2,341            $1,661              $1,466          $1,986           $1,907
  Commercial and multi-
   family(1)                                  323                22                  55              22            2,400
  Construction(2)                             895               275                                 888              872
  Consumer                                     43                14               1,666               2                1
  Commercial business                          83               100               2,165             258              196
                                          -------            ------              ------           -----            -----
     Total non-performing loans             3,685             2,072               5,352           3,156            5,376
                                          -------            ------              ------           -----            -----

Accruing loans greater than
  90 days delinquent                           19                 5                                               
                                          -------            ------              ------          ------            -----
     Total non-performing loans             3,704             2,077               5,352           3,156            5,376
                                          -------            ------              ------           -----            -----

REO                                         1,663             1,672               1,557             465              503
                                          -------            ------              ------          ------           ------
     Total non-performing assets          $ 5,367            $3,749              $6,909          $3,621           $5,879
                                          --=====            -=====              -=====          -=====           -=====
Troubled debt restructurings (3)          $    46            $  384              $               $2,348          
                                          -======            ======              ======          -=====           ======

Total non-performing loans and
  troubled debt restructurings
  as a percentage of gross loans
  receivable (4)                             1.85%             1.29%               3.10%           3.45%            3.73%
                                             ====              ====                ====            ====             ====

Total non-performing assets
  as a percentage of total assets            1.29%             1.00%               2.35%           1.29%            2.47%
                                             ====              ====                ====            ====             ====

Total non-performing assets and
  troubled debt restructurings as
  percentage of total assets                 1.30%             1.11%               2.35%           2.12%            2.43%
                                             ====              ====                ====            ====             ====
</TABLE>


-------------------------------

(1)      Consists of two loans at September 30, 1998 and 1996 and one loan at
         September 30, 1997 and 1995, respectively. For fiscal 1994, consisted
         primarily of one loan restructured during fiscal 1995.

(2)      Consists of six loans from three borrowers at September 30, 1998, two
         loans at September 30, 1997 and 1995 and one loan at September 30,
         1994.

(3)      Consists of lease financing receivables at September 30, 1998 and 1997
         from the Bennett Funding Group of Syracuse, New York ("Bennett
         Funding") and one loan at September 30, 1995. The troubled debt
         restructurings in 1997 and 1995 have been performing in accordance with
         the terms of the agreements since the restructurings.

(4)      Includes loans receivable and loans held for sale, less construction
         and land loans in process and deferred loan origination fees and
         discounts.


                                       13
<PAGE>   15
         The Bank's total non-performing assets and troubled debt restructurings
have increased from $4.1 million, or 1.00% of total assets, at September 30,
1997 to $5.4 million, or 1.29% of total assets at September 30, 1998. The
primary reason for the $1.3 million increase was due to the inclusion in fiscal
1998 of a $900,000 single-family residence located in Atlanta, Georgia. The
remaining $1.4 million of single-family residential loans at September 30, 1998
consisted of 29 loans with principal balances, ranging from $2,000 to $216,000,
with an average of approximately $50,000.

         At September 30, 1998, the $1.7 million of REO consisted of two
single-family residential properties, one with a carrying value of $168,000 and
one former construction loan project with a carrying value of $1.4 million. The
construction loan was for the acquisition and development of a 106-lot
residential townhouse project located in Pennsylvania. The project has all units
substantially completed and has 15 units left to sell, of which seven units have
deposits or agreements of sale. Expected completion of sale of all the remaining
units is approximately six to nine months.

         Other Classified Assets. Federal regulations require that each insured
savings association classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted.

         At September 30, 1998, the Bank had $5.7 million and $250,000 of assets
classified as substandard and loss, respectively, and no assets classified as
doubtful. Substantially all classified assets are also non-performing.

         Allowance for Loan Losses. The Bank's policy is to establish reserves
for estimated losses on delinquent loans when it determines that losses are
expected to be incurred on such loans and leases. The allowance for losses on
loans is maintained at a level believed adequate by management to absorb
potential losses in the portfolio. Management's determination of the adequacy of
the allowance is based on an evaluation of the portfolio, past loss experience,
current economic conditions, volume, growth and composition of the portfolio,
and other relevant factors. The allowance is increased by provisions for loan
losses which are charged against income. The activity in the Bank's allowance
for loan losses has remained relatively stable (other than the $956,000 Bennett
Funding charge-off in fiscal 1997) and the level of provisions has been
relatively small with the exception in fiscal 1996 of an additional $1.1 million
provision related to Bennett Funding. As shown in the table below, at September
30, 1998, the Bank's allowance for loan losses amounted to 46.92% and .86% of
the Bank's non-performing loans and gross loans receivable, respectively.


                                       14
<PAGE>   16
         The following table summarizes changes in the allowance for loan losses
and other selected statistics for the periods presented.

<TABLE>
<CAPTION>
                                                                        Year Ending September 30,
                                                 ---------------------------------------------------------------------------
                                                     1998            1997             1996            1995            1994
                                                 -----------     -----------     -----------     -----------     -----------
                                                                          (Dollars in thousands)
<S>                                                <C>             <C>              <C>             <C>               <C>   
Allowance for loan losses, beginning of
   period                                          $ 1,628         $ 2,624          $ 1,487         $ 1,540           $1,265
Charged-off loans:
  Single-family residential                            (86)           (119)            (113)           (163)            (141)
  Construction
  Commercial lease purchases                                          (956)
  Consumer and commercial business                     (28)           (177)                              (5)         
                                                   -------         -------          -------         -------          -------
    Total charged-off loans                           (114)         (1,252)            (113)           (168)            (141)
                                                   -------         -------          -------         -------          -------
Recoveries on loans previously charged off:
  Single-family residential                             22               7                               12
  Construction                                          14              10                               43
  Commercial and multi-
     family residential                                                                                   8
  Consumer and commercial business                      2                                                            
                                                   -------         -------          -------         -------          -------
    Total recoveries                                   38              17                                63          
                                                   -------         -------          -------         -------          -------
Net loans charged-off                                  (76)         (1,235)            (113)           (105)            (141)
Provision for loan losses                              186             239            1,250              52              416
                                                   -------         -------          -------         -------          -------
Allowance for loan losses, end of
period                                             $ 1,738         $ 1,628          $ 2,624         $ 1,487          $ 1,540
                                                   =======         =======          =======         =======          =======
Net loans charged-off to average
  interest-earning loans(1)                            .04%            .68%             .07%            .07%             .10%
                                                   =======         =======          =======         =======          =======
Allowance for loan losses
  to gross loans receivable(1)                         .86%            .86%            1.54%            .93%            1.07%
                                                   =======         =======          =======         =======          =======
Net loans charged-off to
 allowance for loan losses                            4.37%          75.86%            4.31%           7.06%           9.16 %
                                                   =======         =======          =======         =======          =======
Recoveries to charge-offs                            33.33%           1.36%                %          37.50%                %
                                                   =======         =======          =======         =======          =======
</TABLE>
------------
(1)      Gross loans receivable and average interest-earning loans receivable
         include loans receivable and loans held for sale, less construction and
         land loans in process and deferred loan origination fees and discounts.


                                       15
<PAGE>   17
         The following table presents the Bank's allocation of the allowance for
loan losses to the total amount of loans in each category listed at the dates
indicated.

<TABLE>
<CAPTION>
                                                                       September 30,
                           -------------------------------------------------------------------------------------------------------
                                   1998                1997                 1996                 1995                  1994
                           -------------------  -------------------  -------------------  -------------------  -------------------
                                   % of Loans           % of Loans           % of Loans           % of Loans            % of Loans
                                     in Each              in Each              in Each              in Each              in Each
                                   Category to          Category to          Category to          Category to           Category to
                           Amount  Total Loans  Amount  Total Loans  Amount  Total Loans  Amount  Total Loans  Amount  Total Loans
                           ------  -----------  ------  -----------  ------  -----------  ------  -----------  ------  -----------
                                         (Dollars in thousands)
<S>                        <C>     <C>         <C>      <C>          <C>     <C>          <C>     <C>          <C>     <C>   
Single-family residential  $  446     71.34%   $  439     68.53%     $  204     68.68%    $  226     69.01%    $  280     69.77%
Commercial and multi-
 family residential           109      9.91        77      9.28           3      6.25         12      7.06        243      8.38
Construction                  382      7.64       300      8.31         290      9.93        615      9.79        481      9.11
Consumer                       63     10.44        67     12.87         370     13.50        100     12.62         79     11.23
Commercial business            20       .67        31      1.01       1,152      1.64         55      1.52         45      1.51
Unallocated                   718                 714                   605                  479                  412    
                           ------    ------    ------    ------      ------    ------     ------    ------     ------    ------
    Total allowance for
      loan losses          $1,738    100.00%   $1,628    100.00%     $2,624    100.00%    $1,487    100.00%    $1,540    100.00%
                           -=====    ======    -=====    ======      -=====    ======     -=====    ======     -=====    ======
</TABLE>


                                       16
<PAGE>   18
         Effective December 21, 1993, the OTS, in conjunction with the Office of
the Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued
a joint policy statement ("Policy Statement") regarding an institution's
allowance for loan and lease losses. The Policy Statement, which reflects the
position of the issuing regulatory agencies and does not necessarily constitute
GAAP, includes guidance (i) on the responsibilities of management for the
assessment and establishment of an adequate allowance and (ii) for the agencies'
examiners to use in evaluating the adequacy of such allowance and the policies
utilized to determine such allowance. The Policy Statement also sets forth
quantitative measures for the allowance with respect to assets classified
substandard and doubtful and with respect to the remaining portion of an
institution's loan portfolio. While the Policy Statement sets forth quantitative
measures, such guidance is not intended as a "floor" or "ceiling." The review of
the Policy Statement did not result in a material adjustment to the Bank's
policy for establishing loan losses.

         Management of the Bank presently believes that its allowance for loan
losses is adequate to cover any potential losses in the Bank's loan portfolio.
However, future adjustments to this allowance may be necessary, and the Bank's
results of operations could be adversely affected if circumstances differ
substantially from the assumptions used by management in making its
determinations in this regard.

MORTGAGE-RELATED SECURITIES AND INVESTMENT SECURITIES

         Mortgage-Related Securities. Federally chartered savings institutions
have authority to invest in various types of liquid assets, including United
States Treasury obligations, securities of various federal agencies and of state
and municipal governments, certificates of deposit at federally-insured banks
and savings and loan associations, certain bankers' acceptances and Federal
funds. Subject to various restrictions, federally chartered savings institutions
may also invest a portion of their assets in commercial paper, corporate debt
securities and mutual funds, the assets of which conform to the investments that
federally chartered savings institutions are otherwise authorized to make
directly.

         The Bank maintains a significant portfolio of mortgage-related
securities as a means of investing in housing-related mortgage instruments
without the costs associated with originating mortgage loans for portfolio
retention and with limited credit risk of default which arises in holding a
portfolio of loans to maturity. Mortgage-related securities (which also are
known as mortgage participation certificates or pass-through certificates)
represent a participation interest in a pool of single-family or multi-family
residential mortgages. The principal and interest payments on mortgage-backed
securities are passed from the mortgage originators, as servicer, through
intermediaries (generally U.S. Government agencies and government-sponsored
enterprises) that pool and repackage the participation interests in the form of
securities, to investors such as the Bank. Such U.S. Government agencies and
government sponsored enterprises, which guarantee the payment of principal and
interest to investors, primarily include the FHLMC, the FNMA and the Government
National Mortgage Association ("GNMA"). The Bank also invests to a limited
degree in certain privately issued, credit enhanced mortgage-related securities
rated AAA by national securities rating agencies.

         The FHLMC is a public corporation chartered by the U.S. Government. The
FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal on participation certificates. The FNMA is a
private corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government-assisted housing
programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and
the timely payment of principal and interest on GNMA securities are guaranteed
by the GNMA and backed by the full faith and credit of the U.S. Government.
Because the FHLMC, the FNMA and the GNMA were established to provide support for
low- and middle-income housing, there are limits to the maximum size of loans
that qualify for these, programs which limit is currently $227,150.

         Mortgage-related securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying


                                       17
<PAGE>   19
pool of mortgages, (i.e., fixed-rate or adjustable rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.

         The Bank's mortgage-related securities include regular interests in
collateralized mortgage obligations ("CMOs"). CMOs were developed in response to
investor concerns regarding the uncertainty of cash flows associated with the
prepayment option of the underlying mortgagor and are typically issued by
governmental agencies, governmental sponsored enterprises and special purpose
entities, such as trusts, corporations or partnerships, established by financial
institutions or other similar institutions. A CMO can be collateralized by loans
or securities which are insured or guaranteed by the FNMA, the FHLMC or the
GNMA. In contrast to pass-through mortgage-related securities, in which cash
flow is received pro rata by all security holders, the cash flow from the
mortgages underlying a CMO is segmented and paid in accordance with a
predetermined priority to investors holding various CMO classes. By allocating
the principal and interest cash flows from the underlying collateral among the
separate CMO classes, different classes of bonds are created, each with its own
stated maturity, estimated average life, coupon rate and prepayment
characteristics.

         The short-term classes of a CMO usually carry a lower coupon rate than
the longer term classes and, therefore, the interest differential cash flow on a
residual interest is greatest in the early years of the CMO. As the early coupon
classes are extinguished, the residual income declines. Thus, the longer the
lower coupon classes remain outstanding, the greater the cash flow accruing to
CMO residuals. As interest rates decline, prepayments accelerate, the interest
differential narrows, and the cash flow from the CMO declines. Conversely, as
interest rates increase, prepayments decrease, generating a larger cash flow to
residuals.

         A senior-subordinated structure often is used with CMOs to provide
credit enhancement for securities which are backed by collateral which is not
guaranteed by FNMA, FHLMC or GNMA. These structures divide mortgage pools into
various risk classes: a senior class and one or more subordinated classes. The
subordinated classes provide protection to the senior class. When cash flow is
impaired, debt service goes first to the holders of senior classes. In addition,
incoming cash flows also may go into a reserve fund to meet any future
shortfalls of cash flow to holders of senior classes. The holders of
subordinated classes may not receive any funds until the holders of senior
classes have been paid and, when appropriate, until a specified level of funds
has been contributed to the reserve fund.

         Mortgage-related securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-related
securities are more liquid than individual mortgage loans and may be used to
collateralize certain obligations of the Bank. At September 30, 1998, $27.8
million of the Bank's mortgage-related securities were pledged to secure various
obligations of the Bank, including reverse repurchase agreements and as
collateral for certain government deposits.

         The Bank's mortgage-related securities are classified as either "held
to maturity" or "available for sale" based upon the Bank's intent and ability to
hold such securities to maturity at the time of purchase, in accordance with
GAAP. As of September 30, 1998, the Bank had an aggregate of $134.3 million, or
32.3%, of total assets invested in mortgage-related securities, net, of which
$18.8 million was held to maturity and $115.5 million was available for sale.
The mortgage-related securities of the Bank which are held to maturity are
carried at cost, adjusted for the amortization of premiums and the accretion of
discounts using a method which approximates a level yield, while
mortgage-related securities available for sale are carried at the current fair
value. See Notes 1 and 4 of the Notes to Consolidated Financial Statements in
the Annual Report.


                                       18
<PAGE>   20
         In November 1995, the Financial Accounting Standards Board (the "FASB")
issued a special report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (the "Guide"),
which discussed through a question and answer format many of the implementation
questions that have arisen since the adoption of SFAS 115. Concurrent with the
initial adoption of this implementation guidance but no later than December 31,
1995, an enterprise was permitted to reassess the appropriateness of the
classifications of all securities held at that time and account and disclose
resulting reclassifications in accordance with SFAS 115. The Guide provided that
reclassifications from the held-to-maturity category that result from this
one-time assessment will not call into question the intent of an enterprise to
hold other debt securities to maturity in the future. In December 1995, as
permitted under the terms of the Guide, the Company reclassified certain
securities with an aggregated amortized cost of $50.5 million from held to
maturity to available for sale.

The following table sets forth the composition of the Bank's mortgage-related
securities portfolio, both held to maturity and available for sale, at the dates
indicated.

<TABLE>
<CAPTION>
                                                                       September 30,
                                                               ------------------------------
                                                                  1998       1997       1996
                                                               --------   --------   --------
Held to maturity:
                                                                        (In thousands)
<S>                                                            <C>        <C>        <C>     
Mortgage-backed securities:
  FHLMC                                                        $  4,698   $  2,747   $  3,631
  FNMA                                                            8,747     10,053     11,383
                                                               --------   --------   --------
    Total mortgage-backed securities                             13,445     12,800     15,014
                                                               --------   --------   --------
Collateralized mortgage obligations:
    FHLMC                                                           233      2,026      2,238
    FNMA                                                          5,091      5,740      5,789
    Other                                                                      141        180
                                                               --------   --------   --------
     Total collateralized mortgage obligations                    5,324      7,907      8,207
                                                               --------   --------   --------
    Total mortgage-related securities, amortized cost          $ 18,769   $ 20,707   $ 23,221
                                                               ========   ========   ========
    Total fair value(1)                                        $ 18,700   $ 20,200   $ 22,060
                                                               ========   ========   ========

Available for sale:

Mortgage-backed securities:

  FHLMC                                                        $ 10,968   $ 17,540   $ 12,852
  FNMA                                                           25,600     14,587     11,079
  GNMA                                                           41,379     28,938      8,355
                                                               --------   --------   --------
    Total mortgage-backed securities                             77,947     61,065     32,286
                                                               --------   --------   --------
Collateralized mortgage obligations:
    FHLMC                                                         2,704      5,356      7,298
    FNMA                                                         15,284     17,301     18,594
    GNMA                                                            994      1,338      1,593
    Other                                                        17,040     18,819      1,131
                                                               --------   --------   --------
     Total collateralized mortgage obligations                   36,022     42,814     28,616
                                                               --------   --------   --------
    Total mortgage-related securities, amortized cost          $113,969   $103,879   $ 60,902
                                                               ========   ========   ========
    Total fair value(1)                                        $115,486   $104,472   $ 60,211
                                                               ========   ========   ========
</TABLE>


---------------------------
(1)      See Note 4 of the Notes to Consolidated Financial Statements in the
         Annual Report.


                                       19
<PAGE>   21
     The following table sets forth the purchases, sales and principal
repayments of the Bank's mortgage-related securities for the periods indicated.

<TABLE>
<CAPTION>
                                                                                        Year Ended September 30,
                                                                                   -----------------------------------
                                                                                      1998         1997         1996
                                                                                   ---------    ---------    ---------
                                                                                              (In thousands)
<S>                                                                                <C>          <C>          <C>      
Mortgage-related securities, beginning of period(1)(2)                             $ 125,179    $  83,432    $  79,832
                                                                                   ---------    ---------    ---------
Purchases:
  Mortgage-backed securities - held to maturity                                                                  1,938
  CMOs - held to maturity                                                              2,687                     2,000
  Mortgage-backed securities - available for sale                                     42,422       33,584       15,471
  CMOs - available for sale                                                           10,000       18,069        9,997
Sales:
  Mortgage-backed securities - available for sale                                    (13,200)                   (6,422)
  CMOs - available for sale                                                           (1,047)                   (6,374)
Repayments and prepayments:
  Mortgage-backed securities                                                         (14,456)      (7,668)      (6,467)
  CMOs                                                                               (18,336)      (4,057)      (5,788)
Increase in net premium                                                                   82          535          169
Change in net unrealized gain (loss) on mortgage-related securities
    available for sale                                                                   924        1,284         (924)
                                                                                   ---------    ---------    ---------
Net increase in mortgage-related securities                                            9,076       41,747        3,600
                                                                                   ---------    ---------    ---------
Mortgage-related securities, end of period(1)                                      $ 134,255    $ 125,179    $  83,432
                                                                                   =========    =========    =========
</TABLE>

--------------------------
(1)      Includes mortgage-related securities available for sale.

(2)      Calculated at amortized cost for securities held to maturity and at
         fair value for securities available for sale

     At September 30, 1998, the weighted average contractual maturity of the
Bank's fixed-rate mortgage-backed securities was approximately 23.2 years. The
actual maturity of a mortgage-backed security is less than its stated maturity
due to prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and adversely affect its yield
to maturity. The yield is based upon the interest income and the amortization of
any premium or discount related to the mortgage-backed security. In accordance
with GAAP, premiums and discounts are amortized over the estimated lives of the
loans, which decrease and increase interest income, respectively. The prepayment
assumptions used to determine the amortization period for premiums and discounts
can significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect actual prepayments. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
rising mortgage interest rates, if the coupon rates of the underlying mortgages
are less than the prevailing market interest rates offered for mortgage loans,
refinancings generally decrease and slow the prepayment of the underlying
mortgages and the related securities. Conversely, during periods of falling
mortgage interest rates, if the coupon rates of the underlying mortgages exceed
the prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related securities. Under such circumstances, the Bank may be subject to
reinvestment risk because to the extent that the Bank's mortgage-related
securities amortize or prepay faster than anticipated, the Bank may not be able
to reinvest the proceeds of such repayments and prepayments at a comparable
yield. At September 30, 1998, of the $18.8 million of mortgage-related
securities held to maturity, an


                                       20
<PAGE>   22
aggregate of $9.3 million were secured by fixed-rate securities and an aggregate
of $9.5 million were secured by adjustable-rate securities.

     Investment Securities. The following table sets forth information regarding
the carrying and fair value of the Company's investment securities, both held to
maturity and available for sale, at the dates indicated.

<TABLE>
<CAPTION>
                                                            At September 30,
                                        ---------------------------------------------------------
                                                1998              1997                 1996
                                              -------           -------              -------
                                        Carrying    Fair   Carrying     Fair   Carrying     Fair
                                         Value     Value     Value     Value     Value     Value
                                        -------   -------   -------   -------   -------   -------
                                                              (In thousands)
<S>                                     <C>       <C>       <C>       <C>       <C>       <C>    
FHLB stock                              $ 5,079   $ 5,079   $ 3,769   $ 3,769   $ 2,337   $ 2,337
U.S. Government and agency
 obligations                             12,000    12,109    17,000    16,958    16,500    16,388
Municipal securities                     18,993    19,477     3,138     3,213       145       144
Mutual funds                              2,000     1,992
Preferred stocks                          5,500     5,763
Other equity investments                  1,390     1,280
                                        -------   -------   -------   -------   -------   -------
    Total                               $44,962   $45,700   $23,907   $23,940   $18,982   $18,869
                                        =======   =======   =======   =======   =======   =======
</TABLE>

     At September 30, 1998, the Company had an aggregate of $45.0 million, or
10.8%, of total assets invested in investment securities, of which $5.1 million
consist of FHLB stock and $39.9 million was investment securities available for
sale. Included in U.S. Government and agency obligations are callable bonds with
a term of three years. The Bank's investment securities (excluding equity
securities and FHLB stock) had a weighted average contractual maturity of 14.92
years and a weighted average yield of 6.97% (adjusted to a fully taxable
equivalent yield).

SOURCES OF FUNDS

     General. The Bank's principal source of funds for use in lending and for
other general business purposes has traditionally come from deposits obtained
through the Bank's branch offices. The Bank also derives funds from contractual
payments and prepayments of outstanding loans and mortgage-related securities,
from sales of loans, from maturing investment securities and from advances from
the FHLB of Pittsburgh and other borrowings. Loan repayments are a relatively
stable source of funds, while deposits inflows and outflows are significantly
influenced by general interest rates and money market conditions. The Bank uses
borrowings to supplement its deposits as a source of funds.

     Deposits. The Bank's current deposit products include passbook accounts,
NOW accounts, MMDA, certificates of deposit ranging in terms from 30 days to
five years and noninterest-bearing personal and business checking accounts. The
Bank's deposit products also include Individual Retirement Account ("IRA")
certificates and Keogh accounts.

     The Bank's deposits are obtained primarily from residents in Delaware and
Chester Counties in southeastern Pennsylvania. The Bank attracts local deposit
accounts by offering a wide variety of accounts, competitive interest rates, and
convenient branch office locations and service hours. The Bank utilizes
traditional marketing methods to attract new customers and savings deposits,
including print media and radio advertising and direct mailings. However, the
Bank does not solicit funds through deposit brokers nor does it pay any
brokerage fees if it accepts such deposits. The Bank participates in the
regional ATM network known as MAC(R).


                                       21
<PAGE>   23
     The Bank has been competitive in the types of accounts and in interest
rates it has offered on its deposit products but does not necessarily seek to
match the highest rates paid by competing institutions. With the significant
decline in interest rates paid on deposit products, the Bank in recent years has
experienced disintermediation of deposits into competing investment products.

     The following table shows the distribution of, and certain information
relating to, the Bank's deposits by type of deposit as of the dates indicated.

<TABLE>
<CAPTION>
                                                     September 30,
                             --------------------------------------------------------------
                                     1998                  1997                 1996
                                     ----                  ----                 ----
                              Amount    Percent      Amount   Percent      Amount   Percent
                             --------   -------    --------   -------    --------   -------
                                                 (Dollars in thousands)
<S>                          <C>          <C>      <C>          <C>      <C>          <C>   
Passbook accounts            $ 37,988     15.36%   $ 38,035     16.69%   $ 41,504     18.93%
MMDA accounts                  16,087      6.50      16,429      7.21      16,159      7.37
NOW accounts                   28,181     11.40      27,754     12.18      28,085     12.81
Certificates of deposit       156,801     63.40     139,535     61.22     128,747     58.73
Noninterest-bearing
 deposits                       8,254      3.34       6,165      2.70       4,710      2.16
                             --------   -------    --------   -------    --------   -------
  Total deposits             $247,311    100.00%   $227,918    100.00%   $219,205    100.00%
                             ========   =======    ========   =======    ========   =======
</TABLE>


     The following table sets forth the net savings flows of the Bank during the
periods indicated.

<TABLE>
<CAPTION>
                                                       Year Ended September 30,
                                                    ------------------------------
                                                        1998       1997       1996
                                                    --------   --------   --------
                                                            (In thousands)
<S>                                                 <C>        <C>        <C>      
Increase (Decrease) before interest credited        $  9,737   $     99   $(13,152)

Interest credited                                      9,656      8,614      8,604
                                                    --------   --------   --------

Net savings increase (decrease)                     $ 19,393   $  8,713   $ (4,548)
                                                    ========   ========   ========
</TABLE>

     The following table sets forth maturities of the Bank's certificates of
deposit of $100,000 or more at September 30, 1998 by time remaining to maturity.

<TABLE>
<CAPTION>
                                                     Amounts in
                                                     Thousands
                                                     ---------
<S>                                                  <C>   
Three months or less                                   $4,541
Over three months through six months                    3,145
Over six months through twelve months                   3,185
Over twelve months                                      5,031
                                                       ------
                                                      $15,902
                                                       ======
</TABLE>       


                                       22
<PAGE>   24
     The following table presents, by various interest rate categories, the
amount of certificates of deposit at September 30, 1998 and 1997 and the amounts
at September 30, 1998 which mature during the periods indicated.

<TABLE>
<CAPTION>
                                                                  Amounts at September 30, 1998
                               September 30,                             Maturing Within
                         -------------------------     ------------------------------------------------------
Certificates of
     Deposit                   1998           1997      One Year      Two Years    Three Years     Thereafter
-----------------        ----------     ----------     ---------      ---------    -----------     ----------
                                               (In thousands)
<S>                      <C>            <C>            <C>             <C>         <C>             <C>
 4.0% or less            $      647     $      394     $     647
 4.01% to 6.0%              141,948        116,480       103,226       $20,910       $8,307         $ 9,505
 6.01% to 8.0%               13,248         19,705         5,070         8,097           48              33
 8.01% to 10.0%                 958          2,956           958                                    
                         ----------     ----------     ---------       -------       ------         -------
Total certificate
  accounts               $  156,801     $  139,535     $ 109,901       $29,007       $8,355         $ 9,538
                         ---=======     ---=======     --=======       -======       -=====          ======
</TABLE>

The following table presents the average balance of each deposit type and the
average rate paid on each deposit type for the periods indicated.

<TABLE>
<CAPTION>
                                                              September 30,
                                     -----------------------------------------------------------------
                                            1998                    1997                  1996
                                     -------------------   --------------------   --------------------
                                                Average                Average                Average
                                     Average      Rate      Average      Rate      Average     Rate
                                     Balance      Paid      Balance      Paid      Balance     Paid
                                     --------   --------    --------   --------    --------   --------
                                                          (Dollars in thousands)
<S>                                  <C>        <C>         <C>        <C>         <C>        <C>  
Passbook accounts                    $ 38,273       2.41%   $ 39,199       2.42%   $ 42,270       2.44%
MMDA accounts                          16,368       2.76      16,350       2.75      18,358       2.65
Certificates of deposit               145,105       5.64     133,091       5.58     128,384       5.82
NOW accounts                           29,412       1.28      28,143       1.28      27,098       1.37
Noninterest-bearing
  deposits                              5,779                  4,357                  4,193
                                     --------   --------    --------   --------    --------   --------
    Total deposits                   $234,937       4.23%   $221,140       4.15%   $220,303       4.25%
                                     ========   ========    ========   ========    ========   ========
</TABLE>


                                       23
<PAGE>   25
     Borrowings. The Bank may obtain advances from the FHLB of Pittsburgh upon
the security of the common stock it owns in the FHLB and certain of its
residential mortgage loans and securities held to maturity, provided certain
standards related to creditworthiness have been met. Such advances are made
pursuant to several credit programs, each of which has its own interest rate and
range of maturities. The Bank, during fiscal 1998 and 1997, increased its FHLB
borrowings to fund asset growth thereby leveraging, in part, the capital raised
as a result of the issuance of trust preferred securities in fiscal 1997. At
September 30, 1998, the Bank had $101.6 million in outstanding FHLB advances.
See Note 10 of the Notes to Consolidated Financial Statements in the Annual
Report.

     The Bank has entered into agreements to sell securities under terms which
require it to repurchase the same or substantially similar securities by a
specified date. Repurchase agreements are considered borrowings which are
secured by the sold securities. At September 30, 1998, the Bank had $19.3
million of repurchase agreements outstanding scheduled to mature in 2000. See
Note 11 of the Notes to Consolidated Financial Statements in the Annual Report.

Both the FHLB advances and the repurchase agreements have certain call features
whereby the issuer can call the borrowings after the expiration of certain
timeframes. The timeframes on the callable borrowings range from three months to
three years.

SUBSIDIARIES

     The Bank is permitted to invest up to 2% of its assets in the capital stock
of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of September 30, 1998, the Bank was authorized to invest up to approximately
$8.8 million in the stock of, or loans to, service corporations. As of September
30, 1998, the net book value of the Bank's investment in stock, unsecured loans,
and conforming loans to its service corporations was $1.2 million.

     At September 30, 1998, in addition to the Bank, the Company had five direct
or indirect subsidiaries, First Keystone Capital Trust I, FKF Management
Corporation, Inc., First Pointe, Inc. ("First Pointe"), First Chester Services,
Inc., State Street Development, Inc. and First Media Services, Inc.

     First Keystone Capital Trust I (the "Trust") is a Delaware statutory
business trust wholly owned by the Company formed in 1997 for the purpose of
issuing trust preferred securities and investing the proceeds therefrom in
Junior Subordinated Debentures issued by the Company. See Note 20 of the Notes
to Consolidated Financial Statements in the Annual Report.

     FKF Management Corp., Inc., a Delaware corporation, is a wholly owned
operating subsidiary of the Bank established in 1997 for the purpose of managing
assets of the Bank. Assets under management totaled $135.5 million comprised
principally of investment and mortgage-related securities.

     First Pointe, is a wholly owned subsidiary of the Bank which was formed for
the purpose of developing a real estate parcel received in a deed-in-lieu of
foreclosure action. At September 30, 1998, the Bank's equity investment in First
Pointe was a net deficit of $53,213 and First Pointe had total assets of $1.7
million consisting of 15 units substantially all of which are completed. For the
year ended September 30, 1998, First Pointe had a net loss of $18,339.

     The Bank has three remaining subsidiaries, all inactive, which had been
involved in either real estate development or real estate management. With the
Bank's cessation of its involvement in such activities and the resolution of the
various development projects in which the subsidiaries were involved, these
subsidiaries were placed on an inactive status. See "-Asset Quality -
Non-Performing Assets" and Notes 1 and 7 of the Notes to Consolidated Financial
Statements in the Annual Report.


                                       24
<PAGE>   26
COMPETITION

     The Bank faces strong competition both in attracting deposits and making
real estate loans. Its most direct competition for deposits has historically
come from other savings associations, credit unions and commercial banks located
in its market area including many large financial institutions which have
greater financial and marketing resources available to them. In addition, during
times of high interest rates, the Bank has faced additional significant
competition for investors' funds from short-term money market securities, mutual
funds and other corporate and government securities. The ability of the Bank to
attract and retain savings deposits depends on its ability to generally provide
a rate of return, liquidity and risk comparable to that offered by competing
investment opportunities.

     The Bank experiences strong competition for real estate loans principally
from other savings associations, commercial banks and mortgage banking
companies. The Bank competes for loans principally through the interest rates
and loan fees it charges and the efficiency and quality of services it provides
borrowers and the convenient locations of its branch office network. Competition
may increase as a result of the continuing reduction of restrictions on the
interstate operations of financial institutions.

EMPLOYEES

     The Bank had 77 full-time employees and 8 part-time employees as of
September 30, 1998. None of these employees is represented by a collective
bargaining agreement. The Bank believes that it enjoys excellent relations with
its personnel.


                                       25
<PAGE>   27
REGULATION

     The Company. The Company as a savings and loan holding company within the
meaning of the Home Owners' Loan Act, as amended ("HOLA"), is required to
register as such with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, the Bank is subject to certain restrictions in its dealings
with the Company and affiliates thereof.

     Federal Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings association. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association; (ii)
transactions between the savings association and its affiliates; and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet a QTL test, then
such unitary holding company also shall become subject to the activities
restrictions applicable to multiple savings and loan holding companies and,
unless the savings association qualifies as a QTL within one year thereafter,
shall register as, and become subject to the restrictions applicable to, a bank
holding company. See "- The Bank - Qualified Thrift Lender Test."

     If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings associations)
would thereafter be subject to further restrictions. No multiple savings and
loan holding company or subsidiary thereof which is not a savings association
shall commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof any business
activity, other than: (i) furnishing or performing management services for a
subsidiary savings association; (ii) conducting an insurance agency or escrow
business; (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings association; (iv) holding or managing properties used
or occupied by a subsidiary savings association; (v) acting as trustee under
deeds of trust; (vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies. The activities
described in (i) through (vi) above may only be engaged in after giving the OTS
prior notice and being informed that the OTS does not object to such activities.
In addition, the activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.

     Limitations on Transactions with Affiliates. Transactions between savings
associations and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act ("FRA") and OTS regulations issued in connection therewith.
An affiliate of a savings association is any company or entity which controls,
is controlled by or is under common control with the savings association. In a
holding company context, the parent holding company of a savings association
(such as the Company) and any companies which are controlled by such parent
holding company are affiliates of the savings association. Generally, Sections
23A and 23B (i) limit the extent to which the savings association or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such association's capital stock and surplus, and contain
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the association or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes, among other things, the making of loans or
extension of credit to an affiliate, purchase of assets, issuance of a guarantee
and similar transactions. In addition to the restrictions imposed by Sections
23A and 23B, under OTS regulations no savings association may (i) loan or
otherwise extend


                                       26
<PAGE>   28
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, (ii) a savings
association may not purchase or invest in securities of an affiliate other than
shares of a subsidiary; (iii) a savings association and its subsidiaries may not
purchase a low-quality asset from an affiliate; (iv) and covered transactions
and certain other transactions between a savings association or its subsidiaries
and an affiliate must be on terms and conditions that are consistent with safe
and sound banking practices. With certain exceptions, each extension of credit
by a savings association to an affiliate must be secured by collateral with a
market value ranging from 100% to 130% (depending on the type of collateral) of
the amount of the loan or extension of credit.

     The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations may
be required to give the OTS prior notice of affiliate transactions.

     In addition, Sections 22(g) and (h) of the FRA place restrictions on loans
to executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, an executive officer and to a greater than 10%
stockholder of a savings institution (a "principal stockholder"), and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered to employees of the Bank and also
requires prior board approval for certain loans. In addition, the aggregate
amount of extensions of credit by a savings institution to all insiders cannot
exceed the institution's unimpaired capital and surplus. Furthermore, Section
22(g) places additional restrictions on loans to executive officers. At
September 30, 1998, the Bank was in compliance with the above restrictions.

     Restrictions on Acquisitions. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings association or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings association or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings association, other than
a subsidiary savings association, or of any other savings and loan holding
company.

     Federal Securities Laws. The Company's Common Stock is registered with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934 ("Exchange Act"). The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.

     Shares of common stock owned by an affiliate of the Company are subject to
the resale restrictions of Rule 144 under the Securities Act of 1933, as amended
("Securities Act"). If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the Company
who complies with the other conditions of Rule 144 (including those that require
the affiliate's sale to be aggregated with those of certain other persons) is
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks.

     The Bank. The OTS has extensive regulatory authority over the operations of
savings associations. As part of this authority, savings associations are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.


                                       27
<PAGE>   29
     The OTS' enforcement authority over all savings associations and their
holding companies was substantially enhanced by Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"). This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS. FIRREA significantly increased the amount of and
grounds for civil money penalties. FIRREA requires, except under certain
circumstances, public disclosure of final enforcement actions by the OTS.

     Insurance of Accounts. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the United States Government. As insurer, the
FDIC is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the OTS an
opportunity to take such action.

     The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is not aware of any existing circumstances which could
result in termination of the Bank's deposit insurance.

     The BIF fund met its target reserve level in September 1995, but the SAIF
was not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semi-annual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to an annual minimum of
$2,000) for institutions in the lowest risk category. Deposit insurance premiums
for SAIF members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category).

     On September 30, 1996, President Clinton signed into law legislation (the
"Deposit Insurance Funds Act of 1996") to eliminate the premium differential
between SAIF-insured institutions and BIF-insured institutions by recapitalizing
the SAIF's reserves to the required ratio. The legislation provided that all
SAIF member institutions pay a one-time special assessment to recapitalize the
SAIF, which in the aggregate was sufficient to bring the reserve ratio in the
SAIF to 1.25% of insured deposits. The legislation also provided for the merger
of the BIF and the SAIF, with such merger being conditioned upon, among other
things, the prior elimination of the federal thrift charter.

     Effective October 8, 1996, pursuant to the provision of the Deposit
Insurance Funds Act of 1996, FDIC regulations imposed a one-time special
assessment equal to 65.7 basis points for all SAIF-assessable deposits as of
March 31, 1995, which was collected on November 27, 1996. The Bank's one-time
special assessment amounted to approximately $1.4 million. Net of related tax
benefits, the one-time special assessment amounted to $876,000.

     Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. Beginning October 1, 1996,
effective BIF and SAIF rates both range from zero basis points to 27 basis
points. From 1997 through 1999, SAIF members will pay 6.4 basis points to fund
the Financing Corporation while BIF member institutions will pay approximately
1.3 basis points.


                                       28
<PAGE>   30
     Capital requirements. Federally insured savings associations are required
to maintain minimum levels of regulatory capital. Pursuant to FIRREA, the OTS
has established capital standards applicable to all savings associations. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.

     Current OTS capital standards require savings associations to satisfy three
different capital requirements. Under these standards, savings associations must
maintain "tangible" capital equal to 1.5% of adjusted total assets, "core"
capital equal to 4% of adjusted total assets and "total" capital (a combination
of core and "supplementary" capital) equal to 8.0% of "risk-weighted" assets.
For purposes of the regulation, core capital generally consists of common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits and "qualifying supervisory goodwill." Tangible capital is given the
same definition as core capital but does not include qualifying supervisory
goodwill and is reduced by the amount of all the savings association's
intangible assets, with only a limited exception for purchased mortgage
servicing rights ("PMSRs"). Both core and tangible capital are further reduced
by an amount equal to a savings association's debt and equity investments in
subsidiaries engaged in activities not permissible for national banks (other
than subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). In addition, under the Prompt Corrective Action provisions
of the OTS regulations, all but the most highly rated institutions must maintain
a minimum leverage ratio of 4% in order to be adequately capitalized. See "-
Prompt Corrective Action." At September 30, 1998, the Bank did not have any
investment in subsidiaries engaged in impermissible activities and required to
be deducted from its capital calculation.

     The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") granted the OTS the authority to prescribe rules for the amount of
PMSRs that may be included in a savings association's regulatory capital and
required that the value of readily marketable PMSRs included in the calculation
of a savings association's regulatory capital not exceed 90% of fair market
value and that such value be determined at least quarterly. Under final OTS
rules effective March 4, 1994, (i) PMSRs do not have to be deducted from
tangible and core regulatory capital, provided that they do not exceed 50% of
core capital, (ii) savings associations are required to determine the fair
market value and to review the book value of their PMSRs at least quarterly and
to obtain an independent valuation of PMSRs annually, (iii) savings associations
that desire to include PMSRs in regulatory capital may not carry them at a book
value under GAAP that exceeds the discounted value of their future net income
stream and (iv) for purposes of calculating regulatory capital, the amount of
PMSRs reported as balance sheet assets should amount to the lesser of 90% of
their fair market value, 90% of their original purchase price or 100% of their
remaining unamortized book value. At September 30, 1998, the Bank had PMSRs
totalling $148,000.

     A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital does not exceed the savings association's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
repossessed assets or loans more than 90 days past due. Single-family
residential real estate loans which are not past-due or non-performing and which
have been made in accordance with prudent underwriting standards are assigned a
50% level in the risk-weighing system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans.
Off-balance sheet items also are adjusted to take into account certain risk
characteristics.

     Under OTS regulations, an institution with a greater than "normal" level of
interest rate exposure must deduct an interest rate risk ("IRR") component from
total capital for purposes of calculating risk-based capital requirement.
Interest rate exposure is measured, generally, as the decline in an
institution's net portfolio value that would result from a 200 basis point
increase or decrease in market interest rates (whichever would result in lower
net portfolio value), divided by the estimated economic value of the savings
association's assets. The interest rate risk component


                                       29
<PAGE>   31
to be deducted from total capital is equal to one-half of the difference between
an institution's measured exposure and "normal" IRR exposure (which is defined
as 2%), multiplied by the estimated economic value of the institution's assets.
Although the OTS has decided to delay implementation of this rule, it will
continue to closely monitor the level of interest rate risk at individual
savings associations and it retains the authority, on a case-by-case basis, to
impose additional capital requirements for individual savings associations with
significant interest rate risk. The OTS recently updated its standards regarding
the management of interest rate risk to include summary guidelines to assist
savings associations in determining their exposures to interest rate risk.


                                       30
<PAGE>   32
         The following is a reconciliation of the Bank's equity determined in
 accordance with GAAP to regulatory tangible, core, and risk-based capital at
 September 30, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
                                        September 30, 1998              September 30, 1997             September 30, 1996
                                   -----------------------------    ------------------------------  -----------------------------
                                   Tangible   Core     Risk-based   Tangible   Core     Risk-based  Tangible    Core    Risk-based
                                   Capital   Capital     Capital    Capital   Capital     Capital   Capital   Capital    Capital
                                   -------   -------     -------    -------   -------     -------   -------   -------    --------
                                                            (In thousands)
<S>                                <C>       <C>         <C>        <C>       <C>         <C>       <C>        <C>         <C>    
GAAP equity                        $33,701   $33,701     $33,701    $30,254   $30,254     $30,254   $22,608    $22,608     $22,608
Assets required to be deducted(1)                                                                                              (55)
General valuation allowances                               1,688                            1,578                            1,775
                                   -------   -------     -------    -------   -------     -------   -------    -------     -------

Total regulatory capital            33,701    33,701      35,389     30,254    30,254      31,832    22,608     22,608      24,328
Minimum capital requirement per
  FIRREA published guidelines        6,113    12,225      13,424      5,594    11,188      12,792     4,421      8,841      11,289
                                   -------   -------     -------    -------   -------     -------   -------    -------     -------
Excess                             $27,588   $21,476     $21,965    $24,660   $19,066     $19,040   $18,187    $13,767     $13,039
                                   -======   -======     -======    -======   -======     -======   -======    -======     -======
</TABLE>



----------------------

(1)  Consists of equity investment nonincludable in regulatory capital.

     These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings association's capital, upon a determination that the
regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings association is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
association may be adversely affected by the activities or condition of its
holding company, affiliates, subsidiaries or other persons or savings
associations with which it has significant business relationships. The Bank is
not subject to any such individual minimum regulatory capital requirement.


                                       31
<PAGE>   33
     Prompt Corrective Action. Under Section 38 of the FDIA as added by FDICIA,
the OTS adopted in 1992 regulations implementing Section 38 of the FDIA. Under
the regulations, an institution shall be deemed to be (i) "well capitalized" if
it has total risk-based capital of 10% or more, has a Tier I risk-based capital
ratio of 6% or more, has a Tier I leverage capital ratio of 5% or more and is
not subject to any order or final capital directive to meet and maintain a
specific capital level for any capital measure, (ii) "adequately capitalized" if
it has a total risk-based capital ratio of 8% or more, a Tier I risk-based
capital ratio of 4% or more and a Tier I leverage capital ratio of 4% or more
(3% under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8%, a Tier I risk-based capital ratio that is less than
4% or a Tier I leverage capital ratio that is less than 4% (3% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6%, a Tier I risk-based capital ratio
that is less than 3% or a Tier I leverage capital ratio that is less than 3%,
and (v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2%. Section 38 of the FDIA and the
OTS regulations promulgated thereunder also specify circumstances under the OTS
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized institution
to comply with supervisory actions as if it were in the next lower category
(except that the FDIC may not reclassify a significantly undercapitalized
institution as critically undercapitalized). At September 30, 1998 the Bank meet
the requirements of a "well capitalized" institution under OTS regulations.

     Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required minimum
liquid asset ratio is 4%. The Bank has consistently exceeded such regulatory
liquidity requirement and, for the quarter ended September 30, 1998, had a
liquidity ratio of 4.98%

     Qualified Thrift Lender Test. Under Section 2303 of the Economic Growth and
Regulatory Paper work Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and the
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended ("Code"). The QTL Test set forth in the HOLA requires that
Qualified Thrift Investments ("QTLs") represent 65% of portfolio assets. A
savings institution that does not comply with the QTL test must either convert
to a bank charter or comply with the following restrictions on its operations:
(i) the association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the association
shall be restricted to those of a national bank; (iii) the association shall not
be eligible to obtain any advances from its FHLB; and (iv) payment of dividends
by the association shall be subject to the rules regarding payment of dividends
by a national bank. Upon the expiration of three years from the date the
association ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).

     Portfolio assets are defined as total assets less intangibles, property
used by a savings association in its business and liquidity investments in an
amount not exceeding 20% of assets. Generally, QTLs are residential housing
related assets, The recent legislation allows small business loans, credit card
loans, student loans and loans for personal, family and household purposes to be
included without limitation as qualified investments. In addition, commercial
loans may be made in an amount up to 10% of total assets. At September 30, 1998,
approximately 86.20% of the Bank's assets were invested in QTLs, which was in
excess of the percentage required to qualify the Bank under the QTL Test in
effect at that time.

     Restrictions on Capital Distributions. OTS regulations govern capital
distributions by savings associations, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association to make capital distributions. Generally, the regulation
creates a safe harbor for specified levels of capital distributions from
associations meeting at least their minimum capital requirements, so long as
such associations notify the OTS and


                                       32
<PAGE>   34
receive no objection to the distribution from the OTS. Savings institutions and
distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.

     Generally, savings associations that before and after the proposed
distribution meet or exceed their fully phased-in capital requirements, or Tier
1 associations, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the association's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. Failure to meet fully phased-in or minimum capital requirements will
result in further restrictions on capital distributions including possible
prohibition without explicit OTS approval. See "- Capital Requirements."

     In order to make distributions under these safe harbors, Tier 1 and Tier 2
associations must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 association deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 association as a result of such a determination. The Bank
currently is a Tier 1 institution for purposes of the regulation dealing with
capital distributions.

     OTS regulations also prohibit the Bank from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of the Bank would be reduced below the amount required to be
maintained for the liquidation account established by it for certain depositors
in connection with its conversion from mutual to stock form.

     The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS prompt corrective action regulation. Under
the proposed regulation, an institution that would remain at least adequately
capitalized after making a capital distribution, and that was owned by a holding
company, would be required to provide notice to the OTS prior to making a
capital distribution. "Troubled" associations and undercapitalized associations
would be allowed to make capital distributions only by filing an application and
receiving OTS approval, and such applications would be approved under certain
limited circumstances.

     Community Reinvestment. Under the Community Reinvestment Act of 1977, as
amended ("CRA"), as implemented by OTS regulations, a savings association has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The Bank received a satisfactory rating as a result of its last OTS evaluation.

     Policy Statement on Nationwide Branching. Effective May 11, 1992, the OTS
amended and codified its policy statement on branching by federally chartered
savings associations to delete then-existing regulatory restrictions on the
branching authority of such associations and to permit nationwide branching to
the extent allowed by federal statute. (Prior OTS policy generally permitted
interstate branching for federally chartered savings associations only to the
extent allowed state-chartered savings associations in the states where the
association's home office was located and where the branch was sought or if the
branching resulted from OTS approval of a supervisory interstate acquisition of
a troubled institution.) Current OTS policy generally permits a federally
chartered savings association to establish branch offices outside of its home
state if the association meets the domestic building and loan test in Section
7701(a)(19) of the Code or the asset composition test of subparagraph (c) of
that section, and if, with respect to each state outside of its home state where
the association has established branches, the branches, taken alone, also
satisfy one of the two tax tests. An association seeking to take advantage of
this authority would have to have a branching application approved by the OTS,
which would consider the regulatory capital of the association and its record
under the CRA, as amended, among other things.


                                       33
<PAGE>   35
     Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.

     As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its advances from the FHLB of Pittsburgh,
whichever is greater. At September 30, 1998, the Bank had $5.1 million in FHLB
stock, which was in compliance with this requirement.

     The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended September 30, 1998, 1997 and
1996, dividends from the FHLB to the Bank amounted to approximately $261,000,
$196,000 and $106,000, respectively. If dividends were reduced, the Bank's net
interest income would likely also be reduced. Further, there can be no assurance
that the impact of recent or future legislation on the FHLBs will not also cause
a decrease in the value of FHLB stock held by the Bank, if any.

     Federal Reserve System. The Federal Reserve Bank ("FRB") requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
At September 30, 1998, the Bank was in compliance with applicable requirements.
However, because required reserves must be maintained in the form of vault cash
or a noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets.

     Safety and Soundness Guidelines. The OTS and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial, as well as compensation matters for insured
financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.

FEDERAL AND STATE TAXATION

     General. The Company and the Bank are subject to the corporate tax
provisions of the Code, as well as certain additional provisions of the Code
which apply to thrift and other types of financial institutions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Company and
the Bank.

     Fiscal Year. For the year ended September 30, 1995 and thereafter, the
Company and the Bank and its subsidiaries file a consolidated federal income tax
return on a fiscal year basis. Prior to September 30, 1995, the Company and the
Bank and its subsidiaries filed consolidated federal income tax returns on a
calendar year basis.

     Method of Accounting. The Bank maintains its books and records for federal
income tax purposes using the accrual method of accounting. The accrual method
of accounting generally requires that items of income be recognized when all
events have occurred that establish the right to receive the income and the
amount of income can be determined with reasonable accuracy, and that items of
expense be deducted at the later of (i) the time when all events have occurred
that establish the liability to pay the expense and the amount of such liability
can be determined with reasonable accuracy or (ii) the time when economic
performance with respect to the item of expense has occurred.

     Bad Debt Reserves. The Bank is permitted to establish reserves for bad
debts and to make annual additions thereto which qualify as deductions from
taxable income. The Company, as of October 1, 1996, changed its method of
computing reserves for bad debts to the experience method (the "Experience
Method"). The bad debt deduction


                                       34
<PAGE>   36
allowable under this method is available to small banks with assets less than
$500 million. Generally, this method will allow the Company to deduct an annual
addition to the reserve for bad debts equal to the increase in the balance of
the Company's reserve for bad debts at the end of the year to an amount equal to
the percentage of total loans at the end of the year, computed using the ratio
of the previous six years net charge offs divided by the sum of the previous six
years total outstanding loans at year end.

     The Bank treated such change as a change in a method of accounting
determined solely with respect to the "applicable excess reserves" of the
institution. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after December 31, 1995. The timing of the recapture may be
delayed for a two-year period provided certain residential lending requirements
are met. For financial reporting purposes, the Company will not incur any
additional tax expense. At September 30, 1997, under SFAS No. 109, deferred
taxes were provided on the difference between the book reserve at September 30,
1997 and the applicable excess reserve in an amount equal to the Bank's increase
in the tax reserve from December 31, 1987 to September 30, 1997.

     Prior to September 30, 1996, the Bank had the option of electing either the
experience method or the percentage of taxable income method (the "Percentage
Method") for its annual addition to the bad debt reserves.

     Under the Experience Method, the deductible annual addition is the amount
necessary to increase the balance of the reserve at the close of the taxable
year to the greater of (i) the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum of
the loans outstanding at the close of those six years or (ii) the balance in the
reserve account at the close of the Bank's "base year," which was its tax year
ended December 31, 1987.

     Under the Percentage Method, the bad debt deduction with respect to
qualifying real property loans is computed as a percentage of the Bank's taxable
income before such deduction, as adjusted for certain items (such as capital
gains and the dividends received deduction). Under this method, a qualifying
institution such as the Bank generally may deduct 8% of its taxable income. In
the absence of other factors, the availability of the Percentage Method has
permitted a qualifying savings institution, such as the Bank, to be taxed at an
effective federal income tax rate of 31.28%, as compared to 34% for corporations
generally.

     For taxable years ended on or before December 31, 1988, the Bank has
generally elected to use the Percentage Method to compute the amount of its bad
debt deduction with respect to its qualifying real property loans. For all
taxable years ended after December 31, 1988 with the exception of the September
30, 1996 tax year, the Bank elected to use the Experience Method to compute the
amount of its bad debt deduction with respect to its qualifying real property
loans.

     The income of the Company or any non-bank subsidiaries would not be subject
to the bad debt deduction allowed the Bank, whether or not consolidated tax
returns are filed.

     Distributions. While the Bank maintains a bad debt reserve, if it were to
distribute cash or property to its sole stockholder having a total fair market
value in excess of its accumulated tax-paid earnings and profits, or were to
distribute cash or property to its stockholder in redemption of its stock, the
Bank would generally be required to recognize as income an amount which, when
reduced by the amount of federal income tax that would be attributable to the
inclusion of such amount in income, is equal to the lesser of: (i) the amount of
the distribution or (ii) the sum of (a) the amount of the accumulated bad debt
reserve of the Bank with respect to qualifying real property loans (to the
extent that additions to such reserve exceed the additions that would be
permitted under the experience method) and (b) the amount of the Bank's
supplemental bad debt reserve.

     Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20%
on a base of regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI"). The alternative minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
an item of tax preference is the excess of the bad debt deduction allowable for
a taxable year pursuant to the percentage of


                                       35
<PAGE>   37
taxable income method over the amount allowable under the experience method. The
other items of tax preference that constitute AMTI include (a) tax-exempt
interest on newly-issued (generally, issued on or after August 8, 1986) private
activity bonds other than certain qualified bonds and (b) for taxable years
beginning after 1989, 75% of the excess (if any) of (i) adjusted current
earnings as defined in the Code, over (ii) AMTI (determined without regard to
this preference and prior to reduction by net operating losses). Net operating
losses can offset no more than 90% of AMTI. Certain payments of alternative
minimum tax may be used as credits against regular tax liabilities in future
years.

     Audit by IRS. The Bank's consolidated federal income tax returns for
taxable years through December 31, 1994 have been closed for the purpose of
examination by the IRS.

STATE TAXATION

     The Company is subject to the Pennsylvania Corporate Net Income Tax and
Capital Stock and Franchise Tax. The Corporate Net Income Tax rate for fiscal
1998 is 9.99% and is imposed on the Company's unconsolidated taxable income for
federal purposes with certain adjustments. In general, the Capital Stock Tax is
a property tax imposed at the rate of 1.3% of a corporation's capital stock
value, which is determined in accordance with a fixed formula.

     The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax Act
(the ("MTIT"), as amended to include thrift institutions having capital stock.
Pursuant to the MTIT, the Bank's tax rate is 11.5%. The MTIT exempts the Bank
from all other taxes imposed by the Commonwealth of Pennsylvania for state
income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with GAAP with certain
adjustments. The MTIT, in computing GAAP income, allows for the deduction of
interest earned on state and federal securities, while disallowing a percentage
of a thrift's interest expense deduction in the proportion of interest income on
those securities to the overall interest income of the Bank. Net operating
losses, if any, thereafter can be carried forward three years for MTIT purposes.


                                       36
<PAGE>   38
ITEM 2.  PROPERTIES

         At September 30, 1998, the Bank conducted business from its executive
         offices located in Media, Pennsylvania and five full-service offices
         located in Delaware and Chester Counties, Pennsylvania. See also Note 8
         of the Notes to Consolidated Financial Statements in the Annual Report.

         The following table sets forth certain information with respect to the
         Bank's offices at September 30, 1998.

<TABLE>
<CAPTION>
                                                                            Net Book Value               Amount of
     Description/Address                  Leased/Owned                       of Property                 Deposits
-----------------------------           ----------------                  ------------------      ------------------------
                                                                            (In thousands)
<S>                                     <C>                               <C>                     <C>
Executive Offices:

22 West State Street
Media, Pennsylvania 19063                    Owned(1)                           $1,018                     $ 78,410



Branch Offices:

3218 Edgmont Avenue
Brookhaven, Pennsylvania 19015               Owned                                 316                       79,716



Routes 1 and 100
Chadds Ford, Pennsylvania 19318              Leased(2)                              72                       24,102



23 East Fifth Street
Chester, Pennsylvania 19013                  Leased(3)                             242                       15,523



330 Dartmouth Avenue
Swarthmore, Pennsylvania 19081               Owned                                 121                       44,831



Route 82 and 926                             Leased(4)                              72                        4,729
Kennett Square, PA  19348                                                       ------                     --------
                                                                                $1,841                     $247,311
                                                                                -=====                     -=======
</TABLE>

----------------------------

(1)  Also a branch office.

(2)  Lease expiration date is September 30, 2000. The Bank has two five year
     renewal options.

(3)  Lease expiration date is December 31, 2005. The Bank has one ten year
     renewal option.

(4)  Lease expiration date is September 30, 2001. The Bank has four five year
     renewal options.


                                       37
<PAGE>   39
ITEM 3.  LEGAL PROCEEDINGS.

         The Company is involved in routine legal proceedings occurring in the
         ordinary course of business which, in the aggregate, are believed by
         management to be immaterial to the financial condition of the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         Not applicable.

PART II.

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The information required herein is incorporated by reference on page 42
         of the Company's Annual Report.

ITEM 6.  SELECTED FINANCIAL DATA.

         The information required herein is incorporated by reference from pages
         1 to 2  of the Registrant's Annual Report.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATION.

         The information required herein is incorporated by reference from pages
         7 to 18 of the Registrant's Annual Report.

ITEM 7A  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The Company's balance sheet consists of interest-earning assets and
         interest-bearing liabilities, and is therefore exposed to interest rate
         risk. The following additional information is being provided regarding
         the exposure to this interest rate risk.

         The Company utilizes reports prepared by the OTS to measure interest
         rate risk. Using data from the Bank's quarterly thrift financial
         reports, the OTS models the net portfolio value ("NPV") of the Bank
         over a variety of interest rate scenarios. The NAV is defined as the
         present value of expected cash flows from existing assets less the
         present value of expected cash flows from existing liabilities plus the
         present value of net expected cash inflows from existing off-balance
         sheet contracts. The model assumes instantaneous, parallel shifts in
         the U.S. Treasury Securities yield curve of 100 to 400 basis points,
         either up or down, and in 100 basis point increments.

         The interest rate risk measures used by the OTS include an "Exposure
         Measure" or "Post-Shock" NPV ratio and a "Sensitivity Measure". The
         "Post-Shock" NPV ratio is the net present value as a percentage of
         assets over the various yield curve shifts. A low "Post-Shock" NPV
         ratio indicates greater exposure to interest rate risk and can result
         from a low initial NPV ratio or high sensitivity to changes in interest
         rates. The "Sensitivity Measure" is the decline in the NPV ratio, in
         basis points, caused by a 2% increase or decrease in rates, whichever
         produces a larger decline. The following sets forth the Bank's NPV as
         of September 30, 1998.


                                       38
<PAGE>   40
Net Portfolio Value

<TABLE>
<CAPTION>
Changes in                             Net Portfolio Value
   Rates in                         Dollar           Percentage     Net Portfolio Value As a        Change in
Basis Points        Amount          Change             Change             % of Assets            Percentage (1)
--------------------------------------------------------------------------------------------------------------
<S>                <C>             <C>                <C>                    <C>                    <C>     
     200           $28,808         $(13,106)          (31.27)%               7.25%                  (27.72)%

     100            36,444           (5,470)          (13.05)                8.92                   (11.07)

       0            41,914                                                  10.03

    (100)           44,519            2,605             6.22                10.49                     4.59

    (200)           47,110            5,196            12.40                10.92                     8.87
</TABLE>




          (1)  Based on the portfolio value of the Bank's assets in the base
               case scenario

          Certain shortcomings are inherent in the methodology used in the above
          interest rate risk measurements. Modeling changes in NPV require the
          making of certain assumptions which may or may not reflect the manner
          in which actual yields and costs respond to changes in market interest
          rates. In this regard, the NPV Table presented assumes that the
          composition of the Bank's interest sensitive assets and liabilities
          existing at the beginning of a period remains constant over the period
          being measured and also assumes that a particular change in interest
          rates is reflected uniformly across the yield curve regardless of the
          duration to maturity or repricing of specific assets and liabilities.
          Also, the model does not take into account the Bank's business or
          strategic plans. Accordingly, although the NPV Table provides an
          indication of the Bank's interest rate risk exposure at a particular
          point in time, such measurements are not intended to and do not
          provide a precise forecast of the effect of changes in market interest
          rates on the Bank's net interest income and may differ from actual
          results. See also discussion on pages 7 to 9 of the Annual Report.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

          The financial statements and supplementary data required herein are
          incorporated by reference from pages 20 to 42 of the Annual Report.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL

          DISCLOSURE.

          Not applicable.

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

          The information required herein is incorporated by reference from
          pages 2 to 5 and page 15 of the Registrant's Proxy Statement dated
          December 24, 1998 ("Proxy Statement").


                                       39
<PAGE>   41



ITEM 11.  EXECUTIVE COMPENSATION.

          The information required herein is incorporated by reference from
          pages 8 to 13 of the Registrant's Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

          The information required herein is incorporated by reference from
          pages 6 to 8 of the Registrant's Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

          The information required herein is incorporated by reference from
          pages 14 to 15 of the Registrant's Proxy Statement.

PART IV.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

          (a)   Documents filed as part of this Report.

                (1)   The following documents are filed as part of this report
                      and are incorporated herein by reference from the
                      Registrant's Annual Report.

                      Report of Independent Auditors.

                      Consolidated Statements of Financial Condition at
                      September 30, 1998 and 1997.

                      Consolidated Statements of Income for the Years Ended
                      September 30, 1998, 1997 and 1996.

                      Consolidated Statements of Changes in Stockholders' Equity
                      for the Years Ended September 30, 1998, 1997 and 1996.

                      Consolidated Statements of Cash Flows for the Years Ended
                      September 30, 1998, 1997 and 1996.

                      Notes 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.


                                       40
<PAGE>   42
No                             Description

3.1      Amended and Restated Articles of Incorporation of First Keystone
         Financial, Inc. *

3.2      Amended and Restated Bylaws of First Keystone Financial, Inc. *

4        Specimen Stock Certificate of First Keystone Financial, Inc. *

10.1     Employee Stock Ownership Plan and Trust of First Keystone Financial,
         Inc. *

10.2     401(K)/ Profit Sharing Plan of First Keystone Federal Savings Bank *

10.3     Employment Agreement between First Keystone Financial, Inc. and Donald
         S. Guthrie (incorporated by reference from Exhibit 10.3 to Registrant's
         Form 10-KSB for the year ended September 30, 1995).

10.4     Employment Agreement between First Keystone Financial, Inc. and Stephen
         J. Henderson (incorporated by reference from Exhibit 10.4 to
         Registrant's Form 10-KSB for the year ended September 30, 1995).

10.5     Employment Agreement between First Keystone Financial, Inc. and Thomas
         M. Kelly (incorporated by reference from Exhibit 10.5 to Registrant's
         Form 10-KSB for the year ended September 30, 1995).

10.6     Form of Severance Agreement between First Keystone Financial, Inc. and
         Elizabeth M. Mulcahy (incorporated by reference from Exhibit 10.6 to
         Registrant's Form 10-KSB for the year ended September 30, 1995).

10.8     Form of Severance Agreement between First Keystone Financial, Inc. and
         Carol Walsh (incorporated by reference from Exhibit 10.8 to
         Registrant's Form 10-KSB for the year ended September 30, 1995).

10.9     1995 Stock Option Plan (incorporated by reference from Exhibit 10.9 to
         Registrant's Form 10-KSB for the year ended September 30, 1995).


                                       41
<PAGE>   43
10.10    1995 Recognition and Retention Plan and Trust Agreement, (incorporated
         by reference from Exhibit 10.10 to Registrant's Form 10-KSB for the
         year ended September 30, 1995).

13       Annual Report to Stockholders.

21       Subsidiaries of the Registrant - Reference is made to Item 1
         "Business," for the required information.

23       Consent of Deloitte & Touche LLP.


-----------------------

(*)      Incorporated by reference from the Registration Statement Form S-1
         (Registration No. 33- 84824) filed by the Registrant with the SEC on
         October 6, 1994, as amended.

(b)      Reports filed on Form 8-K.

         None.


                                       42
<PAGE>   44
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          FIRST KEYSTONE FINANCIAL, INC.

                                          By: /s/ Donald S. Guthrie        
                                              ---------------------------------
                                          Donald S. Guthrie
                                          President and Chief Executive
                                          Officer

         Pursuant to the requirements of the Securities and Exchange Act of
1934, this report had been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.

<TABLE>
<S>                                                                    <C>
/s/ Donald S. Guthrie                                                  December 29, 1998
------------------------------------------------
Donald S. Guthrie
President and Chief Executive Officer
(Principal Executive Officer)

/s/ Thomas M. Kelly                                                    December 29, 1998
------------------------------------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
(Principal Financial and Accounting Officer)

/s/ Donald A. Purdy                                                    December 29, 1998
------------------------------------------------
Donald A. Purdy
Chairman of the Board

/s/ William K. Beats                                                   December 29, 1998
------------------------------------------------
William K. Beats
Director

/s/ Edward Calderoni                                                   December 29, 1998
------------------------------------------------
Edward Calderoni
Director

/s/ Silvio F. D'Ignazio                                                December 29, 1998
------------------------------------------------
Silvio F. D'Ignazio
</TABLE>


                                       43
<PAGE>   45

<TABLE>
<S>                                                                    <C>
/s/ Olive J. Faulkner                                                  December 29, 1998
------------------------------------------------
Olive J. Faulkner
Director

/s/ Edmund Jones                                                       December 29, 1998
------------------------------------------------
Edmund Jones
Director

/s/ Willard F. Letts                                                   December 29, 1998
------------------------------------------------
Willard F. Letts
Director

/s/ Walter J. Lewicki                                                  December 29, 1998
------------------------------------------------
Walter J. Lewicki
Director

/s/ Joan G. Taylor                                                     December 29, 1998
------------------------------------------------
Joan G. Taylor
Director
</TABLE>


                                       44