<PAGE>   1
                                                                       EXHIBIT B


SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The selected consolidated financial and other data of First Keystone Financial,
Inc. set forth below does not purport to be complete and should be read in
conjunction with, and is qualified in its entirety by, the more detailed
information, including the Consolidated Financial Statements and related Notes,
appearing elsewhere herein.

<TABLE>
<CAPTION>
                                                                 AT OR FOR THE YEAR ENDED SEPTEMBER 30,
                                                   -----------------------------------------------------------------
                                                     1998          1997         1996           1995          1994
                                                   -----------------------------------------------------------------
(dollars in thousands, except per share data)
<S>                                                <C>           <C>          <C>            <C>           <C>
SELECTED FINANCIAL DATA:
Total assets                                       $ 415,863     $ 373,430    $ 294,241      $ 280,979     $ 237,749
--------------------------------------------------------------------------------------------------------------------
Loans receivable, net                                198,343       188,289      167,530        158,002       142,226
--------------------------------------------------------------------------------------------------------------------
Mortgage-related securities held to maturity          18,769        20,707       23,221         60,294        68,369
--------------------------------------------------------------------------------------------------------------------
Investment securities held to maturity                              10,000       16,532         10,710        12,145
--------------------------------------------------------------------------------------------------------------------
Assets held for sale:
   Mortgage-related securities                       115,486       104,472       60,211         19,538           251
--------------------------------------------------------------------------------------------------------------------
   Investment securities                              40,621        10,211
--------------------------------------------------------------------------------------------------------------------
   Loans                                               2,799         4,577        2,447             57           168
--------------------------------------------------------------------------------------------------------------------
Real estate owned                                      1,663         1,672        1,557            465           503
--------------------------------------------------------------------------------------------------------------------
Deposits                                             247,311       227,918      219,205        223,753       216,065
--------------------------------------------------------------------------------------------------------------------
Borrowings                                           120,878        99,987       46,740         28,411         5,267
--------------------------------------------------------------------------------------------------------------------
Stockholders' equity                                  26,664        24,752       23,084         24,463        11,622
--------------------------------------------------------------------------------------------------------------------
Non-performing assets                                  5,367         3,749        6,909          3,621         5,879
--------------------------------------------------------------------------------------------------------------------
SELECTED OPERATIONS DATA:
Interest income                                    $  27,393     $  22,750    $  19,837      $  18,295     $  15,547
--------------------------------------------------------------------------------------------------------------------
Interest expense                                      15,625        12,639       10,932         10,767         9,153
--------------------------------------------------------------------------------------------------------------------
Net interest income                                   11,768        10,111        8,905          7,528         6,394
--------------------------------------------------------------------------------------------------------------------
Provision for loan losses                                186           239        1,250             52           416
--------------------------------------------------------------------------------------------------------------------
Net interest income
   after provision for loan losses                    11,582         9,872        7,655          7,476         5,978
--------------------------------------------------------------------------------------------------------------------
Other income (expense):
   Service charges and other fees                        898           972        1,047          1,029         1,010
--------------------------------------------------------------------------------------------------------------------
   Net gain on sales of interest-earning assets          577           285          203            113           350
--------------------------------------------------------------------------------------------------------------------
   Net gain on sale of other assets                        1            46
--------------------------------------------------------------------------------------------------------------------
   Net gain (loss) on real estate activities             (25)            7            2            (44)          (47)
--------------------------------------------------------------------------------------------------------------------
   Other                                                  57            40           56             89           158
--------------------------------------------------------------------------------------------------------------------
Operating expenses                                     9,059         6,921        8,645          7,036         7,728
--------------------------------------------------------------------------------------------------------------------
Income (Loss) before income taxes,
    extraordinary item and cumulative effect of
    change in accounting principle                     4,031         4,301          318          1,627          (279)
--------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit)                           1,250         1,664         (567)           504           (95)
--------------------------------------------------------------------------------------------------------------------
Extraordinary item, utilization of state
   tax carryforward
--------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting
   for income taxes                                                                                              600
--------------------------------------------------------------------------------------------------------------------
Net income                                         $   2,781     $   2,637    $     885(2)   $   1,123     $     416
--------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share(1)               $    1.23     $    1.13    $     .37(2)   $     .37           N/A
--------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   Adjusted for the effect of a 2 for 1 stock split declared December 4,
      1997.

(2)   Includes the effects of the one-time SAIF special assessment. The effects
      of the assessment increased operating expenses and decreased income before
      income taxes by $1.4 million. The effects of the assessment also decreased
      net income and earnings per share by $876,000 and $.74, respectively.


                                       1
<PAGE>   2
<TABLE>
<CAPTION>
                                                            At or For the Year Ended September 30,
                                                     ----------------------------------------------------
                                                      1998       1997       1996         1995       1994
                                                     ----------------------------------------------------
<S>                                                  <C>        <C>        <C>          <C>        <C>
SELECTED OPERATING RATIOS:
Average yield earned on interest-earning assets        7.40%      7.54%      7.45%        7.37%      6.84%
---------------------------------------------------------------------------------------------------------
Average rate paid on interest-bearing liabilities      4.68       4.48       4.42         4.62       4.18
---------------------------------------------------------------------------------------------------------
Average interest rate spread                           2.72       3.07       3.03         2.75       2.66
---------------------------------------------------------------------------------------------------------
Net interest margin                                    3.18       3.35       3.34         3.03       2.81
---------------------------------------------------------------------------------------------------------
Ratio of interest-earning assets to
   interest-bearing liabilities                      110.80     106.82     107.65       106.55     103.77
---------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
   losses to operating expenses                      127.84     142.64      88.55(3)    106.25      77.36
---------------------------------------------------------------------------------------------------------
Operating expenses as a percent of average assets      2.37       2.21       3.14(3)      2.73       3.29
---------------------------------------------------------------------------------------------------------
Return on average assets                               0.73       0.84       0.32(3)      0.44        .18
---------------------------------------------------------------------------------------------------------
Return on average equity                              11.13      11.46       3.92(3)      5.59       3.60
---------------------------------------------------------------------------------------------------------
Ratio of average equity to average assets              6.54       7.36       8.20         7.80       4.91
---------------------------------------------------------------------------------------------------------
Full-service offices at end of period                     6          5          5            5          5
---------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS: (4)
Non-performing loans as a
   percent of gross loans receivable                   1.85%      1.09%      3.15%        1.98%      3.74%
---------------------------------------------------------------------------------------------------------
Non-performing assets as a
   percent of total assets                             1.29       1.00       2.35         1.29       2.47
---------------------------------------------------------------------------------------------------------
Allowance for loan losses as a
    percent of gross loans receivable                  0.87       0.86       1.54         0.93       1.07
---------------------------------------------------------------------------------------------------------
Allowance for loan losses as a
   percent of non-performing loans                    46.92      78.38      49.03        47.12      28.65
---------------------------------------------------------------------------------------------------------
Net loans charged-off to average
   interest-earning loans receivable                   0.04       0.68       0.07         0.07       0.10
---------------------------------------------------------------------------------------------------------
CAPITAL RATIOS: (4) (5)
Tangible capital ratio                                 8.27%      8.12%      7.67%        8.23%      4.88%
---------------------------------------------------------------------------------------------------------
Core capital ratio                                     8.27       8.12       7.67         8.23       4.88
---------------------------------------------------------------------------------------------------------
Risk-based capital ratio                              21.09      19.91      17.24        17.82      10.13
---------------------------------------------------------------------------------------------------------
</TABLE>

(3)   Includes the effects of the one-time SAIF special assessment of $1.4
      million. Excluding the one-time effects, the ratio of net interest income
      after provision for loan losses to operating expenses and operating
      expenses as a percent of average assets ratios were 106.04% and 2.62%,
      respectively. In addition, return of average assets and return on average
      equity were .64% and 7.79%, respectively, excluding the special
      assessment.

(4)   Asset Quality Ratios and Capital Ratios are end of period ratios, except
      for charge-offs to average loans. With the exception of end of period
      ratios, all ratios are based on average daily balances during the
      indicated periods.

(5)   Regulatory capital ratios of the Company's wholly-owned subsidiary, First
      Keystone Federal Savings Bank.


                                LOANS RECEIVABLE

                                  [PIE CHART]

<TABLE>
<S>                                     <C>
Single Family                             148088
Construction                               15858
Non-residential                            20563
Consumer Equity                            19609
Commercial Business                         1390
Other                                       2059
</TABLE>


                                DEPOSIT ACCOUNTS

                                  [PIE CHART]

<TABLE>
<S>                                     <C>
Non-interest bearing accounts           $   8,254
NOW accounts                            $  28,181
Passbook accounts                       $  37,988
Money Market demand accounts            $  16,087
Certificate of Deposit accounts         $ 156,801
</TABLE>


                                       2
<PAGE>   3
MESSAGE TO OUR
SHAREHOLDERS

[PRESIDENT ANNOUNCES NEW OFFICE GRAPHIC]

First Keystone Federal President and Chief Executive Officer Donald S. Guthrie
announces plans for the Bank's newest office, slated to open in the summer of
1999 in western Delaware County, Pennsylvania.

     With the same attributes needed to solve the challenges of a Rubik Cube(R),
patience, foresight, solid analytical thinking and good strategic planning, I am
pleased to report that First Keystone's management team guided your Company to
new record earnings. Despite the challenges in fiscal 1998 arising from a
declining interest rate environment, your Company experienced a significant
increase in its net interest income and an increase in earnings per share.

      Recognizing that each piece is an integral part of the whole, and
accomplishments are achieved by remaining focused, the Company earned $2.8
million, or $1.23 diluted earnings per share for the year ended September 30,
1998, compared to $2.6 million, or $1.13 diluted earnings per share for fiscal
1997, reflecting a per share increase of 8.8%.

2 FOR 1 STOCK SPLIT

     I am pleased to report that, as a result of your Company's strong financial
performance in the first quarter of fiscal 1998, First Keystone announced a 2
for 1 stock split. The dividend per share was unaffected by the stock split,
thereby effectively increasing the dividend paid by 100%. This split was
intended to recognize solid fundamental achievements, and reward shareholders
with additional stock.

     The Company also instituted a dividend reinvestment plan and a stock
purchase program during fiscal 1998, enabling shareholders to make additional
cash purchases during the dividend declaration period directly from the
Company's transfer agent. As evidenced by the nearly 50% of the Company's
shareholders of record who have taken advantage of the program, it has been very
well received.

         As our fiscal year came to a close on September 30, 1998, U.S.
financial markets were experiencing great volatility as they reacted to the
financial turbulence throughout the world economy. Major indexes slipped
considerably in August and September from their record breaking highs earlier in
the fiscal year, and like our banking peers, First Keystone's stock price was
impacted by the overall uncertainty in the global economy. I am pleased to
report, however, in accordance with the Company's strategic plan, the Board of
Directors remained focused on building long-term shareholder value. Accordingly,
I am pleased to state that the Company's stock price as of September 30, 1998,
has appreciated over 170% since its initial offering in January 1995. This is a
very healthy annualized rate of return of 31%.

ASSETS GREW

     The Company's total assets increased to $415.9 million at September 30,
1998 from $373.4 million at September 30, 1997. The asset growth was primarily
attributable to a $29.5 million increase in investment and mortgage-related
securities available for sale to $174.9 million at fiscal year end from $145.4
million at September 30, 1997. Growth in assets can also be attributed to an
increase in origination of loans receivable. The Company's net loan portfolio
increased by $10.1 million to $198.3 million at September 30, 1998 from $188.3
million at September 30, 1997.

SIGNIFICANT INCREASE IN DEPOSITS

     The asset growth was funded through increases in deposit accounts and
borrowed money. I am pleased to report that deposits were up by 8.5% this fiscal
year. Total deposits increased to $247.3 million at year end from $227.9 million
at September 30, 1997. This increase can be attributed to cross-selling efforts
in the branches, increased relationship banking with our commercial customers,
and from new deposits at the Willowdale Office,
<PAGE>   4
the Bank's most recent branch located in Chester County, Pennsylvania.

[WILLOWDALE AD GRAPHIC]

Aggressive advertising, a sales oriented staff, and participation in community
events helped the Bank's Willowdale Office more than double its projected
deposits in the first year.

     The Willowdale Office has more than doubled its projected deposits in less
than one year. By capturing this new marketshare and by serving the needs of the
customers, we reaffirm that there is a strong market niche for a progressive
community bank. Although competition in the financial industry is fierce, many
consumers appreciate and seek out the local bank that can make decisions
quickly, provide a wide range of services and show the customer his business is
important to the bank.

CONTINUED EXPANSION

     Your Company continues to strategically implement its business plan to
increase its branch operations in southern Chester County and the western part
of Delaware County as these contiguous counties experience a tremendous influx
of commercial and residential development. In the summer of 1999, within the
heart of our market area, the newest free-standing First Keystone office will
open at The Shoppes at Darlington Square in Chester Heights Borough in Delaware
County, Pennsylvania.

STRONG FINANCIAL POSITION

     The Company's increase in net interest income is primarily a result of
management's investing and leveraging strategies in conjunction with the
issuance of $16.2 million of trust preferred securities in August 1997. As part
of the on-going capital management plan, these proceeds enabled First Keystone
to continue with its asset liability strategies to leverage its capital,
increase its investments in mortgage-related securities, and continue to
repurchase the Company's common stock throughout the fiscal year.

     The Company is well capitalized with a shareholders' equity to assets ratio
of 6.4% at fiscal year end. In addition, the Bank is also considered a well
capitalized institution and exceeds all federal regulatory requirements.

A LOOK AHEAD FOR CONTINUED SUCCESS

     Moving forward, our team of experienced professionals will continue to show
good judgment and strong leadership. With the challenges that lie ahead from a
relatively flat yield curve creating pressure on our margins, First Keystone
will remain focused on each piece of its business. We will proceed using similar
skills required in solving a strategic puzzle including patience, foresight and
analytical thinking. Areas of concentration to increase earnings include growing
the Bank's commercial loan portfolio, enhancing consumer loan programs and
expanding fee based services. We will continue to aggressively market
relationship checking accounts and improve the delivery system through
deployment of efficient operational strategies.

     We will continue to explore other alternatives that could provide First
Keystone with additional sources of quality assets and increase net income to
enhance shareholder value.

     Most importantly, we will continue to do what we do best...serve the
customer; and constantly strive to treat our customers the way we would like to
be treated. Service is the key to our niche market -- a strong, progressive
community bank that makes the customer feel welcomed and important.

     On behalf of the employees and the Board of Directors, I wish you a
prosperous and healthy new year. We appreciate the trust that you have placed in
us, and we pledge to work diligently to produce solid results again for this
coming year.

                                   Sincerely,

                                   /s/ Donald S. Guthrie
                                   -----------------------------------
                                   Donald S. Guthrie
                                   President & Chief Executive Officer
<PAGE>   5
                                                                          1998
                                                                        THE YEAR
                                                                       IN REVIEW

COMMERCIAL LENDING SLIDES INTO PLACE

[TECHNOLOGY INDUSTRY GRAPHIC]

Through the commercial loan department, the Bank was able to provide financing
for a local company that holds a patent in the technology industry.

     As a locally based financial institution, the Bank's loan officers are
knowledgeable about the community and well acquainted with its business leaders.
As a result, management is able to quickly evaluate and approve an unsecured
loan to the local volunteer fire company for a new ambulance, a real estate loan
to a young couple to renovate a storefront building with upper story offices,
and preliminary financing to a company in the development stage which holds a
patented process in the technology industry. With each loan, a new bond is
formed creating a long-term relationship and additional transaction accounts.

     Focusing on developing and maintaining long-term account relationships
contributed to the success of the commercial lending department this fiscal
year. In just its second year, the Bank's commercial lending increased its
number of loan originations by 71%. The Bank's philosophy focusing on small to
moderate businesses minimizes risk, and provides a diversified cross-section of
borrowers throughout First Keystone's market area.

BUILDING A SOLID FRAMEWORK OF CONSTRUCTION LOANS

     The construction, development and acquisition department continued to have
a strong presence in the community. Each year additional relationships are
forged with new developers as a result of First Keystone's experience,
reputation and active participation in area trade associations.

     Enhancement of the department's computer software has enabled construction
loan officers to offer more innovative loan products, such as construction
revolvers. This loan is similar to a line of credit, but the loan is secured
through the real estate of the development project and the cash flow revolves
throughout the life of the project. The advantage to the builder is that it's
faster and more efficient, enabling the developer to complete his customers'
homes in a very timely manner.

RESIDENTIAL LENDING REMAINS AN INTEGRAL PIECE OF THE BUSINESS

     Single-family residential loan originations for fiscal 1998 increased by
$12.9 million. The increase was spurred, in part, by low interest rates creating
a demand for both refinancing and first time homebuyers. The increase in market
share can also be attributed to the Bank's outstanding reputation in the
community, and the fact that many customers seek out the Bank because it is one
of the few area financial institutions that still retains servicing over a
majority of the loans it originates.

     Fiscal 1998 marked the first for an affinity program launched by the Bank
with a national retailer. An innovative consumer loan program that rewarded
customers with a gift certificate for The Home Depot(R) was kicked off at the
close of the Company's fiscal year. In the spirit of home improvement, the Bank
aggressively advertised the loan program with in-lobby banners, aprons and hard
hats in addition to its multi-media advertising strategy.

[ARCM CORP. GRAPHIC]

ARCM Corporation's patented truck side view mirror helps prevent blind spots,
right turn crashes and jackknifing.

[HOME DEPOT GRAPHIC]

As part of a home equity loan promotion, the consumer loan department offered
gift certificates for The Home Depot(R).


The Home Depot(R) is not affiliated with First Keystone Federal. The Home
Depot(R) is a Registered Trademark of Homer TLC, Inc.
<PAGE>   6
BLENDING TECHNOLOGY WITH ENHANCED PRODUCTS AND SERVICES

[DEBIT CARD GRAPHIC]

First Keystone introduced its debit card in the fall of 1998, and enhanced its
ATM network to provide customers with on-line real time.

     Testing the Bank's computer systems and that of its vendors for the Year
2000 is well underway. First Keystone is testing its software and hardware on a
simulated mainframe and applications are currently being performed on schedule.

     The Bank also enhanced its ATM network in fiscal 1998 with on-line real
time. Now the customer can receive faster and more accurate account information
24 hours a day. In conjunction with this ATM enhancement, at the end of fiscal
1998, the Bank introduced its Debit Card, allowing customers to use the
MasterMoney(TM) card wherever the MasterCard(R) logo is accepted. This new
product has been very well received as customers appreciate the flexibility it
provides in managing their money.

     The Company's web site at www.firstkeystone.com continued to grow in
popularity with inquiries increasing throughout the year. In addition, the Bank
continues to expand its Internet and Bank-By-Phone services. The Bank can now
offer its commercial customers credit card merchant processing through their
computers which enables the merchant to approve sales through the Internet.

     Blending efficient uses of technology with enhanced products and services
will enable First Keystone to offer its customers the services they need
provided by a staff of professionals that make it user-friendly for the
consumer.

THE RIGHT PRODUCT MIX IN A CHANGING MARKET

[ADVERTISING CAMPAIGN GRAPHIC]

Capitalizing on area bank mergers and acquisitions, First Keystone launched
hard-hitting advertising campaigns throughout the year targeting displaced
customers of affected institutions.

     Bank mergers and acquisitions continued in fiscal 1998, and First Keystone
geared its marketing efforts to welcome these displaced customers. Throughout
the year, the Bank offered special checking account packages for new customers
and aggressively priced its products accordingly.

     In response to the Bank's commercial customers' requests, First Keystone
introduced new products such as "Member Select" which enables business owners to
offer their employees discounted and free banking services. Also, in conjunction
with opening day of minor league baseball, the Bank launched an "All-Star Youth
Savings Club." With each new account, the child received a collectable baseball
embossed with the Wilmington Blue Rocks' logo as well as First Keystone's, a
full-sized baseball pennant, stickers and a birthday gift.

     A community bank, as recently reported in the region's largest daily
newspaper, can often deliver both innovative and basic products and services for
less than the larger regional banks.

[MEDIA ARTS AND CRAFTS SHOW GRAPHIC]

The Bank hit a home run at the Annual Media Arts and Craft Show (which it
sponsors), promoting its very popular All Star Savings Club for children.

[ALL STAR SAVINGS CLUB GRAPHIC]
<PAGE>   7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS


GENERAL

      First Keystone Financial, Inc. (the "Company") is the holding company of
its wholly owned subsidiary, First Keystone Federal Savings Bank (the "Bank").
For purposes of this discussion, First Keystone Financial, Inc., including its
wholly owned subsidiaries, will be referred to as the "Company". The Company is
a community oriented banking organization that focuses on providing customer and
business services within its primary market area, consisting of Delaware and
Chester counties.

      The following discussion should be read in conjunction with the Company's
consolidated financial statements presented elsewhere herein. Accordingly, the
discussion below with respect to results of operations relates primarily to the
Bank, and the financial data for the periods prior to the conversion of the Bank
to stock completed in January 1995, reflects solely financial data of the Bank
and its subsidiaries.

      The Company's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, which principally consist of loans, mortgage-related securities and
investment securities, and interest expense on interest-bearing liabilities,
which principally consist of deposits and Federal Home Loan Bank ("FHLB")
advances. The Company's results of operations also are affected by the provision
for loan losses, resulting from management's assessment of the adequacy of the
allowance for loan losses, the level of its non-interest income, including
service charges and other fees as well as gains and losses from the sale of
certain assets, the level of its operating expenses, and income tax expense.

ASSET AND LIABILITY MANAGEMENT

      The principal objective of the Company's asset and liability management is
to evaluate the interest rate risk existing in certain assets and liabilities,
determine the level of risk appropriate given the Company's business focus,
operating environment, capital and liquidity requirements and performance
objectives, establish prudent asset concentration guidelines, and manage the
risk consistent with Board approved guidelines. Through asset and liability
management, the Company seeks to reduce both the vulnerability and volatility of
its operations to changes in interest rates and to manage the ratio of
interest-rate sensitive assets to interest-rate sensitive liabilities within
specified maturities or repricing periods. The Company's actions in this regard
are taken under the guidance of the Asset/Liability Committee ("ALCO"), which is
chaired by the Chief Financial Officer and comprised of members of the Company's
senior management. The ALCO meets at least quarterly to review, among other
things, liquidity and cash flow needs, current market conditions and interest
rate environment, the sensitivity to interest rate changes of the Company's
assets and liabilities, the book and market values of assets and liabilities,
unrealized gains and losses, and the purchase and sale activity and maturities
of investments, deposits and borrowings. In addition, the pricing of the
Company's residential loans and deposits is reviewed at least weekly while the
pricing of loans originated for sale in the secondary market is reviewed daily.
The ALCO reports to the Company's Board of Directors on at least a quarterly
basis.

      The Company's primary asset/liability monitoring tool consists of various
asset/liability simulation models, which are prepared on a quarterly basis and
are designed to capture the dynamics of the balance sheet as well as rate and
spread movements and to quantify variations in net interest income under
different interest rate scenarios. A more conventional but limited
Asset/Liability monitoring tool involves an analysis of the extent to which
assets and liabilities are interest rate sensitive and measures an institution's
interest rate sensitivity gap. An asset or liability is said to be interest rate
sensitive within a specific time period if it will mature or reprice within that
time period. The interest rate sensitivity gap is defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A gap is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities. A gap is considered negative when the amount of interest
rate sensitive liabilities exceeds interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income, while a positive gap would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income, while a positive gap
would tend to affect net interest income adversely. While a conventional gap
measure may be useful, it

                                       7
<PAGE>   8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)


ASSET AND LIABILITY MANAGEMENT (CONTINUED)

is limited in its ability to predict trends in future earnings. It makes no
presumptions about changes in prepayment tendencies, deposit or loan maturity
preferences or repricing time lags that may occur in response to a change in the
interest rate environment. For purposes of the table below, annual prepayment
assumptions range from 10% to 40% for fixed-rate mortgage loans and
mortgage-backed securities and 6% to 15% for adjustable rate mortgage loans and
mortgage-backed securities. Passbook and statement savings accounts are assumed
to decay at a rate of 30.0%, 30.0%, and 40.0% in each of the first three years,
respectively. Money market ("MMDA") and negotiable order of withdrawal ("NOW")
accounts are assumed to decay at a rate of 75% and 25%, in one year or less and
over one year, respectively. First Keystone's passbook, statement savings, MMDA
and NOW accounts are generally subject to immediate withdrawal. However,
management considers a portion of these deposits to be core deposits having
significantly longer effective maturities based upon the Bank's retention of
such deposits in changing interest rate environments.

      Management believes that the assumptions used by it to evaluate the
vulnerability of the Bank's operations to changes in interest rates are
conservative and consider them reasonable. However, the interest rate
sensitivity of the Bank's assets and liabilities as portrayed in the table below
could vary substantially if different assumptions were used or actual experience
differs from the assumptions used in the table.

The following table summarizes the anticipated maturities or repricing of the
Company's interest-earning assets and interest-bearing liabilities as of
September 30, 1998, based on the information and assumptions set forth above.


<TABLE>
<CAPTION>
                                                                          More Than      More Than
                                             Within         Six to        One Year         Three          Over
                                              Six           Twelve        to Three        Years to        Five
                                             Months         Months          Years        Five Years       Years         Total
                                            ---------      ---------      ---------      ---------      ---------     ---------
(Dollars in thousands)
<S>                                         <C>            <C>            <C>            <C>            <C>           <C>
Interest-earning assets:                                                                                                       
   Loans receivable(1)                      $  52,969      $  25,765      $  46,921      $  28,485      $  43,896     $ 198,036
   Mortgage-related securities                 41,186         18,904         49,020         21,130          4,015       134,255
   Loans held for sale                          2,799                                                                     2,799
   Investment securities                          813         12,000                         2,435         30,452        45,700
   Interest-earning deposits                   21,669                                                                    21,669
-------------------------------------------------------------------------------------------------------------------------------
      Total interest-earning assets         $ 119,436      $  56,669      $  95,941      $  52,050      $  78,363     $ 402,459
===============================================================================================================================

Interest-bearing liabilities:
   Deposits                                 $  89,459      $  71,404      $  76,911      $   9,537                    $ 247,311
   Borrowed funds                              30,325                         5,159         49,425      $  35,969       120,878
-------------------------------------------------------------------------------------------------------------------------------
      Total interest-bearing liabilities    $ 119,784      $  71,404      $  82,070      $  58,962      $  35,969     $ 368,189
===============================================================================================================================

Excess (deficiency) of interest-
  earning assets over
  interest-bearing liabilities              $    (348)     $ (14,735)     $  13,871      $  (6,912)     $  42,394     $  34,270
===============================================================================================================================
Cumulative excess (deficiency) of
  interest-earning assets over
  interest- bearing liabilities             $    (348)     $ (15,083)     $  (1,212)     $  (8,124)     $  34,270
===============================================================================================================================
Cumulative excess (deficiency) of
  interest-earning assets over interest-
  bearing liabilities as a percentage of
  total assets                                  (0.08)%        (3.63)%        (0.29)%        (1.95)%         8.24%
===============================================================================================================================
</TABLE>

(1)   Balances have been reduced for non-accruing loans, which amounted $3.8
      million at September 30, 1998 and, with respect to construction loans, the
      amount of loans in process.

                                       8

<PAGE>   9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)


ASSET AND LIABILITY MANAGEMENT (CONTINUED)

      The Company also utilizes market value analysis, which addresses the
estimated change in the Company's equity value arising from movements in
interest rates. The market value of portfolio equity is estimated by valuing the
Company's assets and liabilities. The extent to which assets gain or lose value
in relation to gains or losses of liabilities determines the appreciation or
depreciation in equity on a market value basis. Market value analysis is
intended to evaluate the impact of immediate and sustained shifts of the current
yield curve upon the market value of the Company's current balance sheet.

CHANGES IN FINANCIAL CONDITION

      General. Total assets of the Company increased by $42.4 million, or 11.3%,
from $373.4 million at September 30, 1997 to $415.8 million at September 30,
1998. The increase reflected primarily growth in investment and mortgage-related
securities available for sale and loans receivable. The asset growth was funded
by increases in customer deposits and advances from the FHLB of Pittsburgh.
Asset growth was also funded by a modest increase in stockholders' equity.

      Cash and Investments. Cash and investments (including investments
available for sale) increased by $22.9 million, or 55.0%, to $64.7 million at
September 30, 1998 compared to $41.8 million at September 30, 1997. The increase
was primarily due to increases in investment securities available for sale as
the Company increased its securities portfolio with purchases of tax-exempt
municipal securities.

      Loans Held For Sale and Loans Receivable, Net. Aggregate loans receivable
(loans receivable, net, and loans held for sale) increased $8.3 million or 4.3%
to $201.1 million at September 30, 1998 compared to $192.9 million at September
30, 1997 despite increasing levels of loan prepayments due to the declining
interest rate environment. Single-family mortgage loans increased $12.9 million,
or 9.6%, while multi-family and commercial mortgages increased $2.3 million, or
12.3%, for the year ended September 30, 1998.

      Mortgage-Related Securities and Mortgage-Related Securities Available For
Sale. Mortgage-related securities and mortgage-related securities available for
sale increased in the aggregate by $9.1 million, or 7.3%, to $134.3 million at
September 30, 1998 compared to $125.2 million at September 30, 1997. The
increase was the result of the Company's continued use of leveraging to increase
interest income.

      Non-Performing Assets. The Company's total non-performing loans (including
troubled debt restructurings) and real estate owned increased $1.3 million or
31.7% from $4.1 million, or 1.1%, of total assets at September 30, 1997 to $5.4
million, or 1.0%, of total assets at September 30, 1998. The increase in the
non-performing assets was primarily due to the inclusion in fiscal 1998 of one
loan with a principal balance of approximately $900,000 which is collateralized
by a single-family residence. Non-performing assets consist primarily of
single-family residential loans.

      Real estate owned decreased modestly by $9,000 to $1.7 million, or .40%,
of total assets at September 30, 1998 as compared to $1.7 million, or .45%, of
total assets at September 30, 1997.

      Deposits. Deposits increased by $19.4 million, or 8.5%, from $227.9
million at September 30, 1997 to $247.3 million at September 30, 1998. This
increase was primarily due to a $17.3 million increase in certificates of
deposit and a $2.1 million, or 33.9%, increase in non-interest bearing accounts
as the Company continues its emphasis in the commercial accounts area. Passbook,
NOW and money market accounts remained relatively unchanged from the prior year.

      Borrowings. The Company's total borrowings increased $20.9 million to
$120.9 million at September 30, 1998 from $100.0 million at September 30, 1997.
The FHLB advances were used to fund loan and investment growth and had a
weighted average interest rate of 5.6% at September 30, 1998.

                                  TOTAL ASSETS
                             (DOLLARS IN THOUSANDS)

                                  [BAR GRAPH]

<TABLE>
<S>                           <C>      
1996                          $ 294,241
1997                          $ 373,430
1998                          $ 415,863
</TABLE>


                                       9
<PAGE>   10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)


CHANGES IN FINANCIAL CONDITION (CONTINUED)

      Equity. At September 30, 1998, total stockholders' equity was $26.7
million or 6.4% of total assets, compared to $24.8 million or 6.6% of total
assets at September 30, 1997. The $1.9 million increase was due to net income
for the year of $2.8 million and an increase of $1.1 million in unrealized gain
on available for sale securities offset in part by the Company's stock
repurchases and dividends paid aggregating $2.5 million. The slight decrease in
the capital ratio was due to the increase in total assets as the Company
continued to leverage its capital.

      Average Balances, Net Interest Income and Yields Earned and Rates Paid.
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods.

<TABLE>
<CAPTION>
                                                                          YEAR ENDED SEPTEMBER 30,
                                               ---------------------------------------------------------------------------
                                                                        1998                           1997                         
                                               YIELD/COST -------------------------------  -------------------------------
                                                   AT                           AVERAGE                         Average             
                                                SEPT. 30,  AVERAGE               YIELD/   Average                Yield/   
                                                  1998     BALANCE    INTEREST    COST    Balance    Interest     Cost    
                                               ---------------------------------------------------------------------------
                                                                                        (Dollars in Thousands)
<S>                                            <C>         <C>        <C>       <C>       <C>        <C>        <C>       
Interest-earning assets:                                   
   Loans receivable(1) (2)                        8.05%    $197,776   $ 16,447    8.32%   $179,566   $ 14,737     8.21%   
   Mortgage-related securities(2)                 6.75      123,283      8,029    6.51      92,393      6,197     6.71    
   Investment securities(2)                       5.99       38,475      2,429    6.31      21,774      1,478     6.79    
   Other interest-earning assets                  5.80       10,585        488    4.61       7,793        338     4.34    
--------------------------------------------------------------------------------------------------------------------------
       Total interest-earning assets              7.27      370,119   $ 27,393    7.40     301,526   $ 22,750     7.54    
Noninterest-earning assets                                   11,608                         11,193                        
--------------------------------------------------------------------------------------------------------------------------
   Total assets                                            $381,727                       $312,719                        
==========================================================================================================================
Interest-bearing liabilities:                                                                                             
   Deposits                                       4.21     $234,937   $  9,937    4.23    $221,140   $  9,182     4.15    
   FHLB advances and other borrowings             5.68       99,092      5,688    5.74      61,124      3,457     5.65    
--------------------------------------------------------------------------------------------------------------------------
      Total interest-bearing liabilities          4.69      334,029     15,625    4.68     282,264     12,639     4.47    
Noninterest-bearing liabilities                              22,730                          7,453                        
--------------------------------------------------------------------------------------------------------------------------
   Total liabilities                                        356,759                        289,717                        
Stockholders' equity                                         24,968                         23,002                        
--------------------------------------------------------------------------------------------------------------------------
   Total liabilities and stockholders' equity              $381,727                       $312,719                        
==========================================================================================================================
   Net interest-earning assets                             $ 36,090                       $ 19,262                        
==========================================================================================================================
Net interest income/interest rate spread          2.58%               $ 11,768    2.72%              $ 10,111     3.07%   
==========================================================================================================================
Net yield on interest-earning assets(3)                                           3.18%                           3.35%   
==========================================================================================================================
Ratio of average interest-earning assets to                                                                               
    average interest-bearing liabilities                                        110.80%                         106.82%   
==========================================================================================================================

<CAPTION>                                      
                                              ---------------------------------
                                                            1996 
                                              ---------------------------------           
                                                                        Average
                                               Average                  Yield/
                                               Balance      Interest     Cost
                                              ---------- ----------------------

<S>                                           <C>           <C>        <C>
Interest-earning assets:
   Loans receivable(1) (2)                    $ 164,359     $ 13,459     8.19%
   Mortgage-related securities(2)                80,539        5,229     6.49
   Investment securities(2)                      11,534          715     6.20
   Other interest-earning assets                  9,930          434     4.37
-----------------------------------------------------------------------------
       Total interest-earning assets            266,362     $ 19,837     7.45
Noninterest-earning assets                        9,325
------------------------------------------------------------------------------
   Total assets                               $ 275,687
=============================================================================
Interest-bearing liabilities:
   Deposits                                    $220,303     $  9,363     4.25
   FHLB advances and other borrowings            27,119        1,569     5.79
-----------------------------------------------------------------------------
      Total interest-bearing liabilities        247,422       10,932     4.42
Noninterest-bearing liabilities                   5,210
-----------------------------------------------------------------------------
   Total liabilities                            252,632
Stockholders' equity                             22,604
-----------------------------------------------------------------------------
   Total liabilities and stockholders' equity $ 275,687
=============================================================================
   Net interest-earning assets                $  18,940
=============================================================================
Net interest income/interest rate spread                    $  8,905     3.03%
=============================================================================
Net yield on interest-earning assets(3)                                  3.34%
=============================================================================
Ratio of average interest-earning assets to
    average interest-bearing liabilities                               107.65%
=============================================================================
</TABLE>

(1)   Includes non-accrual loans.

(2)   Includes assets classified as either available for sale or held for sale.

(3)   Net interest income divided by interest-earning assets.


                                       10
<PAGE>   11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)


CHANGES IN FINANCIAL CONDITION (CONTINUED)

      Rate/Volume Analysis. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total change in rate and volume. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to rate and the
change due to volume.

<TABLE>
<CAPTION>
                                                                  YEAR ENDED SEPTEMBER 30,
                                             --------------------------------------------------------------------
                                                      1998 VS. 1997                     1997 VS. 1996
                                             --------------------------------------------------------------------
                                                INCREASE                           INCREASE
                                            (DECREASE) DUE TO                  (DECREASE) DUE TO
                                             --------------------------------------------------------------------
                                                               TOTAL INCREASE                      TOTAL INCREASE
                                             RATE      VOLUME    (DECREASE)     RATE      VOLUME     (DECREASE)
                                             --------------------------------------------------------------------
<S>                                         <C>        <C>     <C>             <C>       <C>       <C>
Interest-earnings assets:                                                                          
   Loans receivable(1)                       $ 198     $1,512      $1,710      $   30    $ 1,248       $ 1,278
   Mortgage-related securities(1)             (174)     2,006       1,832         178        790           968
   Investment securities(1)                    (95)     1,046         951          74        689           763
   Other interest-earning assets                22        128         150          (3)       (93)          (96)
-----------------------------------------------------------------------------------------------------------------
      Total interest-earning assets            (49)     4,692       4,643         279      2,634         2,913
-----------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:                                                                         
   Deposits                                    174        581         755        (217)        36          (181)
   FHLB advances and other borrowings           (2)     2,233       2,231         (34)     1,922         1,888
-----------------------------------------------------------------------------------------------------------------
      Total interest-bearing liabilities       172      2,814       2,986        (251)     1,958         1,707
-----------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income   $(221)    $1,878      $1,657      $  530    $   676       $ 1,206
-----------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   Includes assets classified as either available for sale or held for sale.


                              RESULTS OF OPERATIONS

                                   NET INCOME
                             (Dollars in thousands)

                                  [BAR GRAPH]

<TABLE>
<S>                    <C>    
1995                   $ 1,123
1996                   $ 1,426
1997                   $ 2,637
1998                   $ 2,781
</TABLE>

      General. The Company reported net income of $2.8 million, $2.6 million and
$885,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
The $144,000 increase in net income for the year ended September 30, 1998
compared to the year ended September 30, 1997 was primarily due to a $1.7
million, or 16.4%, increase in net interest income, a $158,000, or 11.7%,
increase in other income, and a $414,000 decrease in income tax expense offset
by a $2.1 million, or 30.9%, increase in operating expenses. The increase in
operating expenses for the year ended September 30, 1998 was primarily due to
the minority interest expense related to the issuance of certain trust preferred
securities.

      The $1.7 million increase in net income for the year ended September 30,
1997 compared to the year ended September 30, 1996 was primarily due to a $1.2
million, or 13.5%, increase in net interest income, a $1.7 million, or 19.9%,
decrease in operating expenses and a $1.0 million decrease in the provision for
loan losses offset in part by a $2.2 million increase in income taxes. The
decrease in operating expenses for the year ended September 30, 1997 as compared
to fiscal 1996 was primarily due to the one-time SAIF special assessment
recognized in fiscal 1996. Excluding this assessment, net income increased $1.1
million in fiscal 1997, an increase of 73.1% over that earned in fiscal 1996.

      Net Interest Income. Net interest income is determined by interest rate
spread (i.e., the difference between the yields earned on interest-earning
assets and the rates paid on interest-bearing liabilities) and the relative
amounts of interest-earning assets and interest-bearing liabilities. The
Company's average interest-rate spread was 2.72%, 3.07% and 3.03% during the
years ended September 30, 1998, 1997 and 1996, respectively. The Company's
interest-rate spread was 2.58% at September 30, 1998. The Company's net interest
margin (i.e., net interest income as a percentage of average interest-earning

                                                                              
                                       11
<PAGE>   12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)


RESULTS OF OPERATIONS (CONTINUED)

assets) was 3.18%, 3.35% and 3.34% during the years ended September 30, 1998,
1997 and 1996, respectively. In fiscal 1998, the Company's net interest spread
and net interest margin were impacted by the relatively flat yield curve in
which assets have repriced at lower interest rate levels than liabilities.

                               NET INTEREST INCOME
                             (DOLLARS IN THOUSANDS)

                                  [BAR GRAPH]

<TABLE>
<S>                      <C>     
1995                     $  7,528
1996                     $  8,905
1997                     $ 10,111
1998                     $ 11,768
</TABLE>

      Net interest income increased by $1.7 million, or 16.4%, in the year ended
September 30, 1998 to $11.8 million compared to $10.1 million in fiscal 1997.
The reason for such increase was a $4.6 million, or 20.4%, increase in interest
income partially offset by a $3.0 million, or 23.6%, increase in interest
expense. Net interest income increased by $1.2 million, or 13.5%, in fiscal 1997
compared to fiscal 1996 due to a $2.9 million, or 14.7%, increase in total
interest income offset in part by a $1.7 million, or 15.6%, increase in total
interest expense.

      Interest Income. Total interest income amounted to $27.4 million for the
year ended September 30, 1998 compared to $22.8 million for the year ended
September 30, 1997. The primary reason for the increase in the 1998 period was a
$2.9 million, or 36.6%, increase in interest income from mortgage-related
securities, investments and other interest-earning assets as a result of a $50.4
million, or 41.3%, increase in the average balance thereof. Such increase was
partially offset by a 22 basis point (with 100 basis points being equal to 1.0%)
decrease in the yield earned thereon. The increase in the average balances was
due to increased leveraging of the Company's capital base while the decrease in
the yield reflected the effects of both purchases of lower yielding tax free
municipal obligations as well as the declining interest rate environment
existing during fiscal 1998. In addition, interest income from loans increased
$1.7 million, or 11.6%, due to a $18.2 million, or 10.1%, increase in the
average loan balance and a 11 basis point increase in the yield earned thereon.
The increase in the average balance of the loan portfolio in fiscal 1998
reflected increased originations of primarily fixed-rate loans held in
portfolio.

      The $2.9 million, or 14.7%, increase in total interest income during the
year ended September 30, 1997 over 1996 was primarily due to a $1.6 million, or
25.6%, increase in interest income from mortgage-related securities, investments
and other interest-earning assets as a result of a $20.0 million, or 19.6%,
increase in the average balance thereof and a 32 basis point increase in the
yield earned thereon. The increase in the average balances and the yield was due
to increased leveraging of the Company's capital base during fiscal 1997 and
investment in higher yielding assets. Additionally, interest income on loans
increased $1.3 million, or 9.5%, due to a $15.2 million, or 9.3%, increase in
the average balance of the loan portfolio and a 2 basis point increase in the
average yield earned thereon. The increase in the average balance of the loan
portfolio in fiscal 1997 reflects increased originations of both fixed and
adjustable-rate loans held in portfolio.

      Interest Expense. Total interest expense increased by $3.0 million, or
23.6%, in the year ended September 30, 1998 compared to fiscal 1997. The reason
for such increase was a $2.2 million increase in interest expense on borrowings
and $755,000 increase in interest expense on deposits. The increase in interest
expense on borrowings was due to a $38.0 million increase in the average balance
of total borrowings and a 9 basis point increase in the average rate paid
thereon. The increase in interest paid on deposits was due to a $13.8 million
increase in the average balance of deposits combined with an 8 basis point
increase in the average rate paid. The increase in the average balances of
deposits and borrowings was used to fund loan originations and purchases of
investment securities. The modest increase in the rates paid on deposits and
borrowings was due to general market interest rate fluctuations.

      Total interest expense amounted to $12.6 million for the year ended
September 30, 1997 as compared to $10.9 million for fiscal 1996. The $1.7
million, or 15.6%, increase in interest expense in fiscal 1997 compared to
fiscal 1996 was due to a $1.9 million increase in interest expense on borrowings
offset partially by a $181,000 decrease in interest expense on deposits. The
increase in interest expense on borrowings was due to a $34.0 million increase
in the average balance partially offset by a 14 basis


                                       12
<PAGE>   13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS (CONTINUED)

point decline in the average rate paid on borrowings. The decrease in interest
paid on deposits was due to an 10 basis point decline in the average rate paid
on deposits offset in part by a $837,000 increase in the average balance of
deposits. The increase in the average balances of borrowings and deposits was
used to fund mortgage originations and the purchase of mortgage-related and
investment securities. The decrease in the average rate paid on deposits and
borrowings was due to general market interest rate fluctuations.

                                  OTHER INCOME
                             (DOLLARS IN THOUSANDS)


             [BAR GRAPH]


<TABLE>
<S>                      <C>    
1996                     $ 1,308
1997                     $ 1,350
1998                     $ 1,543
</TABLE>

      Provisions for Loan Losses. Provisions for loan losses are charged to
earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on historical experience, the volume and type of
lending conducted by the Company, the amount of the Company's classified assets,
the status of past due principal and interest payments, general economic
conditions, particularly as they relate to the Company's primary market area,
and other factors related to the collectibility of the Company's loan and loans
held for sale portfolios. Management of the Company assesses the allowance for
loan losses on a monthly basis and makes provisions for loan losses as deemed
appropriate in order to maintain the adequacy of the allowance for loan losses.
For the year ended September 30, 1998, the provision for loan losses amounted to
$186,000 as compared to $239,000 for fiscal 1997. For the year ended September
30, 1996, the provision for loan losses was $1.2 million. The substantial
provision established for potential losses in fiscal 1996 related to the Bennett
Funding bankruptcies which were resolved in fiscal 1997. At September 30, 1998,
the Company's allowance for loan losses amounted to 46.9% of total
non-performing loans and .87% of gross loans receivable.

      Although management of the Company believes that the Company's allowance
for loan losses was adequate at September 30, 1998, based on facts and
circumstances available to it, there can be no assurances that additions to such
allowance will not be necessary in future periods, which would adversely affect
the Company's results of operations for such periods. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's provision for loan losses and the carrying
value of its other non-performing assets based on their judgments about
information available to them at the time of their examination.

      Other Income. For the year ended September 30, 1998, the Company reported
other income of $1.5 million compared to $1.4 million for the year ended
September 30, 1997. The primary reason for the $158,000 or 11.7% increase in
other income in fiscal 1998 was a $241,000 increase in net gain on sales of
mortgage loans held for sale and a $51,000 gain on the sale of investments and
mortgage-related securities partially offset by a decrease of $74,000 in service
charges and other fees.

      The $42,000, or 3.2%, increase in other income for the year ended
September 30, 1997 as compared to fiscal 1996 was due to increases in gains on
sales of mortgage loans of $76,000 and gain on sale of other assets of $46,000
partially offset by a decrease of $75,000 in service charges and other fees. The
increase in gains on sales of loans for fiscal 1998 and 1997 reflected the
Company's increased emphasis on the origination and sale, servicing released, of
non-conforming loans. See Note 6 to the Consolidated Financial Statements.

      Operating Expenses. Operating expenses include compensation and employee
benefits, occupancy and equipment expense, Federal Deposit Insurance Corporation
("FDIC") insurance premiums, data processing expense and other items. Operating
expenses increased $2.1 million, or 30.9%, for the year ended September 30, 1998
compared to the year ended September 30, 1997 and amounted to $9.1 million in
fiscal 1998 compared to $6.9 million in fiscal 1997. The primary reason for the
substantially higher level of operating expenses for fiscal 1998 was the $1.6
million minority interest in expense of subsidiary relating to the issuance of
trust preferred securities by the Company. See Note 20 to the Consolidated
Financial Statements for further information regarding the trust preferred
securities. Also contributing to the increase was a $468,000, or 14.7% increase
in compensation expense, a $241,000, or 30.2% increase in other expenses, and a
$155,000, or 18.1%, increase in occupancy and equipment
                                                                              
                                       13

<PAGE>   14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)


RESULTS OF OPERATIONS (CONTINUED)

expense partially offset by a $153,000, or 20.9%, decrease in professional fees
and a $62,000, or 30.0%, decrease in FDIC insurance premiums. Expansion of the
branch network contributed to both the increased occupancy and equipment expense
and compensation expense. Compensation expense also increased due to general
salary increases as well as increased costs associated with the market value
accounting for the employee stock ownership plan in accordance with Statement of
Position 93-6. The increase in other expenses was due to a provision established
for the Company's real estate owned property.

      Operating expenses decreased $1.7 million, or 19.9%, to $6.9 million for
the year ended September 30, 1997 compared to the year ended September 30, 1996.
The primary reason for the decrease in operating expenses in fiscal 1997 was the
one-time Savings Association Insurance Fund ("SAIF") special assessment of $1.4
million relating to deposit insurance charged in fiscal 1996. The special
assessment was the result of legislation enacted in the fall of 1996 which was
designed to recapitalize the SAIF insurance fund to the 1.25% of total insured
deposits required by the FDIC. The recapitalization decreased the amount of
insurance that the Company now pays to insure deposit accounts from $.23 per
$100 of deposits to $.065 per $100, which amount effectively reflects the amount
required to be paid by SAIF-insured institutions to pay the debt service on
bonds issued by the Financing Corporation. FDIC insurance premium expense was
reduced by $323,000, or 60.9% for fiscal 1997. Also contributing to the decrease
in operating expenses was a $311,000 charge to earnings in fiscal 1996 for
certain costs relating to the restructuring that the Company effected in fiscal
1996. Offsetting these decreases were modest increases in advertising, other
expenses and a $153,000 expense for minority interests in expense of
subsidiaries which relates to expenses incurred from the issuance of the
Company's trust preferred securities.

      Income Taxes. The Company recognized income tax expenses of $1.3 million,
or 31.0%, of pre-tax income, for the year ended September 30, 1998, compared to
$1.7 million, or 38.7%, of pre-tax income, for the year ended September 30,
1997. The primary reason for the decrease in the percentage of tax expense was
the reduction in state income taxes and the increase in tax-free income
resulting from purchases of tax-exempt securities, as the Company employed
various strategies to reduce both federal and state income taxes. The Company
recognized an income tax benefit of $567,000 for fiscal 1996. The benefit in
fiscal 1996 was the result of an adjustment for prior year tax contingencies of
approximately $700,000. Excluding this benefit, the income tax expense would
have been $133,000, or 41.8%, of pre-tax income.

      Federal legislation enacted in August 1996 repealed the percentage of
taxable income method of accounting for bad debts for thrift institutions
effective for years beginning after December 31, 1995. The Company was required
as of October 1, 1996 to adopt the experience method computation for bad debts
and to provide for taxes relating to excess bad debts reserves over the base
year of December 1987. As of September 30, 1998, the Company has provided
deferred income taxes totalling $74,000 on its excess bad debt reserves.

LIQUIDITY AND CAPITAL RESOURCES

      The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Company's
primary sources of funds are deposits, amortization, prepayments and maturities
of outstanding loans and mortgage-related securities, sales of loans, maturities
of investment securities and other short-term investments, borrowings and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-related securities and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, the Company invests excess
funds in overnight deposits and other short-term interest-earning assets which
provide liquidity to meet lending


                                       14
<PAGE>   15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)


LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

requirements. The Company has the ability to obtain advances from the FHLB of
Pittsburgh through several credit programs and in addition, has established a
line of credit with the FHLB in an amount not to exceed 10% of assets and
subject to certain conditions, including holding a predetermined amount of FHLB
stock as collateral. This line of credit is used from time to time for liquidity
purposes. As an additional source of funds, the Company has access to the
Federal Reserve discount window, but only after it has exhausted its access to
the FHLB of Pittsburgh. At September 30, 1998, the Company had $101.6 million of
outstanding advances from the FHLB of Pittsburgh.

                                LOANS RECEIVABLE
                             (DOLLARS IN THOUSANDS)

           [BAR GRAPH]

<TABLE>
<S>                      <C>      
1996                     $ 167,530
1997                     $ 188,289
1998                     $ 198,343
</TABLE>

      Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer term basis, the Company maintains a
strategy of investing in various lending products and mortgage-related
securities. The Company uses its sources of funds primarily to meet its ongoing
commitments, to pay maturing savings certificates and savings withdrawals, fund
loan commitments and maintain a portfolio of mortgage-backed and investment
securities. At September 30, 1998, the total of approved loan commitments
outstanding amounted to $11.8 million. At the same date, commitments under
unused lines of credit and loans in process on construction loans amounted to
$14.6 million. Certificates of deposit scheduled to mature in one year or less
at September 30, 1998 totalled $113.8 million. Based upon its historical
experience, management believes that a significant portion of maturing deposits
will remain with the Company.

      The Company is required by the Office of Thrift Supervision ("OTS") to
maintain average daily balances of liquid assets, defined as a ratio of cash and
certain marketable securities that can be readily converted into cash to total
deposits and short-term borrowings, of 4% to assure its ability to meet demand
for withdrawals and repayment of short-term borrowings. The Company's liquidity
ratio under these guidelines was 4.98% for the quarter ended September 30, 1998.

      The OTS requires that the Bank meet minimum regulatory tangible, core,
tier 1 risk-based and total risk-based capital requirements. At September 30,
1998, the Bank exceeded all regulatory capital requirements and was deemed a
well capitalized institution for regulatory purposes. See Note 13 to the
Consolidated Financial Statements.

      The Company's assets consist primarily of its investment in the Bank and
investments in various corporate debt and equity instruments and its only
material source of income consists of earnings from its investment in the Bank
and interest and dividends earned on other investments. The Company, as a
separately incorporated holding company, has no significant operations other
than serving as the sole stockholder of the Bank and paying interest to its
subsidiary for junior subordinated debt in conjunction with the issuance of
trust preferred securities. On an unconsolidated basis, the Company has no paid
employees. The expenses incurred by the Company relate to its reporting
obligations under the Securities Exchange Act of 1934, related expenses incurred
as a publicly traded company, and expenses relating to the issuance of the trust
preferred securities. Management believes that the Company has adequate
liquidity available to respond to its liquidity demands. Under applicable
federal regulations, the Bank may pay dividends within certain limits after
providing written notice to the OTS. See Note 21 to the Consolidated Financial
Statements.

RECENT ACCOUNTING PRONOUNCEMENTS

      In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which requires an entity to present, as a component of comprehensive income, the
amounts from transactions and other events which currently are excluded from the
statement of income and are recorded directly to stockholders' equity.

                                                                              
                                       15

<PAGE>   16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)


RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

      Also in June 1997, FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which requires an entity to disclose
information in a manner consistent to internally used information and requires
more detailed disclosures of operating and reporting segments than are currently
in practice. In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosure About Pensions and Other Postretirement Benefits." This statement
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. These
statements are effective for fiscal years beginning after December 15, 1997.
Management has not completed an analysis of the effect the adoption of the
statements will have on the Company's financial condition or results of
operations.

      In June 1998, SFAS No 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. This statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. This statement is effective for fiscal
years beginning after June 15, 1999, and will not be applied retroactively to
financial statements of prior periods. Management of the Company does not
believe this statement will have a material impact on the Company financial
position or results of operations when adopted.

IMPACT OF INFLATION AND CHANGING PRICES

      The Consolidated Financial Statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.

      Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.

YEAR 2000 ISSUES

(YEAR 2000 READINESS DISCLOSURE STATEMENT)

      In order to be ready for the year 2000 (the "Year 2000 Issue"), the
Company has developed a Year 2000 Policy (the "Policy") which was presented to
the Board of Directors during June 1997. The Policy was developed using the
guidelines outlined in the Federal Financial Institutions Examination's
Council's "The Effect of 2000 on Computer Systems". The Board of Director and
their Executive Committee assigned responsibility for the Policy to the Year
2000 Committee, which reports to the Board of Directors on a monthly basis. The
Policy recognizes that the Company's operating, processing and accounting
operations are computer reliant and could be affected by the Year 2000 Issue.
The Company is primarily reliant on third party vendors for its computer output
and processing, as well as other significant functions and services (i.e.,
securities safekeeping services, securities pricing information, etc.). The Year
2000 Committee is continually working with these third party vendors to assess
their year 2000 readiness. Based upon the initial assessment, management
presently believes that with planned modifications to existing software and
hardware and planned conversions to new software and hardware, the Company's
third party vendors are taking the appropriate steps to ensure critical systems
will function properly. The Company has identified 63 priority 1 (directly
effects customers) and 58 priority 2 (effects employee's ability to service
customers) third party vendors. Of such priority 1 and priority 2 vendors, the
Company has been informed that 33% are already Year 2000 compliant. The
Company's data service processing vendor, which is our major software provider,
has informed the


                                       16
<PAGE>   17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
Financial Conditions and Results of Operations (continued)


YEAR 2000 ISSUES (CONTINUED)

Company that it expects to complete testing of its updated systems (in which
testing the Company has been involved) by the end of April 1999. The initial
phase of testing of the data service processor's updated system will be
completed in February 1999. Substantially all of the Company's vendors of its
priority 1 and priority 2 applications (discussed below) have provided
assurances, written or oral, that they are working to make their products and
services Year 2000 compliant. The Company currently expects the majority of such
modifications and conversions and related testing of such systems to be
completed by December 31, 1998 with any remaining ones being completed by March
31, 1999. While the Company has received assurances from such vendors as to
compliance, such assurances are not guarantees and may not be enforceable. The
Company's existing older contracts with such vendors do not include Year 2000
certifications or warranties. Thus, in the event such vendor's products and/or
services are not Year 2000 compliant, the Company's recourse in the event of
such failure maybe limited. If the required modifications and conversions are
not made, or are not completed on a timely basis, the Year 2000 Issue could have
a material impact on the operations of the Company. There can be no assurance
that potential system interruptions or unanticipated additional expense incurred
to obtain Year 2000 compliance would not have a material adverse effect on the
Company's business, financial condition, results of operations and business
prospects. Nevertheless, the Company does not believe that the cost of
addressing the Year 2000 issues will be a material event or uncertainty that
would cause reported financial information not to be necessarily indicative of
future operating results or financial conditions, nor does it believe that the
costs or the consequences of incomplete or untimely resolution of its Year 2000
issues represents a known material event or uncertainty that is reasonably
likely to affect its future financial results, or cause its reported financial
information not to be necessarily indicative of future operating results or
future financial condition. The Year 2000 issues also affect certain of the
Company's customers, particularly in the areas of access to funds and additional
expenditures to achieve compliance. As of February 28, 1998, the Company had
contacted all of its commercial credit customers (19 borrowers with loans
outstanding aggregating $10.0 million) regarding the customers awareness of the
Year 2000 Issue. While no assurance can be given that the customers will be Year
2000 compliant, management believes, based on representations of such customers
and reviews of their operations (including assessments of the borrowers' level
of sophistication and data and record keeping requirements), that the customers
are either addressing the appropriate issues to insure compliance or that they
are not faced with material Year 2000 issues. In substantially all cases the
credit extended to such borrowers is collateralized by real estate which
inherently minimizes the Company's exposure in the event that such borrowers do
experience problems becoming Year 2000 compliant. The Company has completed its
own company-wide Year 2000 contingency plan. Individual contingency plans
concerning specific software and hardware issues and operational plans for
continuing operations were completed for a substantial majority of its mission
critical hardware and software applications as of September 15, 1998 with the
remainder expected to be completed by the end of 1998. The Year 2000 Committee
has reviewed substantially all mission critical test plans and contingency plans
to ensure the reasonableness of the plans. Testing began on mission critical
systems in August 1998 and planned completion of testing of a majority of such
systems is expected by December 1998 with the remainder by March 31, 1999. The
Company has completed contingency plans for substantially all priority 1 and
priority 2 applications. The Company is working to develop contingency plans for
the remainder by the end of 1998 including working on contingency plans which
address operational policies and procedures in the event of data processing,
electric power supply and/or telephone service failures associated with the Year
2000. Such contingency plans provide documented actions to allow the Company to
maintain


                                       17
<PAGE>   18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)


YEAR 2000 ISSUES (CONTINUED)

and/or resume normal operations in the event of the failure of priority 1 and
priority 2 applications. Such plans identify participants, processes and
equipment that will be necessary to permit the Company to continue operations.
Such plans may include providing off-line system processing, back-up electrical
and telephone systems and other methods to ensure the Company's ability to
continue to operate. The costs of modifications to the existing software is
being primarily absorbed by the third party vendors. The Company recognizes that
the need exists to purchase new hardware and software regardless of year 2000
implications. Based upon current estimates, the Company has identified the
hardware and software that would have to be replaced, and have found the amounts
to not be material and in line with normal expenditures for technology upgrades.
The Company is being charged $25,000 to participate in the data service
processor year 2000 test system. As of September 30, 1998, the Company has
incurred $13,328 of that cost.

FORWARD LOOKING STATEMENTS

      In this Report, the Company has included certain "forward looking
statements" concerning the future operations of the Company. It is management's
desire to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. This statement is for the express
purpose of availing the Company of the protections of such safe harbor with
respect to all "forward looking statements" contained in this Report. The
Company has used "forward looking statements" to describe the future plans and
strategies including management's expectations of the Company's Year 2000
readiness and future financial results. Management's ability to predict results
or the effect of future plans and strategy is inherently uncertain. Factors that
could affect results include interest rate trends, competition, the general
economic climate in Delaware and Chester Counties, the mid-Atlantic region and
the country as a whole, loan delinquency rates, changes in federal and state
regulation, Year 2000 uncertainties and other uncertainties described in the
Company's filings with the Securities and Exchange Commission, including its
Form 10-K for the year ended September 30, 1998. These factors should be
considered in evaluating the "forward looking statements", and undue reliance
should not be placed on such statements.

                                       18
<PAGE>   19
[DELOITTE & TOUCHE LOGO]

Board of Directors
First Keystone Financial, Inc. and Subsidiaries
Media, Pennsylvania 19063

      We have audited the accompanying consolidated statements of financial
condition of First Keystone Financial, Inc. and Subsidiaries (the "Company") as
of September 30, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended September 30, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
First Keystone Financial, Inc. and Subsidiaries at September 30, 1998 and 1997
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1998 in accordance with generally
accepted accounting principles.


/s/ DELOITTE & TOUCHE LLP


DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
November 6, 1998


DELOITTE TOUCHE TOHMATSU INTERNATIONAL


                                       19
<PAGE>   20
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION



(dollars in thousands, except per share data)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                  SEPTEMBER 30
                                                                             -----------------------
                                                                                1998          1997
                                                                             -----------------------
<S>                                                                          <C>           <C>
ASSETS
Cash and amounts due from depository institutions                            $   2,457     $   1,832
Interest-bearing deposits with depository institutions                          21,669        19,729
----------------------------------------------------------------------------------------------------
   Total cash and cash equivalents                                              24,126        21,561
Investment securities available for sale                                        40,621        10,211
Mortgage-related securities available for sale                                 115,486       104,472
Loans held for sale                                                              2,799         4,577
Investment securities held to maturity--at amortized
   cost (approximate fair value of $9,960)                                                    10,000
Mortgage-related securities held to maturity--at
   amortized cost (approximate fair value of $18,700
   and $20,200 at September 30, 1998 and 1997,
   respectively)                                                                18,769        20,707
Loans receivable--net                                                          198,343       188,289
Accrued interest receivable                                                      3,117         2,565
Real estate owned                                                                1,663         1,672
Federal Home Loan Bank stock--at cost                                            5,079         3,769
Office properties and equipment--net                                             2,612         2,552
Deferred income taxes                                                              283           680
Prepaid expenses and other assets                                                2,965         2,375
----------------------------------------------------------------------------------------------------
    Total Assets                                                             $ 415,863     $ 373,430
====================================================================================================
 LIABILITIES, MINORITY INTEREST IN SUBSIDIARY
       AND STOCKHOLDERS' EQUITY

Liabilities:
    Deposits                                                                 $ 247,311     $ 227,918
    Advances from Federal Home Loan Bank                                       101,578        75,387
    Securities sold under agreements to repurchase                              19,300        24,600
    Accrued interest payable                                                     1,683         1,575
    Advances from borrowers for taxes and insurance                              1,036           913
    Accounts payable and accrued expenses                                        2,091         2,085
----------------------------------------------------------------------------------------------------
      Total liabilities                                                        372,999       332,478
----------------------------------------------------------------------------------------------------
   Guaranteed preferred beneficial interest in
      subordinated debt                                                         16,200        16,200
----------------------------------------------------------------------------------------------------
Stockholders' Equity:
   Preferred stock, $.01 par value, 10,000,000 shares
      authorized; none issued
   Common stock, $.01 par value, 20,000,000 shares authorized; issued and
      outstanding; September 30, 1998 and 1997, 2,329,216
      and 2,585,000 shares, respectively                                            14            14
   Additional paid in capital                                                   13,204        12,896
   Common stock acquired by stock benefit plans                                 (1,789)       (2,038)
   Treasury stock at cost, 390,784 and 263,162 shares
      at September 30, 1998 and 1997, respectively                              (4,575)       (2,545)
   Unrealized gain on available for
      sale securities--net of tax                                                1,487           408
    Retained earnings--partially restricted                                     18,323        16,017
----------------------------------------------------------------------------------------------------
      Total stockholders' equity                                                26,664        24,752
----------------------------------------------------------------------------------------------------
   Total Liabilities, Minority Interest in Subsidiary
      and Stockholders' Equity                                               $415,863      $ 373,430
====================================================================================================
</TABLE>


See notes to consolidated financial statements.


                                       20
<PAGE>   21
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income

(dollars in thousands, except per share data)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                             YEAR ENDED SEPTEMBER 30
                                                       ----------------------------------
                                                          1998         1997         1996
                                                       ----------------------------------
<S>                                                    <C>          <C>          <C>
INTEREST INCOME:
Interest on:
   Loans                                               $ 16,447     $ 14,737     $ 13,459
   Mortgage-related securities                            8,029        6,197        5,229
   Investments                                            2,429        1,478          715
   Interest-bearing deposits                                488          338          434
-----------------------------------------------------------------------------------------
         TOTAL INTEREST INCOME                           27,393       22,750       19,837
-----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on:
   Deposits                                               9,937        9,182        9,363
   Federal Home Loan Bank advances                        4,206        3,381        1,569
   Securities sold under agreements to repurchase         1,482           76
-----------------------------------------------------------------------------------------
         TOTAL INTEREST EXPENSE                          15,625       12,639       10,932
-----------------------------------------------------------------------------------------
Net interest income                                      11,768       10,111        8,905
Provision for loan losses                                   186          239        1,250
-----------------------------------------------------------------------------------------
Net interest income after provision for loan losses      11,582        9,872        7,655
-----------------------------------------------------------------------------------------
OTHER INCOME (LOSS):
   Service charges and other fees                           898          972        1,047
   Net gain (loss) on sale of:
      Investments and mortgage-related securities            51                        (6)
      Loans held for sale                                   526          285          209
      Real estate owned                                       7           32           34
      Other assets                                            1           46
   Real estate operations                                   (32)         (25)         (32)
   Other income                                              57           40           56
-----------------------------------------------------------------------------------------
         TOTAL OTHER INCOME                               1,508        1,350        1,308
-----------------------------------------------------------------------------------------
OPERATING EXPENSES:
   Salaries and employee benefits                         3,642        3,174        3,236
   Occupancy and equipment                                1,013          858        1,022
   Professional fees                                        580          733          793
   Federal deposit insurance premium                        145          207          530
   SAIF special assessment                                                          1,426
   Bank service charges                                     417          384          401
   Data processing                                          360          335          337
   Advertising                                              293          280          201
   Minority interest in expense of subsidiary             1,571          153
   Other                                                  1,038          797          699
-----------------------------------------------------------------------------------------
         TOTAL OPERATING EXPENSES                         9,059        6,921        8,645
-----------------------------------------------------------------------------------------
Income before income tax expense (benefit)                4,031        4,301          318
Income tax expense (benefit)                              1,250        1,664         (567)
-----------------------------------------------------------------------------------------
         NET INCOME                                    $  2,781     $  2,637     $    885
=========================================================================================
EARNINGS PER COMMON SHARE:
   Basic                                               $   1.31     $   1.20     $   0.37
   Diluted                                             $   1.23     $   1.13     $   0.37
</TABLE>


See notes to consolidated financial statements.


                                       21

<PAGE>   22
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity


(dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                         UNREALIZED
                                                                 COMMON                 GAIN (LOSS)ON
                                                                  STOCK                  SECURITIES                    TOTAL
                                                  ADDITIONAL   ACQUIRED BY                AVAILABLE                   STOCK-
                                         COMMON     PAID-IN   STOCK BENEFIT  TREASURY     FOR SALE      RETAINED     HOLDERS'
                                          STOCK     CAPITAL       PLANS        STOCK    (NET OF TAX)    EARNINGS      EQUITY
------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>      <C>         <C>            <C>        <C>             <C>          <C>
Balance at October 1, 1995               $ 14      $ 12,568     $(1,006)                $    142        $12,745      $24,463
   Common stock acquired
       by stock benefit plans                                      (704)                                                (704)
   ESOP stock committed
       to be released                                               109                                                  109
   Excess of fair value above
       cost of ESOP shares
       committed to be released                          91                                                               91
   RRP amortization                                                 164                                                  164
   Net unrealized loss relating to
       transfer of securities from held
       to maturity to available for sale,
       net of tax                                                                           (227)                       (227)
   Net unrealized loss on securities
       available for sale, net of tax                                                       (409)                       (409)
   Purchase of treasury stock                                               $ (1,288)                                 (1,288)
   Net income                                                                                               885          885
------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996              14        12,659      (1,437)      (1,288)       (494)        13,630       23,084

   Common stock acquired
       by stock benefit plans                                      (775)                                                (775)
   ESOP stock committed
       to be released                                                33                                                   33
   Excess of fair value above
       cost of ESOP and RRP shares
       committed to be released                         237                                                              237
   RRP amortization                                                 141                                                  141
   Net unrealized gain on securities
       available for sale, net of tax                                                        902                         902
   Exercise of stock options                                                      11                                      11
   Purchase of treasury stock                                                 (1,268)                                 (1,268)
   Dividends paid                                                                                          (250)        (250)
   Net income                                                                                             2,637        2,637
------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997              14        12,896      (2,038)      (2,545)        408         16,017       24,752

   ESOP stock committed
       to be released                                               108                                                  108
   Excess of fair value above
       cost of ESOP and RRP shares
       committed to be released                         308                                                              308
   RRP amortization                                                 141                                                  141
   Net unrealized gain on securities
       available for sale, net of tax                                                      1,079                       1,079
   Exercise of stock options                                                       6                                       6
   Purchase of treasury stock                                                 (2,036)                                 (2,036)
   Dividends paid                                                                                          (475)        (475)
   Net income                                                                                             2,781        2,781
------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998            $ 14     $  13,204     $(1,789)    $ (4,575)   $  1,487        $18,323      $26,664
==============================================================================================================================
</TABLE>


See notes to consolidated financial statements.

                                        22
<PAGE>   23
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

(dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            YEAR ENDED SEPTEMBER 30
                                                                     ------------------------------------
                                                                        1998         1997         1996
                                                                     ------------------------------------
<S>                                                                  <C>          <C>          <C>
OPERATING ACTIVITIES:
    Net income                                                       $  2,781     $  2,637     $    885
    Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
       Provision for depreciation and amortization                        453          364          520
       Amortization of discounts                                         (609)        (872)        (161)
       Gain (Loss) on sales of:
          Loans held for sale                                            (526)        (285)        (209)
          Investments and mortgage-related
             securities available for sale                                (51)                        6
          Real estate owned                                                (7)         (32)         (34)
          Other assets                                                     (1)         (46)
       Provision for loan losses                                          186          239        1,250
       Provision for real estate owned losses                             200
       Amortization of stock benefit plans                                563          422          364
    Changes in assets and liabilities which provided (used) cash:
       Origination of loans held for sale                             (56,398)     (37,209)     (30,239)
       Loans sold in the secondary market                              58,176       35,079       27,849
       Deferred income taxes                                             (112)         862         (700)
       Accrued interest receivable                                       (552)        (161)           3
       Prepaid expenses and other assets                                 (590)        (740)        (297)
       Accrued interest payable                                           108           74          405
       Accounts payable and accrued expenses                                6         (705)         569
---------------------------------------------------------------------------------------------------------
         Net cash (used in) provided by operating activities            3,627         (373)         211
---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:

    Loans originated or acquired                                      (64,979)     (56,049)     (52,056)
    Purchases of:
       Investments held to maturity                                    (2,000)     (12,000)
       Investments available for sale                                 (40,892)      (6,030)     (18,000)
       Mortgage-related securities held to maturity                    (2,687)                   (4,013)
       Mortgage-related securities available for sale                 (52,422)     (51,654)     (25,770)
       Purchase of FHLB stock                                          (1,310)      (1,432)        (845)
    Proceeds from sales of investment and
       mortgage-related securities available for sale                  20,299                    17,790
    Proceeds from sales of real estate owned                            1,451          944        1,009
    Proceeds from sales of other assets                                    30          101
    Principal collected on loans                                       55,694       35,418       40,160
    Proceeds from maturities, calls or repayments of:
       Investment securities available for sale                         5,070       12,500        3,065
       Mortgage-related securities available for sale                  28,129        9,243        3,908
       Investment securities held to maturity                          12,000        2,000        4,000
       Mortgage-related securities held to maturity                     4,663        2,483        8,347
    Purchase of property and equipment                                   (542)        (409)         (84)
    Net expenditures on real estate acquired through
       foreclosure and in development                                  (1,462)        (734)        (371)
---------------------------------------------------------------------------------------------------------
         Net cash (used in) investing activities                      (38,958)     (65,619)     (22,860)
---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
    Net increase (decrease) in deposit accounts                        19,393        8,713       (4,548)
    Net proceeds from FHLB and other borrowings                        20,891       53,247       18,329
    Net increase (decrease) in advances from
       borrowers for taxes and insurance                                  123           (8)        (114)
    Proceeds from issuance of capital securities                                    16,200
    Common stock acquired by stock benefit plans                                      (775)        (704)
    Purchase of treasury stock                                         (2,036)      (1,268)      (1,288)
    Cash dividends                                                       (475)        (250)
---------------------------------------------------------------------------------------------------------
         Net cash provided by financing activities                     37,896       75,859       11,675
---------------------------------------------------------------------------------------------------------
Increase (Decrease) in cash and cash equivalents                        2,565        9,867      (10,974)
Cash and cash equivalents at beginning of year                         21,561       11,694       22,668
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                             $ 24,126     $ 21,561     $ 11,694
---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings                $ 15,517     $ 12,600     $ 10,500
Cash payments of income taxes                                           1,150          630          720
Transfers of loans receivable into real estate owned                      207          411        1,768
Transfers of investment securities to investment
   securities available for sale                                                                  6,710
Transfers of mortgage-related securities to
   mortgage-related securities available for sale                                                43,823
=========================================================================================================
</TABLE>


See notes to consolidated financial statements.


                                                23
<PAGE>   24
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)



1.       NATURE OF OPERATIONS AND ORGANIZATION STRUCTURE

         On September 21, 1994, the Board of Directors of First Keystone Federal
Savings Bank (the "Bank") adopted a plan of conversion to convert from a
federally chartered mutual savings bank to a federally chartered capital stock
savings bank with the concurrent formation of a holding company (the
"Conversion").

         The Conversion was completed on January 25, 1995 with the issuance by
the holding company, First Keystone Financial, Inc. (the "Company"), of
1,360,000 shares of its common stock in a public offering to the Bank's eligible
depositors and borrowers, members of the general public and the Bank's employee
stock ownership plan (the "ESOP"). In exchange for the net conversion proceeds
of $11.5 million, less $1.0 million retained by the Company, the Company
acquired 100% of the issued and outstanding capital stock of the Bank.

         The Bank is principally in the business of attracting deposits through
its branch offices and investing those deposits together with funds from
borrowings and operations in single-family residential, commercial real estate
and commercial business loans. The Bank is primarily supervised and regulated by
the Office of Thrift Supervision ("OTS").


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

         The accompanying consolidated financial statements include the accounts
of the Company, the Bank, and the Bank's wholly-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

         The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.

SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE

         Securities held to maturity are carried at amortized cost only if the
Company has the positive intent and ability to hold these securities to
maturity. Securities available for sale are carried at fair value with resulting
unrealized gains or losses recorded to equity, net of tax. At September 30, 1998
and 1997, there were no securities held in a trading account.

         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
"Questions and Answers Guide"). In December 1995, in accordance with the
provisions of the Questions and Answers Guide, the Company reclassified certain
securities with an aggregate amortized cost of $50.5 million from held to
maturity to available for sale. The Questions and Answers Guide provided that
reclassifications from the held-to-maturity category that resulted from this
one-time reassessment would not call into question the intent of an enterprise
to hold other debt securities to maturity in the future.

ALLOWANCE FOR LOAN LOSSES

         An allowance for loan losses is maintained at a level that management
considers adequate to provide for probable losses based upon an evaluation of
known and inherent risks in the loan portfolio. Management's evaluation of the
portfolio is based upon past loss experience, current economic conditions and
other relevant factors. While management uses the best information available to
make such evaluation, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations.

         The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114 "Accounting by Creditors for
Impairment of a Loan" and No. 118, "Accounting by Creditors for

                                       24
<PAGE>   25
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Impairment of a Loan - Income Recognition and Disclosures." Impaired loans are
predominantly measured based on the fair value of the collateral. The provision
for loan losses charged to expense is based upon past loan loss experience and
an evaluation of possible losses and impairment existing in the current loan and
lease portfolio. A loan is considered to be impaired when, based upon current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the original contractual terms of the loan.
An insignificant delay or insignificant shortfall in amounts of payments does
not necessarily result in the loan being identified as impaired. For this
purpose, delays less than 90 days are considered to be insignificant. Large
groups of smaller balance homogeneous loans, including residential real estate
and consumer loans, are collectively evaluated for impairment, except for loans
restructured under a troubled debt restructuring. The majority of loans
classified as impaired on an individual basis are construction and commercial
loans and commercial loans secured by real estate.

MORTGAGE BANKING ACTIVITIES

         The Company originates mortgage loans held for investment and for sale.
At origination, the mortgage loan is identified as either held for sale or for
investment. Mortgage loans held for sale are carried at the lower of cost or
forward committed contracts (which approximates market), determined on a net
aggregate basis.

         At September 30, 1998, 1997, and 1996, loans serviced for others
totalled approximately $96,275, $114,554 and $127,229, respectively. Servicing
loans for others consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors, and processing foreclosures. Loan
servicing income is recorded on the cash basis and includes servicing fees from
investors and certain charges collected from borrowers, such as late payment
fees. The Company has fiduciary responsibility for related escrow and custodial
funds aggregating approximately $824 and $793 at September 30, 1998 and 1997,
respectively.

         The Company adopted SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinquishments of Liabilities" at January 1,
1997. This statement requires an entity which sells loans with servicing
retained to assess the retained interest in the servicing asset or liability
associated with the sold loans based on the relative fair values. The servicing
asset or liability is amortized in proportion to and over the period of
estimated net servicing income or net servicing loss, as appropriate. Assessment
of the fair value of the retained interest is performed on a continuing basis.
The adoption of this statement did not have a material impact on the Company's
financial position or results of operations.

INCOME RECOGNITION ON LOANS

         Interest on loans is credited to income when earned. Accrual of loan
interest is discontinued and a reserve established on existing accruals if
management believes after considering, among other things, economic and business
conditions and collection efforts, that the borrowers' financial condition is
such that collection of interest is doubtful.

REAL ESTATE OWNED

         Real estate owned consists of properties acquired by foreclosure or
deed in-lieu-of foreclosure. These assets are initially recorded at the lower of
carrying value of the loan or estimated fair value less selling costs at the
time of foreclosure and at the lower of the new cost basis or net realizable
value thereafter. The amounts recoverable from real estate owned could differ
materially from the amounts used in arriving at the net carrying value of the
assets at the time of foreclosure because of future market factors beyond the
control of the Company. Costs relating to the development and improvement of
real estate owned properties are capitalized and those relating to holding the
property are charged to expense.

OFFICE PROPERTIES AND EQUIPMENT

         Office properties and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the expected useful lives of the
assets. The costs of maintenance and repairs are expensed as they are incurred,
and renewals and betterments are capitalized.


                                       25
<PAGE>   26
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES

         Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date.

INTEREST RATE RISK

         At September 30, 1998 and 1997, the Company's assets consist primarily
of assets that earned interest at either adjustable or fixed interest rates and
the average life of which is long term. Those assets were funded primarily with
medium-term liabilities that have interest rates which vary over time with
market rates.

         Since the assets and liabilities reprice at different times, the
Company is exposed to interest rate risk.

EARNINGS PER SHARE

         In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share."
This statement establishes standards for computing and presenting earnings per
share ("EPS") for financial statements issued for periods ending after December
15, 1997, and requires restatement of all prior-period EPS data presented. The
adoption of this statement did not have a material impact on the Company's
financial statements.

ACCOUNTING FOR STOCK OPTIONS

         The Company accounts for stock options in accordance with SFAS No. 123
"Accounting for Stock-Based Compensation," which allows an entity to choose
between the intrinsic value method, as defined in Accounting Principals Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" or the fair
value method of accounting for stock-based compensation described in SFAS No.
123. An entity using the intrinsic value method must disclose pro forma net
income and earnings per share as if the stock-based compensation was accounted
for using the fair value method. The Company continues to account for
stock-based compensation using the intrinsic value method and has not recognized
compensation expense under this method.

STATEMENT OF CASH FLOWS

         For purposes of reporting cash flows, cash and cash equivalents include
cash and amounts due from depository institutions and interest-bearing deposits
with depository institutions.

NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

         In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires an entity to present, as a component of comprehensive
income, the amounts from transactions and other events which currently are
excluded from the statement of income and are recorded directly to stockholders'
equity.

         Also in June 1997, FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which requires an entity to
disclose information in a manner consistent to internally used information and
requires more detailed disclosures of operating and reporting segments than are
currently in practice. In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosure About Pensions and Other Postretirement Benefits." This
statement revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
These statements are effective for fiscal years beginning after December 15,
1997. Management has not completed an analysis of the effect the adoption of the
statements will have on the Company's financial condition or results of
operations.

         In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. This statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. This 


                                       26
<PAGE>   27
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)

2.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

statement is effective for fiscal years beginning after June 15, 1999, and
will not be applied retroactively to financial statements of prior periods.
Management of the Company does not believe this statement will have a material
impact on the Company financial position or results of operations when adopted.

RECLASSIFICATIONS

         Certain reclassifications have been made to the September 30, 1997 and
1996 consolidated financial statements to conform with the September 30, 1998
presentation. Such reclassifications had no impact on the reported net income.


3.       INVESTMENT SECURITIES

         The amortized cost and approximate fair value of investment securities
available for sale and held to maturity, by contractual maturities (where
applicable), are as follows:


<TABLE>
<CAPTION>
                                                                SEPTEMBER 30, 1998
                                             ------------------------------------------------------
                                                             GROSS          GROSS
                                             AMORTIZED     UNREALIZED     UNREALIZED    APPROXIMATE
                                               COST           GAIN           LOSS       FAIR VALUE
                                             ------------------------------------------------------
<S>                                          <C>           <C>            <C>           <C>
Available for Sale:

U.S. Treasury securities and securities
   of U.S. Government agencies:
       5 to 10 years                         $  12,000          $ 109                     $12,109
Municipal obligations                           18,993            484                      19,477
Mutual funds                                     2,000                      $   8           1,992
Preferred stocks                                 5,500            263                       5,763
Other equity investments                         1,390                        110           1,280
---------------------------------------------------------------------------------------------------
       Total                                 $  39,883          $856        $ 118         $40,621
===================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                             September 30, 1997
                                             ------------------------------------------------------
                                                             Gross          Gross
                                             Amortized     Unrealized     Unrealized    Approximate
                                               Cost           Gain           Loss       Fair Value
                                             ------------------------------------------------------
<S>                                          <C>           <C>            <C>           <C>
Available for Sale:

U.S. Treasury securities and securities
   of U.S. Government agencies:
       1 to 5 years                           $ 4,000          $ 15                       $ 4,015
        5 to 10 years                           3,000                       $ 17            2,983
Municipal obligations                           3,138            75                         3,213
---------------------------------------------------------------------------------------------------
       Total                                  $10,138          $ 90         $ 17          $10,211
===================================================================================================
Held to Maturity:


U.S. Treasury securities and securities
   of U.S. Government agencies:
       Over 10 years                          $10,000                       $ 40           $9,960
---------------------------------------------------------------------------------------------------
       Total                                  $10,000                       $ 40           $9,960
===================================================================================================
</TABLE>


                                       27
<PAGE>   28
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)

4.       MORTGAGE-RELATED SECURITIES

         Mortgage-related securities available for sale and mortgage-related
securities held to maturity are summarized as follows:

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30, 1998
                                             ------------------------------------------------------
                                                             GROSS          GROSS
                                             AMORTIZED     UNREALIZED     UNREALIZED    APPROXIMATE
                                               COST           GAIN           LOSS       FAIR VALUE
                                             ------------------------------------------------------
<S>                                          <C>           <C>            <C>           <C>
Available for Sale:

   FHLMC pass-through certificates          $  10,968         $   197                     $ 11,165
   FNMA pass-through certificates              25,600             503                       26,103
   GNMA pass-through certificates              41,379             562                       41,941
   Collateralized mortgage obligations         36,022             327       $ 72            36,277
---------------------------------------------------------------------------------------------------
      Total                                 $ 113,969         $ 1,589       $ 72          $115,486
===================================================================================================
Held to Maturity:

   FHLMC pass-through certificates           $  4,698            $ 33      $   1          $  4,730
   FNMA pass-through certificates               8,747              46        103             8,690
   Collateralized mortgage obligations          5,324               1         45             5,280
---------------------------------------------------------------------------------------------------
      Total                                  $ 18,769            $ 80      $ 149          $ 18,700
===================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                              September 30, 1997
                                            -------------------------------------------------------
                                                             Gross          Gross
                                             Amortized     Unrealized     Unrealized    Approximate
                                               Cost           Gain           Loss       Fair Value
                                            -------------------------------------------------------
<S>                                         <C>            <C>            <C>           <C>
Available for Sale:

   FHLMC pass-through certificates          $  17,540           $ 213       $   9         $ 17,744
   FNMA pass-through certificates              14,587             149          21           14,715
   GNMA pass-through certificates              28,938             133          17           29,054
   Collateralized mortgage obligations         42,814             376         231           42,959
---------------------------------------------------------------------------------------------------
      Total                                 $ 103,879           $ 871       $ 278         $104,472
===================================================================================================
Held to Maturity:

   FHLMC pass-through certificates           $  2,747            $ 15        $ 52         $  2,710
   FNMA pass-through certificates              10,053              29         272            9,810
   Collateralized mortgage obligations          7,907              17         244            7,680
---------------------------------------------------------------------------------------------------
      Total                                  $ 20,707            $ 61        $568         $ 20,200
===================================================================================================
</TABLE>

         The collateralized mortgage obligations contain both fixed and
adjustable classes of securities which are repaid in accordance with a
predetermined priority. The underlying collateral of the securities are loans
which are primarily insured by FHLMC, FNMA, and GNMA.

         Mortgage-related securities with a carrying value of $27,846 and
$21,923 were pledged as collateral for public funds on deposit, treasury tax and
loan processing and financings at September 30, 1998 and 1997, respectively (see
Notes 9 and 11).


5.       ACCRUED INTEREST RECEIVABLE

         The following is a summary of accrued interest receivable by category:

<TABLE>
<CAPTION>
                                                                           SEPTEMBER 30
                                                                   -----------------------------
                                                                     1998                1997
                                                                   -----------------------------
<S>                                                                <C>                 <C>
Loans                                                              $ 1,542             $  1,593
Mortgage-related securities                                            823                  726
Investment securities                                                  752                  246
------------------------------------------------------------------------------------------------
     Total                                                         $ 3,117             $  2,565
================================================================================================
</TABLE>


                                       28
<PAGE>   29
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
notes to Consolidated Financial Statements (Continued)
Years Ended September 30, 1998, 1997 and 1996 (dollars in thousands)


6.       LOANS RECEIVABLE


         Loans receivable consist of the following:

<TABLE>
<CAPTION>
                                          SEPTEMBER 30
                                     ----------------------
                                         1998       1997
                                     ----------------------
<S>                                  <C>         <C>
Real estate loans:
   Single-family                     $ 148,088   $ 135,168
   Construction and land                15,858      16,400
   Multi-family and commercial          20,563      18,305
Consumer loans:
   Home equity and lines of credit      19,609      22,964
   Deposit                                 181         348
   Education                               449         365
   Other                                 1,429       1,690
Commercial loans                         1,390       2,000
-----------------------------------------------------------
      Total loans                      207,567     197,240
   Loans in process                     (5,781)     (5,670)
   Allowance for loan losses            (1,738)     (1,628)
   Deferred loan fees                   (1,705)     (1,653)
-----------------------------------------------------------
   Loans receivable--net             $ 198,343   $ 188,289
===========================================================
</TABLE>

         The Company originates loans primarily in its local market area of
Delaware and Chester Counties, Pennsylvania to borrowers that share similar
attributes. This concentration of credit exposes the Company to a higher degree
of risk associated with this economic region.

         To a lesser extent, the Company participates in the origination and
sale of nonagency, non-conforming loans to the secondary market. The Company
recognized gains on sale of loans held for sale of $526,000, $281,000 and
$183,000 for fiscal years ended September 30, 1998, 1997 and 1996, respectively.

         The Company offers loans to its directors and senior officers on terms
permitted by OTS regulations. There were approximately $388 and $440 of loans
outstanding to senior officers and directors as of September 30, 1998 and 1997,
respectively. The amount of repayments during the years ended September 30, 1998
and 1997 totalled $102 and $266, respectively. There was $50 and $271 of new
loans granted during fiscal year 1998 and 1997, respectively.

         The Company has undisbursed portions under consumer and commercial
lines of credit as of September 30, 1998 of $4,587 and $4,238, respectively.

         The Company originates both adjustable and fixed interest rate loans
and purchases mortgage-backed securities and collateralized mortgage obligations
in the secondary market. The originated adjustable-rate loans have interest rate
adjustment limitations and are generally indexed to U.S. Treasury securities
plus a fixed margin. Future market factors may affect the correlation of the
interest rate adjustment with rates the Company pays on the short-term deposits
that have been primarily utilized to fund these loans. The adjustable-rate
mortgage-related securities adjust to various national indices plus a fixed
margin. At September 30, 1998, the composition of these loans and
mortgage-related securities follows:

<TABLE>
<CAPTION>
             FIXED-RATE
---------------------------------------

 TERM TO MATURITY            BOOK VALUE
---------------------------------------
<S>                          <C>
 1 month to 1 year            $   3,102
 1 year to 3 years                5,962
 3 years to 5 years               7,141
 5 years to 10 years             19,123
 Over 10 years                  203,205
---------------------------------------
      Total                   $ 238,533
=======================================
</TABLE>

<TABLE>
<CAPTION>
           ADJUSTABLE-RATE
---------------------------------------

     TERM TO
 RATE ADJUSTMENT             BOOK VALUE
---------------------------------------
<S>                          <C>
 1 month to 1 year            $  76,949
 1 year to 3 years               18,583
 3 years to 5 years               1,976
---------------------------------------
      Total                   $  97,508
=======================================
</TABLE>


         The following is an analysis of the allowance for loan losses:

<TABLE>
<CAPTION>
                              YEAR ENDED
                             SEPTEMBER 30
                      -------------------------
                       1998      1997     1996
                      -------------------------
<S>                   <C>       <C>      <C>
Beginning balance     $1,628    $2,624   $1,487
Provisions charged
  to income               186      239    1,250
Charge-offs              (114)  (1,252)    (113)
Recoveries                 38       17
-----------------------------------------------
     Total            $1,738    $1,628   $2,624
===============================================
</TABLE>


         At September 30, 1998 and 1997, non-performing loans (which include
loans in excess of 90 days delinquent) amounted to approximately $3,704 and
$2,077, respectively.



                                       29
<PAGE>   30
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Years Ended September 30, 1998, 1997 and 1996 (dollars in thousands)

7.       REAL ESTATE OWNED

         Real estate owned is comprised of:

<TABLE>
<CAPTION>
                                SEPTEMBER 30
                              ----------------
                                1998     1997
                              ----------------
<S>                           <C>       <C>
Real estate acquired
  in settlement of loans      $   196   $  168
Real estate acquired
  and in development            1,467    1,504
----------------------------------------------
     Total                    $ 1,663   $1,672
==============================================
</TABLE>

         In fiscal year 1996, First Pointe, Inc., a subsidiary of the Company,
accepted a deed in lieu of foreclosure on a construction loan for the
acquisition and improvement of a 106-lot real estate development project located
in Pennsylvania. As of September 30, 1998, 91 of the townhouses were completed
and sold. Work-in-process consists of 15 units of which two consist of a sample 
home and a sales office.


8.       OFFICE PROPERTIES AND EQUIPMENT

         Office properties and equipment are summarized by major classification
as follows:

<TABLE>
<CAPTION>
                              SEPTEMBER 30
                          --------------------
                            1998         1997
                          --------------------
<S>                       <C>           <C>
Land and buildings        $ 4,220       $4,045
Furniture, fixtures
  and equipment             3,753        3,448
----------------------------------------------
     Total                  7,973        7,493
Accumulated
  depreciation and
  amortization             (5,361)      (4,941)
----------------------------------------------
     Net                  $ 2,612       $2,552
==============================================
</TABLE>


         The future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
September 30, 1998 are as follows:

<TABLE>
<CAPTION>
  September 30:
<S>                                      <C>
      1999                               $ 119
      2000                                 121
      2001                                  53
      2002                                  36
      2003                                  27
      Thereafter                            59
----------------------------------------------
      Total minimum
         future rental payments          $ 415
==============================================
</TABLE>

         Leasehold expense was approximately $197, $148 and $155 for the years
ended September 30, 1998, 1997 and 1996, respectively.


9.       DEPOSITS

                  Deposits consist of the following major classifications:

<TABLE>
<CAPTION>
                                                               SEPTEMBER 30
                                          --------------------------------------------------
                                                     1998                       1997
                                          --------------------------------------------------
                                             AMOUNT        PERCENT        Amount     Percent
--------------------------------------------------------------------------------------------
<S>                                       <C>              <C>         <C>           <C>
Non-interest bearing accounts             $    8,254         3.3%      $   6,165        2.7%
NOW accounts                                  28,181        11.4          27,754       12.2
Passbook accounts                             37,988        15.4          38,035       16.7
Money market demand accounts                  16,087         6.5          16,429        7.2
Certificate of deposit accounts              156,801        63.4         139,535       61.2
--------------------------------------------------------------------------------------------
     Total                                $  247,311       100.0%      $ 227,918      100.0%
============================================================================================ 
</TABLE>


         The weighted average interest rates paid on deposits were 4.21% and
4.26% at September 30, 1998 and 1997, respectively.

         Included in deposits as of September 30, 1998 are deposits greater than
$100,000 totalling approximately $30,700.

         At September 30, 1998 and 1997, the Company had pledged certain
mortgage-related securities aggregating approximately $1,633 and $2,870,
respectively, as collateral for government deposits.


                                       30
<PAGE>   31
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)

9. DEPOSITS (continued)

         A summary of scheduled maturities of certificates is as follows:

<TABLE>
<CAPTION>
                             SEPTEMBER 30
                                 1998
                             ------------
<S>                          <C>
Within one year              $   109,908
One to two years                  26,535
Two to three years                10,821
Thereafter                         9,537
-----------------------------------------
Total                        $   156,801
=========================================
</TABLE>

         A summary of interest expense on deposits is as follows:

<TABLE>
<CAPTION>
                             YEAR ENDED
                            SEPTEMBER 30
                    -------------------------
                      1998      1997    1996
---------------------------------------------
<S>                 <C>        <C>     <C>
NOW accounts        $    376  $  360  $   372
Passbook accounts        923     949    1,030
Money market
  demand accounts        452     450      487
Certificates of
  deposit accounts     8,186   7,423    7,474
---------------------------------------------
Total               $  9,937  $9,182  $ 9,363
=============================================
</TABLE>


10.      ADVANCES FROM FEDERAL HOME LOAN BANK

         A summary of advances from the Federal Home Loan Bank ("FHLB") of
Pittsburgh follows:

<TABLE>
<CAPTION>
                                                                SEPTEMBER 30
                                            -------------------------------------------------
                                                        1998                    1997
                                            -------------------------------------------------
                                                            WEIGHTED                 Weighted
                                                             AVERAGE                  average
                                                            INTEREST                 interest
                                               AMOUNT         RATE       Amount        rate
                                            -------------------------------------------------
<S>                                         <C>             <C>         <C>          <C>
Advances from FHLB due by
September 30,
   1998                                                                 $ 33,200       5.7%
   1999                                     $   30,325         5.8%       11,325       5.7
   2000                                          5,159         5.4           257       6.0
   Thereafter                                   66,094         5.5        30,605       5.6
---------------------------------------------------------------------------------------------

         Total                              $  101,578         5.6%     $ 75,387       5.7%
=============================================================================================
</TABLE>

         The advances are collateralized by Federal Home Loan Bank stock and
substantially all first mortgage loans held by the company.

         Included in the table above at September 30, 1998 are convertible
advances whereby the FHLB has the option at a predetermined time to convert the
fixed interest rate to an adjustable rate tied to LIBOR. The Company then has
the option to prepay these advances if the FHLB converts the interest rate.
These advances are included in the year in which they mature.

         The Company has available an annually renewable line of credit not to
exceed 10% of the Company's maximum borrowing capacity which was $20.5 million
at the time the commitment was executed. At September 30, 1998 and 1997, there
were no balances outstanding on the line of credit.


                                       31
<PAGE>   32

FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Years Ended September 30, 1998, 1997 and 1996 (dollars in thousands)



11.      SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

         The Company sold, under agreements to repurchase, mortgage-related
securities to broker-dealers. Securities underlying the agreements with
broker-dealers were delivered to the dealer who arranged the transaction.
Securities delivered to broker-dealers may have been sold, loaned, or otherwise
disposed of, such securities to other parties in the normal course of their
operations.

         Information concerning securities sold under agreements to repurchase
is summarized as follows:

<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30
                                                      -------------------------------
                                                        1998                    1997
                                                      -------------------------------
<S>                                                   <C>                    <C>
Average balance for months outstanding                 $24,411                $11,179
-------------------------------------------------------------------------------------
Average interest rate for months outstanding              6.07%                  5.90%
-------------------------------------------------------------------------------------
Maximum month-end balance during the year              $24,600                $24,600
-------------------------------------------------------------------------------------

 Mortgage-related securities underlying the
   agreements at year-end:
        Carrying value                                 $23,055                $27,255
-------------------------------------------------------------------------------------
        Estimated fair value                           $23,385                $27,267
-------------------------------------------------------------------------------------
</TABLE>


12.      INCOME TAXES

         In August 1996, the Small Business Job Protection Act (the "Act") was
signed into law. The Act repealed the percentage of taxable income method of
accounting for bad debts for thrift institutions effective for years beginning
after December 31, 1995. Prior to October 1, 1996, the Company was permitted
under the Internal Revenue Code (the "Code") to deduct an annual addition to the
reserve for bad debts in determining taxable income, subject to certain
limitations. The Company's deduction was based upon the percentage of taxable
income method as defined by the Code. The bad debt deduction allowable under
this method equaled 8% of taxable income determined without regard to that
deduction and with certain adjustments. This addition differs from the bad debt
experience used for financial accounting purposes. The Act required the Company,
as of October 1, 1996, to change its method of computing reserves for bad debts
to the experience method. The bad debt deduction allowable under this method is
available to small banks with assets less than $500 million. Generally, this
method allowed 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
chargeoffs divided by the sum of the previous six years total outstanding loans
at year end.

         The Company 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. 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 the amount
equal to the Bank's increase in the tax reserve from December 31, 1987 to
September 30, 1996. Retained earnings at September 30, 1998, 1997 and 1996
included approximately $2.5 million representing bad debt deductions for which
no deferred income taxes have been provided.

         Income tax expense (benefit) is comprised of the following:

<TABLE>
<CAPTION>
                              YEAR ENDED
                             SEPTEMBER 30
                      --------------------------
                       1998      1997      1996
------------------------------------------------
<S>                   <C>       <C>       <C>
Current
  Federal             $1,362    $  489    $   30
  State                            313       103
------------------------------------------------
     Subtotal           1,362      802       133
  Deferred               (112)     862      (700)
------------------------------------------------
     Total            $1,250    $1,664    $ (567)
================================================
</TABLE>


                                       32
<PAGE>   33
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)


12.      INCOME TAXES (CONTINUED)

         The Company's effective tax rate is less than the statutory federal
income tax rate for the following reasons:

<TABLE>
<CAPTION>
                                                                          YEAR ENDED
                                                                         SEPTEMBER 30
                                                 -------------------------------------------------------------
                                                       1998                1997                 1996
                                                 -------------------------------------------------------------
                                                          PERCENTAGE          Percentage           Percentage
                                                           OF PRETAX           of Pretax            of Pretax
                                                  AMOUNT    INCOME    Amount    Income    Amount     Income
                                                 -------------------------------------------------------------
<S>                                              <C>      <C>         <C>     <C>         <C>      <C>
Tax at statutory rate                            $ 1,370      34.0%   $1,462       34.0%  $  108        34.0%
Increase (decrease) in taxes resulting from:
     Adjustment for resolution
        of tax contingency                                                                  (700)     (220.2)
     Tax exempt interest, net                       (149)     (3.7)      (24)       (.6)     (14)       (4.3)
     State tax--net of federal tax effect                                207        4.8       68        21.3
     Other                                            29        .7        19         .5      (29)       (9.1)
--------------------------------------------------------------------------------------------------------------
        Total                                    $ 1,250      31.0%   $1,664       38.7%  $ (567)     (178.3)%
==============================================================================================================
</TABLE>

         The tax effect of temporary differences that give rise to significant
portions of the deferred tax accounts, calculated at 34%, are as follows:

<TABLE>
<CAPTION>
                                       SEPTEMBER 30
                                    ------------------
                                      1998       1997
                                    ------------------
<S>                                 <C>        <C>
Accelerated depreciation            $   249    $  221
Allowance for loan losses               634       525
Deferred loan fees                      (61)      (43)
Accrued expenses                        161       185
Unrealized gain (loss)
  on available for sale securities     (767)     (258)
Other                                    67        50
------------------------------------------------------
   Total deferred tax asset         $   283    $  680
======================================================
</TABLE>


13.      REGULATORY CAPITAL REQUIREMENTS

         The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by regulators about components, risk
weightings, and other factors.

         Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of tangible and core capital (as defined in the regulations) to
adjusted assets (as defined), and of Tier I and total capital (as defined) to
average assets (as defined). Management believes, as of September 30, 1998, that
the Bank meets all capital adequacy requirements to which it is subject.

         As of September 30, 1998, the most recent notification from the Office
of Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier-1 risk-based,
and Tier-1 leveraged-ratios as


                                       33
<PAGE>   34
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Years Ended September 30, 1998, 1997 and 1996 (dollars in thousands)

13. REGULATORY CAPITAL REQUIREMENTS (continued)

set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.

         The Bank's actual capital amounts and ratios are also presented in the
table. At September 30, 1998 and 1997, risk-based capital, for regulatory
requirements, is increased by $1,688 and $1,578, respectively, of general loan
loss reserves for a total of $35,389 and $31,832, respectively. During fiscal
1997, regulatory capital was increased by a $6.0 million capital contribution by
the holding company in conjunction with the issuance of junior subordinated
debentures (see Note 20).

<TABLE>
<CAPTION>
                                                                                         REQUIRED TO BE
                                                                     REQUIRED FOR       WELL CAPITALIZED
                                                                   CAPITAL ADEQUACY       UNDER PROMPT
                                                    ACTUAL             PURPOSES         CORRECTIVE ACTION
                                               ------------------------------------------------------------
                                               AMOUNT  PERCENTAGE  AMOUNT  PERCENTAGE   AMOUNT   PERCENTAGE
                                               ------------------------------------------------------------
<S>                                            <C>     <C>         <C>     <C>          <C>      <C>
AT SEPTEMBER 30, 1998:
  Core Capital (to Adjusted Tangible Assets)   33,701      8.3%    16,301      4.0%     20,376       5.0%
-----------------------------------------------------------------------------------------------------------
  Tier I Capital (to Risk Weighted Assets)     33,701     20.1        N/A      N/A      24,451       6.0
-----------------------------------------------------------------------------------------------------------
  Total Capital (to Risk Weighted Assets)      35,389     21.1     13,424      8.0      16,780      10.0
-----------------------------------------------------------------------------------------------------------
  Tangible Capital (to Tangible Assets)        33,701      8.3      6,113      1.5         N/A       N/A
-----------------------------------------------------------------------------------------------------------
September 30, 1997:
   Core Capital (to Adjusted Tangible Assets)  30,254      8.1%    14,902      4.0%     18,627       5.0%
-----------------------------------------------------------------------------------------------------------
   Tier I Capital (to Risk Weighted Assets)    30,254     18.9        N/A      N/A       9,594       6.0
-----------------------------------------------------------------------------------------------------------
   Total Capital (to Risk Weighted Assets)     31,832     19.9     12,792      8.0      15,990      10.0
-----------------------------------------------------------------------------------------------------------
   Tangible Capital (to Tangible Assets)       30,254      8.1      5,594      1.5         N/A       N/A
-----------------------------------------------------------------------------------------------------------
</TABLE>


         At the date of the Conversion, the Bank established a liquidation
account in an amount equal to its retained income as of August 31, 1995. The
liquidation account is maintained for the benefit of eligible account holders
and supplemental eligible account holders who continue to maintain their
accounts at the Bank after the Conversion. The liquidation account is reduced
annually to the extent that eligible account holders and supplemental eligible
account holders have reduced their qualifying deposits as of each anniversary
date. Subsequent increases will not restore an eligible account holder's or
supplemental eligible account holder's interest in the liquidation account. In
the event of a complete liquidation of the Bank, each eligible account holder
and supplemental eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held.

         The Bank may not declare or pay cash dividends on or repurchase any of
its shares of common stock if the effect thereof would cause equity to be
reduced below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements.


                                       34

<PAGE>   35
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)

14.      EMPLOYEE BENEFITS


401(k) PROFIT SHARING PLAN

         The Bank's 401(k) profit sharing plan covers substantially all
full-time employees of the Company and provides for pre-tax contributions by the
employees with matching contributions at the discretion of the Board of
Directors determined at the beginning of the calendar year. All amounts are
fully vested. For calendar year 1998, there was no contribution to the 401(k)
profit sharing plan. For calendar year 1997, the Board approved an 1% of salary
profit sharing contribution of all contributing participants. For calendar year
1996, a salary match up to 2.5% was approved by the Board. Pension expense was
$35 and $88 for the years ended September 30, 1997, and 1996, respectively.

EMPLOYEE STOCK OWNERSHIP PLAN

         In connection with the Conversion, the Company established an ESOP for
the benefit of eligible employees. The ESOP purchased 207,600 shares of common
stock in the Conversion. During November 1996, the ESOP purchased an additional
77,550 shares of common stock. At September 30, 1998, 88,386 shares of the total
number of shares held by the ESOP were committed to be released. The Company
accounts for its ESOP in accordance with AICPA Statement of Position 93-6,
"Employers Accounting for Employee Stock Ownership Plans," which requires the
Company to recognize compensation expense equal to the fair value of the ESOP
shares during the periods in which they become committed to be released. To the
extent that the fair value of the ESOP shares differs from the cost of such
shares, this differential will be charged or credited to equity as additional
paid-in-capital. Management expects the recorded amount of expense to fluctuate
as continuing adjustments are made to reflect changes in the fair value of the
ESOP shares. The Company's ESOP, which is internally leveraged, does not report
the loan receivable from the ESOP as an asset and does not report the ESOP debt
from the employer as a liability. The Company recorded compensation and employee
benefit expense related to the ESOP of $450, $275 and $200 for the years ended
September 30, 1998, 1997 and 1996, respectively.

RECOGNITION AND RETENTION PLAN

         Under the 1995 Recognition and Retention Plan and Trust (the "RRP"),
the Company had outstanding awards aggregating 50,590 shares as of September 30,
1998 to the Company's Board of Directors and executive officers subject to
vesting and other provisions of the RRP.

         At September 30, 1998 and 1997, the deferred cost of unearned RRP
shares totaled $258 and $399, respectively, and is recorded as a charge against
stockholders' equity. Compensation expense will be recognized ratably over the
five year vesting period for shares awarded. For the fiscal years ended
September 30, 1998, 1997 and 1996, the Company recorded compensation and
employee benefit expense of $141, $141 and $137, respectively, relating to the
RRP.

STOCK OPTION PLAN

         Under the 1995 Stock Option Plan (the "Plan"), Common Stock totaling
272,000 shares has been reserved for issuance for the Plan. An aggregate of
251,124 stock options have been granted to the Company's executive officers,
nonemployee directors and other key employees, subject to vesting and other
provisions of the Plan. During the years ended September 30, 1998 and 1997,
1,088 and 544 shares, respectively, were exercised at an exercise price of $7.56
and $7.50.


                                       35
<PAGE>   36
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)

14.  EMPLOYEE BENEFITS (continued)

         The following is a summary of transactions under the Plan:

<TABLE>
<CAPTION>
                                                                                        WEIGHTED
                                                                       EXERCISE          AVERAGE
                                                       NUMBER OF         PRICE       EXERCISE PRICE
                                                     OPTION SHARES       RANGE          PER SHARE
                                                     ----------------------------------------------
<S>                                                  <C>             <C>             <C>
Outstanding at September 30, 1995                      239,360       $ 7.50 -  7.50      $ 7.50
Granted                                                  6,800         8.50 -  8.50        8.50
Canceled                                                (9,792)        7.50 -  7.50        7.50
---------------------------------------------------------------------------------------------------
Outstanding at September 30, 1996                      236,368         7.50 -  8.50        7.53
Granted                                                 15,720        12.38 - 14.25       13.52
Canceled                                                (5,032)        7.50 -  8.50        7.64
Exercised                                               (1,088)        7.50 -  7.50        7.50
---------------------------------------------------------------------------------------------------
Outstanding at September 30, 1997                      245,968       $ 7.50 - 14.25        7.91
Granted                                                  5,700        12.88 - 12.88       12.88
Exercised                                                 (578)        7.50 -  8.50        7.56
---------------------------------------------------------------------------------------------------
Outstanding at September 30, 1998                      251,090       $ 7.50 - 14.25      $ 8.02
===================================================================================================
</TABLE>

         A summary of the exercise price range at September 30, 1998 is as
follows:

<TABLE>
<CAPTION>
                                             WEIGHTED             WEIGHTED
                       EXERCISE               AVERAGE              AVERAGE
    NUMBER OF            PRICE               REMAINING         EXERCISE PRICE
  OPTION SHARES          RANGE           CONTRACTUAL LIFE         PER SHARE
-----------------------------------------------------------------------------
<S>                 <C>                  <C>                   <C>
     229,670        $ 7.50 -  8.50             7.03                 $7.53
      21,420         12.38 - 14.25             9.27                 13.35
-----------------------------------------------------------------------------
     251,090        $ 7.50 - 14.25             7.22                 $8.02
=============================================================================
</TABLE>

         The Company applies APB Opinion No. 25 in accounting for stock options
and, accordingly, no compensation expense has been recognized in the financial
statements. Had the Company determined compensation expense based on the fair
value at the grant date for its stock options under SFAS 123, the Company's net
income and income per share would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
                                  YEAR ENDED
                                 SEPTEMBER 30
                           -----------------------
                             1998            1997
                           -----------------------
<S>                        <C>              <C>
Net income:
  As reported              $2,781           $2,637
--------------------------------------------------
  Pro forma                  2,770           2,598
--------------------------------------------------
Net income per common and
 common equivalent share:
  Earnings per
   common share
   - As reported           $ 1.23           $ 1.13
--------------------------------------------------
   - Pro forma               1.22             1.12
--------------------------------------------------
  Weighted average
   fair value of
   options granted
   during the period       $ 5.15           $10.55
--------------------------------------------------
</TABLE>

         The binomial option-pricing model was used to determine the grant date
fair value of options. Significant assumptions used to calculate the above fair
value of the awards are as follows:

<TABLE>
<CAPTION>
                            September 30
                         --------------------
                         1998           1997
---------------------------------------------
<S>                      <C>            <C>
  Risk free interest
   rate of return         4.69%          6.12%
---------------------------------------------
  Expected option
   life (months)            60             60
---------------------------------------------
  Expected volatility       45%            37%
---------------------------------------------
  Expected Dividends       1.9%             1%
---------------------------------------------
</TABLE>

OTHER

         The Company established an expense accrual in connection with the
anticipated funding of a trust to be created to formalize the Company's deferred
compensation arrangements with four former officers of the Company. A total of
$377 and $448 was included in the Company's liabilities at September 30, 1998
and 1997.


                                       36
<PAGE>   37
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Years Ended September 30, 1998, 1997 and 1996 (dollars in thousands)


15.      COMMITMENTS AND CONTINGENCIES


         The Company has outstanding loan commitments, excluding undisbursed
portion of loans in process and equity lines of credit, of approximately $11,759
and $7,651 as of September 30, 1998 and 1997, respectively, which are all
expected to be funded within four months. Of these commitments outstanding, the
breakdown between fixed and adjustable rate loans is as follows:

<TABLE>
<CAPTION>
                                SEPTEMBER 30
                             ------------------
                               1998      1997
                             ------------------
<S>                          <C>         <C>
Fixed-rate (ranging
  from 5.875% to 13.50%)      $ 6,859    $4,073
Adjustable-rate                 4,900     3,578
-----------------------------------------------
     Total                    $11,759    $7,651
===============================================
</TABLE>

Generally, non-conforming loans are sold in the secondary market, depending on
cash flow, interest rate, risk management and other considerations. There were
approximately $6,029 and $5,324 in outstanding commitments to sell loans at
September 30, 1998 and 1997, respectively.


16.      RELATED PARTY TRANSACTIONS


         The Company retains the services of a law firm in which one of the
Company's Directors is a member. In addition to providing general legal counsel
to the Company, the firm also prepares mortgage documents and attends loan
closings for which it is paid directly by the borrower.


17.      SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT


         On September 30, 1996, the Economic Growth and Paperwork Reduction Act
of 1996, which includes the recapitalization of the Savings Association
Insurance Fund ("SAIF"), became law. Accordingly, all depository institutions
with SAIF-insured deposits were charged a one-time special assessment on their
SAIF-assessible deposits as of March 31, 1995 at the rate of 65.7 basis points,
which was paid on November 27, 1996. The Bank accrued $1.4 million for this
special assessment at September 30, 1996.


18.      FAIR VALUE OF FINANCIAL INSTRUMENTS


         The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about the Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.


                                       37
<PAGE>   38
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)

18.      FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30
                                           --------------------------------------------------
                                                     1998                       1997
                                           --------------------------------------------------
                                                          ESTIMATED                 Estimated
                                            CARRYING        FAIR         Carrying     Fair
                                             AMOUNT         VALUE         Amount      Value
<S>                                        <C>            <C>            <C>        <C>
Assets:
   Cash and interest-earning deposits      $   24,126     $  24,126      $ 21,561   $ 21,561
---------------------------------------------------------------------------------------------
   Investment securities                       40,621        40,621        20,211     20,171
---------------------------------------------------------------------------------------------
   Loans                                      198,343       214,020       188,289    196,194
---------------------------------------------------------------------------------------------
   Loans held for sale                          2,799         2,799         4,577      4,577
---------------------------------------------------------------------------------------------
   Mortgage-related securities                134,255       134,146       125,179    124,672
---------------------------------------------------------------------------------------------

Liabilities:
   Savings deposits                            37,988        37,988        38,035     38,035
---------------------------------------------------------------------------------------------
   NOW and MMDA deposits                       52,522        52,522        50,348     50,348
---------------------------------------------------------------------------------------------
   Certificates of deposit                    156,801       158,526       139,535    139,741
---------------------------------------------------------------------------------------------
   Advances from Federal Home Loan Bank       101,578       120,235        75,387     83,525
---------------------------------------------------------------------------------------------
   Securities sold under agreements
      to repurchase                            19,300        19,884        24,600     24,605
---------------------------------------------------------------------------------------------
   Off balance sheet commitments               26,365        26,365        19,439     19,439
---------------------------------------------------------------------------------------------
</TABLE>

         The fair value of cash and interest-earning deposits is their carrying
value due to their short term nature. The fair value of investments and
mortgage-related securities is based on quoted market prices, dealer quotes, and
prices obtained from independent pricing services. The fair value of loans is
estimated, based on present values using approximate current entry-value
interest rates, applicable to each category of such financial instruments.

         The fair value of NOW deposits, MMDA deposits, and savings deposits is
the amount reported in the financial statements. The fair value of certificates
of deposit and FHLB advances is based on a present value estimate, using rates
currently offered for deposits of similar remaining maturity.

         No adjustment was made to the entry-value interest rates for changes in
credit performing commercial loans, construction loans, and land loans for which
there are no known credit concerns. Management believes that the risk factor
embedded in the entry-value interest rates, along with the general reserves
applicable to the performing commercial, construction, and land loan portfolios
for which there are no known credit concerns, result in a fair valuation of such
loans on an entry-value basis. The fair value of non-performing loans, with a
recorded book value of approximately $3,704 and $2,077 (which are collateralized
by real estate properties with property values in excess of carrying amounts) as
of September 30, 1998 and 1997, respectively, was not estimated because it is
not practicable to reasonably assess the credit adjustment that would be applied
in the marketplace for such loans. The fair value estimates presented herein are
based on pertinent information available to management as of September 30, 1998
and 1997. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.


                                       38
<PAGE>   39
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)

19.      EARNINGS PER SHARE


         Basic earnings per share is computed based on the weighted average
number of shares of common stock outstanding. Diluted earnings per common share
is computed based on the weighted average number of shares of common stock
outstanding, increased by the number of common shares that are assumed to have
been purchased with the proceeds from the exercise of stock options. The
calculation of the weighted average shares, after giving effect to the stock
split, was as follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED
                                                         SEPTEMBER 30
                                             ------------------------------------
                                                1998         1997          1996
                                             ------------------------------------
<S>                                          <C>           <C>          <C>
Average common share outstanding             2,130,712     2,198,453    1,191,583
Increase in shares due to options -
  diluted basis                                135,100       125,316
---------------------------------------------------------------------------------
Adjusted shares outstanding - diluted        2,265,812     2,323,769    1,191,583
=================================================================================
</TABLE>


20.      CAPITAL SECURITIES


         On August 21, 1997, First Keystone Capital Trust I ("the Trust"), a
trust formed under Delaware law, that is a subsidiary of the Company, issued
$16.2 million of preferred securities at an interest rate of 9.7%, with a
scheduled maturity of August 15, 2027. The Company owns all the common stock of
the Trust. The proceeds from the issue were invested in Junior Subordinated
Debentures (the "Debentures") issued by the Company. The Debentures are
unsecured and rank subordinate and junior in right of payment to all
indebtedness, liabilities and obligations of the Company. The Debentures
represent the sole assets of the Trust. Interest on the Preferred Securities is
cumulative and payable semi-annually in arrears. The Company has the option,
subject to required regulatory approval, to prepay the securities beginning
August 15, 2007.

         The securities are shown on the liability side of the balance sheet as
"Guaranteed preferred beneficial interest in subordinate debt." The Company has,
under the terms of the Debentures and the related Indenture as well as the other
operative corporate documents, agreed to irrevocably and unconditionally
guarantee the Trust's obligations under the Debentures. The Company contributed
approximately $6.0 million of the net proceeds to the Bank to support the Bank's
lending activities. The interest cost associated with this issue is treated as a
non-interest expense on the consolidated statement of operations rather than
interest expense.
<PAGE>   40
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)

21.      PARENT COMPANY FINANCIAL INFORMATION


         Condensed financial statements of First Keystone Financial, Inc. are as
follows:


                   CONDENSED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                               SEPTEMBER 30
                                         -----------------------
                                             1998           1997
                                         -----------------------
<S>                                      <C>            <C>
ASSETS
Interest-bearing deposits                $    222       $  9,832
Investment securities
    available for sale                      7,043
Investment in subsidiaries                 35,622         31,168
Other assets                                  884            712
----------------------------------------------------------------
      Total assets                       $ 43,771       $ 41,712
================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Other borrowed money                     $ 16,802       $ 16,702
Other liabilities                             305            258
----------------------------------------------------------------
      Total liabilities                    17,107         16,960
Stockholders' equity                       26,664         24,752
----------------------------------------------------------------
      Total liabilities and
         stockholders' equity            $ 43,771       $ 41,712
================================================================
</TABLE>

                       CONDENSED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                          YEAR ENDED
                                                                         SEPTEMBER 30
                                                            -------------------------------------
                                                              1998           1997           1996
                                                            -------------------------------------
<S>                                                         <C>            <C>            <C>
INCOME:

      Dividends from subsidiary                             $     5        $ 1,000        $ 1,350
      Loan to Employee Stock Ownership Plan                     136            129             88
      Interest and dividends on investments                     502                              
      Interest on deposits                                       43             48             20
-------------------------------------------------------------------------------------------------
         Total income                                           686          1,177          1,458

Interest on other borrowed money                              1,620            153

Operating expenses                                              107             26             13
-------------------------------------------------------------------------------------------------
Income (Loss) before income taxes and equity in
   undistributed income of subsidiaries                      (1,041)           998          1,445
   Income tax expense (benefit)                                (343)            10             39
-------------------------------------------------------------------------------------------------
Income (Loss) before equity in (return of) undistributed
   income of subsidiaries                                      (698)           988          1,406
Equity in (return of) undistributed income
of subsidiaries                                               3,479          1,649           (521)
-------------------------------------------------------------------------------------------------
NET INCOME                                                  $ 2,781        $ 2,637        $   885
=================================================================================================
</TABLE>


                                       40

<PAGE>   41
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Years Ended September 30, 1998, 1997 and 1996 (dollars in thousands)

21.      PARENT COMPANY FINANCIAL INFORMATION (continued)


                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                                                  SEPTEMBER 30
                                                         --------------------------------
                                                           1998        1997         1996
                                                         --------------------------------
<S>                                                      <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

   Net income                                            $ 2,781     $ 2,637     $   885
   Adjustments to reconcile net income
      to cash provided by operations:
      (Equity in) Return of undistributed
         earnings of subsidiaries                         (3,479)     (1,649)        521
      Increase in investment of subsidiaries                 (48)     (1,000)     (1,350)
      Amortization of common stock acquired
         by stock benefit plans                              563         411         364
      Gain on sale of investment available for sale           (5)
      Increase in other assets                              (172)       (677)
      Increase in other liabilities                           47         184          36
-----------------------------------------------------------------------------------------
         Net cash (used in) provided
            by operating activities                         (313)        (94)        456
-----------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:

   Purchases of investments available for sale            (8,891)                  1,350
   Proceeds from sale of
      investments available for sale                       2,005
   Dividends received from subsidiaries                                1,000
-----------------------------------------------------------------------------------------
       Net cash provided (used in)
         by investing activities                          (6,886)      1,000       1,350
------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:

   Proceeds from issuance of debentures                               16,200
   Increase in other
      borrowed money                                         100
    Capital contribution to subsidiary                                (6,000)
    Common stock acquired by
       stock benefit plans                                              (775)       (704)
    Purchase of treasury stock                            (2,036)     (1,257)     (1,288)
    Dividends paid                                          (475)       (250)
-----------------------------------------------------------------------------------------
       Net cash (used in) provided by
          financing activities                            (2,411)      7,918      (1,992)
-----------------------------------------------------------------------------------------
    Increase (Decrease) in cash                           (9,610)      8,824        (186)
    Cash at beginning of period                            9,832       1,008       1,194
-----------------------------------------------------------------------------------------
    Cash at end of period                                $   222     $ 9,832     $ 1,008
=========================================================================================
</TABLE>

                                       41
<PAGE>   42
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Years Ended September 30, 1998, 1997 and 1996 (dollars in thousands)

22.  QUARTERLY       Unaudited quarterly financial data for the year ended 
     FINANCIAL       September 30, 1998 and 1997 is as follows:
          DATA
   (Unaudited)

<TABLE>
<CAPTION>
                                                1998                                          1997
                              -------------------------------------------------------------------------------------
                                1ST         2ND         3RD         4TH       1st        2nd        3rd       4th
                                QTR         QTR         QTR         QTR       QTR        QTR        QTR       QTR
<S>                           <C>         <C>        <C>         <C>        <C>        <C>       <C>       <C>
Interest Income               $ 6,762     $6,836     $ 6,776     $7,019     $5,305     $5,495    $5,759    $6,191
Interest Expense                3,827      3,834       3,852      4,112      2,929      3,042     3,228     3,440
-------------------------------------------------------------------------------------------------------------------
Net Interest Income             2,935      3,002       2,924      2,907      2,376      2,453     2,531     2,751
Provision for Loan Losses          75         76          20         15         56         60        56        67
-------------------------------------------------------------------------------------------------------------------
Net Interest Income after
   Provision for Loan Losses    2,860      2,926       2,904      2,892      2,320      2,393     2,475     2,684
Non-Interest Income               385        408         320        407        317        352       325       356
Non-Interest Expense            2,155      2,256       2,363      2,298      1,638      1,682     1,706     1,895
-------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes      1,090      1,078         861      1,001        999      1,063     1,094     1,145
Provision for Income Taxes        418        394         160        278        384        410       421       449
-------------------------------------------------------------------------------------------------------------------
Net Income                    $   672     $  684     $   701     $  723     $  615     $  653    $  673    $  696
===================================================================================================================


PER SHARE:

Earnings Per Share -Basic     $   .31     $  .32     $   .33     $  .35     $  .27     $  .30    $  .31    $   .32
Earnings Per Share -Diluted   $   .29     $  .30     $   .31     $  .33     $  .26     $  .29    $  .30    $   .30
Common Stock Price Range
     of the Company
High                          $ 18.75     $19.00     $ 22.25     $17.75     $10.13     $11.25    $11.69    $16.63
Low                           $ 14.63     $16.38     $ 17.25     $11.63     $ 8.88     $ 9.50    $10.63    $11.38
</TABLE>


                                       42