<PAGE>   1
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K



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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       OR


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

          For the transition period from __________ to _______________

                          Commission File No.: 0-27942
                                               -------

                             COMMONWEALTH BANCORP, INC.
            --------------------------------------------------------
             (Exact name of registrant as specified in its charter)


                   PENNSYLVANIA                         23-2828883
         ----------------------------------       -----------------------
            (State or other jurisdiction              (I.R.S. Employer
         of incorporation or organization)         Identification Number)

              COMMONWEALTH BANK PLAZA
              2 WEST LAFAYETTE STREET
              NORRISTOWN, PENNSYLVANIA                    19401
            ---------------------------            ---------------------
                     (Address)                           (Zip Code)

      Registrant's telephone number, including area code:  (610) 313-1600

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

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

                    COMMON STOCK (PAR VALUE $.10 PER SHARE)
                    ---------------------------------------
                                (Title of Class)

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

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

As of March 9, 1999, the aggregate value of the 13,359,414 shares of Common
Stock of the Registrant outstanding on such date, which excludes 796,308 shares
held by all directors and officers of the Registrant as a group, was
approximately $205 million.  This figure is based on the closing sales price of
$15.3125 per share of the Registrant's Common Stock on March 9, 1999 as
reported by the Nasdaq Stock Market.

Number of shares of Common Stock outstanding as of March 9, 1999: 14,155,722


                      DOCUMENTS INCORPORATED BY REFERENCE

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

(1)  Portions of the Annual Report to Stockholders for the year ended December
31, 1998 are incorporated into Part II, Items 5 through 8 of this Form 10-K.

(2)  Portions of the definitive proxy statement for the Annual Meeting of
Stockholders to be filed within 120 days of December 31, 1998 are incorporated
into Part III, Items 10 through 13 of this Form 10-K.

--------------------------------------------------------------------------------
<PAGE>   2
PART I

ITEM 1. BUSINESS

GENERAL

         Commonwealth Bancorp, Inc. ("Commonwealth" or the "Company"), a
Pennsylvania corporation, is the holding company for Commonwealth Bank
("Bank").  The Bank is a federally chartered stock savings bank, primarily
regulated by the Office of Thrift Supervision ("OTS").  The Bank conducts
business from its executive offices in Norristown, Pennsylvania and, as of
December 31, 1998, 60 full-service offices located in southeast Pennsylvania.

         ComNet Mortgage Services ("ComNet"), a division of the Bank, also
located in Norristown, conducts business through eight loan origination offices
located in Pennsylvania, New Jersey, Rhode Island, and Virginia.  ComNet
operates under the trade name of Homestead Mortgage in Maryland.  Business is
also conducted by ComNet through its wholesale network, which includes
correspondents in 25 states.

         The Bank first issued stock on January 21, 1994, as a result of the
conversion of Commonwealth Federal Savings Bank from a federally chartered
mutual savings bank to a federally chartered stock savings bank.  The Bank was
a subsidiary of Commonwealth Mutual Holding Company, a federally chartered
mutual holding company, which owned approximately 55% of the outstanding common
stock of the Bank.  On June 14, 1996, the Company completed an offering of
common stock in connection with the second-step conversion and reorganization
from the mutual holding company form of ownership to the stock holding company
form.

         The Bank is subject to examination and comprehensive regulation by the
OTS, which is the Bank's chartering authority and primary regulator, and by the
Federal Deposit Insurance Corporation ("FDIC"), which, as administrator of the
Savings Association Insurance Fund ("SAIF") and the Bank Insurance Fund
("BIF"), insures the Bank's deposits up to applicable limits.  The Bank also is
subject to certain reserve requirements established by the Board of Governors
of the Federal Reserve System ("Federal Reserve Board"), and is a member of the
Federal Home Loan Bank ("FHLB") of Pittsburgh, which is one of the 12 regional
banks comprising the FHLB System.

MARKET AREA

         The Bank's 60 full-service branch offices, which include 20
supermarket branch offices, are located throughout Berks, Bucks, Chester,
Delaware, Lebanon, Lehigh, Montgomery, and Philadelphia Counties, Pennsylvania.
The Bank's branch locations are concentrated in the Reading area of Berks
County; central and southern Montgomery County; and the northeast Philadelphia
community within Philadelphia County.  Management believes that the Bank's
meaningful presence in these markets, coupled with its emphasis on providing
superior customer service, enables the Bank to compete effectively with larger
regional and national banks.





                                      -1-
<PAGE>   3
         The Bank focuses on relationship banking by cross-selling services to
new and established customers.  These include a variety of loan and deposit
products for individuals and businesses.  The Bank also makes available other
financial instruments, such as annuity products and mutual funds, through
arrangements with third parties.

LENDING ACTIVITIES

         GENERAL.  At December 31, 1998, loans held for investment totaled $1.3
billion, which represented 59% of total assets.  The Company's loans consist
principally of conventional loans which are secured by first liens on
single-family residences.  Conventional residential real estate loans are loans
which are neither insured by the Federal Housing Administration ("FHA") nor
partially guaranteed by the Veterans Administration ("VA").  The other
principal categories of loans in the Company's portfolio are consumer loans and
commercial loans, including commercial real estate loans and loans which are
guaranteed by the Small Business Administration ("SBA").  In addition, the
Company's loan portfolio includes a small amount of loans which are secured by
multi-family residential (five or more units) properties.

         Although Commonwealth originates loans in a number of states, the
Company's mortgage loans held for investment are primarily secured by
properties located in Pennsylvania and New Jersey.  At December 31, 1998,
approximately 52% of the Company's total mortgage loans held for investment
were secured by properties located in these states.





                                      -2-
<PAGE>   4
         LOAN PORTFOLIO COMPOSITION.  The following table sets forth the
composition of the Company's loans held for investment at the dates indicated.

<TABLE>
<CAPTION>
                                                                        December 31,
                                              -------------------------------------------------------------
                                                          1998                             1997
                                              ------------------------------    ---------------------------

                                                                Percent of                     Percent of
                                                 Amount            Total          Amount          Total
                                                 ------       -------------       ------       -----------

                                                                   (dollars in thousands)
<S>                                          <C>                 <C>         <C>              <C>


 Mortgage loans-Residential (1)               $  969,617            71.90%     $ 958,542        75.51%
 Consumer loans:
   Equity lines of credit                         34,845             2.58         41,592         3.28
   Second mortgages                              126,360             9.37         98,934         7.79
   Recreational vehicles                          39,920             2.96         22,182         1.75
   Other                                          38,781             2.88         32,085         2.53
                                              ----------           ------     ----------       ------
     Total consumer loans                        239,906            17.79        194,793        15.35

 Commercial loans:
   Small Business Administration(2)               14,491             1.07         20,016         1.58
   Commercial real estate (3)                     83,485             6.20         71,508         5.63
   Business loans (3)                             41,026             3.04         24,456         1.93
                                              ----------           ------     ----------       ------
     Total commercial loans                      139,002            10.31        115,980         9.14
                                              ----------           ------     ----------       ------
     Total loans receivable                    1,348,525           100.00%     1,269,315       100.00%
                                              ----------           ======     ----------       ======
 Less:
   (Premium)/Discount on
     loans purchased                             (2,880)                         (3,559)
   Allowance for loan losses                       9,589                           9,024
   Deferred loan fees                              3,639                           3,009
   Allowance for imputed interest                     -                               -
                                              ----------                      ----------
 Loans receivable, net                        $1,338,177                      $1,260,841
                                              ==========                      ==========

</TABLE>


<TABLE>
<CAPTION>
                                                                             December 31,
                                     -----------------------------------------------------------------------------------------
                                                   1996                         1995                         1994
                                     ----------------------------  ---------------------------  ------------------------------

                                                      Percent of                   Percent of                    Percent of
                                         Amount          Total       Amount           Total       Amount           Total
                                         ------       ----------     ------        ----------     ------         ----------

                                                                      (dollars in thousands)
<S>                                  <C>               <C>          <C>               <C>         <C>              <C>


 Mortgage loans-Residential (1)      $  857,053          76.37%     $655,152          81.08%     $450,959           75.55%
 Consumer loans:
   Equity lines of credit                49,136           4.38        44,432           5.50        49,246            8.26
   Second mortgages                      77,304           6.89        48,653           6.03        42,883            7.18
   Recreational vehicles                 11,884           1.06           791           0.10            -               -
   Other                                 30,983           2.76        17,218           2.13        12,013            2.01
                                     ----------        -------      --------        -------      --------         -------
     Total consumer loans               169,307          15.09       111,094          13.76       104,142           17.45

 Commercial loans:
   Small Business Administration(2)      25,104           2.24        29,472           3.65        35,482            5.94
   Commercial real estate (3)            35,452           3.15         9,386           1.16         4,679            0.78
   Business loans (3)                    35,380           3.15         2,801           0.35         1,671            0.28
                                     ----------        -------      --------        -------      --------         -------
     Total commercial loans              95,936           8.54        41,659           5.16        41,832            7.00
                                     ----------        -------      --------        -------      --------         -------
     Total loans receivable           1,122,296         100.00%      807,905         100.00%      596,933          100.00%
                                      ---------         ======       -------         ======       -------          ======
 Less:
   (Premium)/Discount on
     loans purchased                    (3,655)                        1,004                        2,864
   Allowance for loan losses              9,971                        7,485                        7,307
   Deferred loan fees                     2,866                        2,681                        3,555
   Allowance for imputed interest            -                            -                            63
                                     ----------                     --------                     --------
 Loans receivable, net               $1,113,114                     $796,735                     $583,144
                                     ==========                     ========                     ========

</TABLE>

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

(1)  At December 31, 1998, $404 million, or 42%, of the Company's 1-4
     family residential loans had adjustable interest rates.

(2)  Consists entirely of loans (or securities backed by loans) which are
     guaranteed by the SBA, with the majority adjusting monthly or quarterly.
     All such loans or securities were purchased by the Company.


(3)  Approximately $11.5 million of business loans were reclassified to
     commercial real estate loans in December 1997.  Previously reported
     amounts were not restated.





                                      -3-
<PAGE>   5
         CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES.  The following
table sets forth the  scheduled contractual amortization of the Company's loans
held for investment at December 31, 1998, as well as the dollar amount of such
loans which are scheduled to mature after one year which have fixed or
adjustable interest rates.  Demand loans, loans having no schedule of
repayments and no stated maturity, and overdraft loans are reported as due in
one year or less.


<TABLE>
<CAPTION>
                                                                Principal Repayments Contractually Due
                                                                    in Year(s) Ended December 31,
                                          -------------------------------------------------------------------------------------
                           Total at
                          December 31,                                          2002-        2004-        2010-        There-
                              1998           1999        2000         2001      2003         2009         2015         after
                         ---------------  ----------   --------    ---------  ---------   -----------  ----------  ------------
                                                                    (in thousands)
 <S>                      <C>               <C>         <C>         <C>        <C>          <C>         <C>           <C>
 Mortgage loans:
    1-4 family
    residential             $   969,617     $27,386     $26,762     $28,264    $ 60,193     $194,350    $191,990      $440,672
 Consumer                       239,906      37,820      25,142      23,357      38,619       73,710      38,430         2,828
 Commercial real estate          83,485       8,519       8,861       9,410      28,938       20,229       7,528            -
 Business loans                  41,026       4,659       5,056       6,509       5,928        9,442       9,432            -
 SBA                             14,491       1,373         922         932       1,997        5,584       3,671            12
                              ---------      ------      ------      ------     -------      -------     -------       -------
      Total  (1)             $1,348,525     $79,757     $66,743     $68,472    $135,675     $303,315    $251,051      $443,512
                              =========      ======      ======      ======     =======      =======     =======       =======
</TABLE>
-----------------

(1)      Of the $1.3 billion of loan principal repayments contractually due
after December 31, 1999,  $762 million have fixed rates of interest and $507
million have adjustable rates of interest.

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





                                      -4-
<PAGE>   6
         ACTIVITY IN LOANS HELD FOR INVESTMENT.  The following table sets forth
the activity in the Company's loans held for investment during the periods
indicated.


<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                               ------------------------------------------------
                                                    1998             1997             1996
                                               --------------  ----------------  --------------
                                                              (in thousands)
 <S>                                             <C>              <C>              <C>
 Gross loans held for investment at
     beginning of period                         $1,269,315       $1,122,296       $  807,905
 Originations of loans held for investment:
     1-4 family residential                         196,783          107,628           52,304
     Consumer                                       101,878           75,383           46,157
     Commercial real estate                          41,508           32,905           16,848
     Business loans                                  31,810           14,424           16,955
                                                  ---------        ---------        ---------
       Total originations                           371,979          230,340          132,264
 Purchases of loans held for investment:
     1-4 family residential (1)                     140,567          152,480          257,575
     Consumer (2)                                    24,728           13,426           57,833
     Commercial real estate                             -                -             26,110
     Business loans                                     -                -             18,269
     SBA                                                -                -               -
                                                  ---------        ---------        ---------
       Total purchases                              165,295          165,906          359,787
       Total originations and purchases             537,274          396,246          492,051
 Repayments                                        (458,064)        (249,227)        (177,660)
                                                  ---------        ---------        ---------
 Net activity in loans held for
   investment                                        79,210          147,019          314,391
                                                  ---------        ---------        ---------
 Gross loans held for investment at end
   of period                                     $1,348,525       $1,269,315       $1,122,296
                                                  =========        =========        =========
</TABLE>

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

(1)    The $141 million of 1-4 family residential loans purchased during 1998
consisted of loans generated through Commonwealth's wholesale correspondent
network.  The $152 million of 1-4 family residential loans purchased during
1997 consisted of $21 million of adjustable rate loans purchased by the Company
from third parties and $131 million of loans generated through Commonwealth's
wholesale correspondent network.  The $258 million of 1-4 family residential
loans purchased during 1996 consisted of $80 million of adjustable rate loans
purchased by the Company from third parties, $148 million of loans generated
through Commonwealth's wholesale correspondent network, and $30 million
purchased in the June 1996 acquisition of 12 former Meridian Bank branches (the
"Berks Acquisition").  For additional information, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Acquisitions"
in Item 7 hereto.

(2)    Recreational vehicle loans totaling $25 million, $13 million, and $12
million were purchased during 1998, 1997, and 1996, respectively.





                                      -5-
<PAGE>   7
         RESIDENTIAL LOAN ORIGINATIONS AND SALES.  The primary lending
activities of the Company are the origination and sale, without recourse, of
conventional and insured/guaranteed real estate loans secured by first liens on
1-4 family residences.

         Retail loans are originated by Commonwealth's sales force of
commissioned or salaried loan originators through referrals from the Company,
real estate brokers, builders of new homes and others, as well as through
direct contact with borrowers.  In connection with the origination of each
loan, Commonwealth prepares mortgage documentation, conducts credit checks, has
the subject property appraised by independent appraisers, and closes the loan.

         The retail loan production office originating a loan is responsible
for taking the loan application and coordinating information flow between the
applicant and Commonwealth's processing center in Norristown, Pennsylvania.
Retail loan applications must be approved by Commonwealth's underwriting
department for compliance with underwriting criteria, including the ratio of
the loan amount to the value of the security property ("loan-to-value ratio"),
borrower income qualifications and necessary insurance.  Upon approval,
Commonwealth issues a formal commitment letter to the prospective borrower
specifying the amount of the loan, the prevailing interest rate or means for
determining the same, the fees to be paid to Commonwealth, and the date on
which the commitment expires.

         Wholesale loans are purchased from correspondents/brokers or funded by
Commonwealth on behalf of correspondents and brokers.  Commonwealth currently
employs three regional account executives to work with over 186 correspondents
and brokers.  The correspondent or broker is responsible for the processing of
the loan application.  When a wholesale loan enters the underwriting stage, for
the majority of correspondents and brokers, the underwriting is performed by
Commonwealth similar to retail loan originations above.  In certain instances,
Commonwealth delegates the underwriting function to correspondents and brokers.
Such delegated underwriting meets Commonwealth's criteria of underwriting
standards.  Once the underwriting approval is complete, the purchase or funding
is initiated.

         Commonwealth originates conventional loans and, to a lesser extent,
FHA-insured and VA-guaranteed loans.  The vast majority of conventional loans
are originated under terms and documentation which conform to the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC") guidelines and, as such, are eligible for sale in the
secondary market.

         The results of the Company's mortgage banking operations are
significantly dependent upon its ability to originate loans.  This ability, in
turn, is substantially dependent upon prevailing interest rate levels, which
affect the degree to which consumers obtain new loans and refinance existing
loans.  Economic conditions in the Company's service areas also have a
significant effect on the residential housing market and, thus, could have a
similar effect on Commonwealth's loan origination activity.





                                      -6-
<PAGE>   8
         Mortgage loan originated and purchased totaled $1,111 million and $585
million during 1998 and 1997, respectively, which included $376 million and
$192 million, respectively, of loans originated through the wholesale
correspondent lending network.

         Commonwealth sells substantially all of the fixed-rate loans it
originates which conform to FNMA/FHLMC requirements to investors in the
secondary market on either a servicing retained or servicing released basis.
The Company retains essentially all of the adjustable rate loans, as well as
certain loans originated by it which do not conform to the requirements for
sale to the FNMA and the FHLMC (primarily because the principal amount exceeds
the limit, which is currently $240,000 for loans secured by a single-family,
owner-occupied residence) and loans to employees of the Company.

         The Company's mortgage loans sold to others generally are sold in
groups through mortgage-backed securities issued by the FNMA or the FHLMC, or
on a loan-by-loan basis to these agencies or other investors.  In the case of
the loans sold through mortgage-backed securities, the loans are grouped in
pools of $1.0 million or more and certain documents are delivered to the FNMA
or the FHLMC, which issues a mortgage-backed security representing an undivided
interest in the loan pool.  For issuing the security, the FNMA or the FHLMC
receives an annual guarantor fee of approximately 0.17% to 0.29% of the
declining principal amount of the loan pool.  Commonwealth, through investment
bankers, arranges to sell mortgage-backed securities to investors.

         A period of 30 to 90 days generally lapses between Commonwealth's
commitment to make a mortgage loan and the ultimate sale of the loan to an
investor.  During this period, Commonwealth employs various hedging techniques,
such as forward commitments and put options, to protect the value of its
mortgage production.  Mortgage loans generally will decrease in value during
periods of increasing interest rates and increase in value during periods of
decreasing interest rates.  The cost of the various hedging techniques employed
by the Company are deducted from the net gain or loss on the sale of mortgage
loans.  Accordingly, fluctuations in prevailing interest rates may result in a
gain or loss to Commonwealth as a result of adjustments to the carrying value
of loans held for sale, or on the sale of loans to the extent that Commonwealth
has not obtained prior commitments by investors to purchase such loans or
otherwise  hedged the value of the loans against changes in interest rates.
Moreover, the amount of unhedged loans can increase as a result of increases in
interest rates, which can result in greater than anticipated closings of loans
in process.

         The principal means by which Commonwealth hedges its mortgage
production are through the use of mandatory forward and option contracts, which
are legal agreements between two parties to purchase and sell a specific
quantity of a financial instrument, at a specified price, with delivery and
settlement at a specified future date.  Commonwealth adjusts the amount of its
unhedged loans in process based on management's assessment of market conditions
and loan closing rates.





                                      -7-
<PAGE>   9
         The following table sets forth certain information relating to the
volume and type of loans originated and sold by Commonwealth during the periods
indicated.


<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                        ------------------------------------------------------------------
                                               1998                    1997                    1996
                                        --------------------- ---------------------- ---------------------
                                                      Number                Number                  Number
                                        Principal       of     Principal      of       Principal      of
                                         Amount        Loans    Amount       Loans       Amount      Loans
                                         ------       ------    ------       -----       ------      -----
                                                              (dollars in thousands)
<S>                                    <C>            <C>      <C>         <C>        <C>           <C>
 Originations for the Company (1):
   Conventional                         $   337,350     1,562    $238,799     1,286      $200,558        979
   FHA/VA                                         -         -           -         -             -          -
                                        -----------    ------    --------   -------      --------      -----
     Total Company                          337,350     1,562     238,799     1,286       200,558        979
                                      -------------    ------    --------   -------      --------      -----
 Originations for others (1):
   Conventional                             667,129     5,351     249,741     2,081       232,622      2,176
   FHA/VA                                   106,917     1,019      96,606     1,014        28,893        322
                                          ---------    ------    --------   -------      --------      -----
     Total Other                            774,046     6,370     346,347     3,095       261,515      2,498
                                            -------     -----     -------     -----       -------      -----
 Total Company and others                $1,111,396     7,932    $585,146     4,381      $462,073      3,477
                                          =========     =====     =======     =====       =======      =====

 Retained by the Company (1)(2):
   Conventional                         $   337,350     1,562    $238,799     1,286      $200,558        979
   FHA/VA                                         -         -           -         -             -          -
                                            -------     -----     -------     -----       -------      -----
     Total Company                          337,350     1,562     238,799     1,286       200,558        979
                                            -------     -----     -------     -----       -------      -----
 Sales to Others (1)(3):
   Conventional                             597,889     5,455     233,299     2,116       236,190      2,275
   FHA/VA                                    97,475       915      94,654       979        29,781        331
                                           --------    ------    --------   -------      --------      -----
     Total Other                            695,364     6,370     327,953     3,095       265,971      2,606
                                            -------    ------    --------   -------      --------      -----
 Total Company and Other                 $1,032,714     7,932    $566,752     4,381      $466,529      3,585
                                          =========    ======     =======   =======       =======      =====
 Other adjustments to
   loans held for sale (4)               $    4,386            $    1,845             $   (4,210)
                                          =========             =========              ==========
 Increase/(decrease) in
   mortgage loans held for sale            $ 83,068             $  20,239             $   (8,666)
                                            =======              ========              ==========
</TABLE>

--------------------
(1)      Consists entirely of 1-4 family residential loans.
(2)      Consists primarily of 1-4 family residential loans which have
         adjustable rates, are nonconforming due to the size of the loan, or
         are made to an employee of the Company.
(3)      Includes loans converted into mortgage-backed securities.
(4)      Consists of repayments of loans held for sale, net gain on sale of
         loans, and deferred loan fees.





                                      -8-
<PAGE>   10
         The following table sets forth certain information
relating to the geographic distribution of loans originated by
Commonwealth through its retail and wholesale networks during the
periods indicated.

<TABLE>
<CAPTION>

                                                                               Year Ended December 31,
                                -------------------------------------------------------------------------------------------------

                                              1998                             1997                             1996
                                -------------------------------------------------------------------------------------------------
                                                     Number                           Number                            Number
                                   Principal           of           Principal           of           Principal            of
                                    Amount            Loans           Amount           Loans           Amount           Loans
                                    ------            -----           ------           -----           ------           -----
                                                                      (dollars in thousands)
<S>                                <C>               <C>             <C>             <C>               <C>             <C>
RETAIL:

Pennsylvania                           $367,033         3,004           $186,086         1,682           $166,770          1,542
Maryland                                243,334         1,571            147,713         1,069                  0              0
New Jersey                               70,277           497             32,236           222             28,863            220
Rhode Island                             24,438           230             19,776           207             20,328            222
Virginia                                 23,034           151                  0             0                  0              0
Connecticut                               7,325            55              6,930            58             10,433             90
Florida                                       0             0                  0             0              1,894             21
                                ----------------    ----------    ---------------    ----------    ---------------    -----------
    Total  Retail                       735,441         5,508            392,741         3,238            228,288          2,095
                                ----------------    ----------    ---------------    ----------    ---------------    -----------

WHOLESALE:

Pennsylvania                            117,121           880             37,551           276             44,328            336
Maryland                                105,691           614             35,080           164             50,049            268
Virginia                                 56,128           322             29,624           139             42,326            207
Delaware                                 27,999           215             11,904            95             16,682            133
New Jersey                               22,823           153             19,757           147             17,250            106
Massachusetts                            12,821            59              4,960            25              1,276              4
Connecticut                              12,514            73              2,241            18                234              1
North Carolina                            3,967            17             12,276            66              7,570             54
Georgia                                   2,425             9              4,901            25             13,551             60
Washington, D.C.                          2,407            16                633             2                460              2
Florida                                   1,979            12              1,559            13              9,156             54
New York                                  1,919            14                390             4                  0              0
Texas                                     1,849             7              5,407            27              3,768             22
Ohio                                      1,058             3              2,948            18              2,831             14
Arizona                                     984             3              8,393            30              3,633             17
Indiana                                     894             4              1,644            13              1,670             13
Wisconsin                                   591             2              1,150             9                203              1
Rhode Island                                586             6                 90             1                  0              0
South Carolina                              564             3              1,756            13              1,151              6
Missouri                                    493             3                 83             1                139              1
Illinois                                    308             1              3,011            15              6,214             32
Colorado                                    273             1              2,464            13              1,269              5
Michigan                                    272             3              2,045            13                  0              0
West Virginia                               155             2                100             1                171              2
Kansas                                       75             1                339             2              1,543              8
Tennessee                                    59             1                230             1              1,225              8
Louisiana                                     0             0              1,065             8                769              2
Kentucky                                      0             0                590             3                264              2
Alabama                                       0             0                214             1              6,053             24
                                ----------------    ----------    ---------------    ----------    ---------------    -----------
    Total Wholesale                     375,955         2,424            192,405         1,143            233,785          1,382
                                ----------------    ----------    ---------------    ----------    ---------------    -----------

Total Retail and Wholesale (1)       $1,111,396         7,932           $585,146         4,381           $462,073          3,477
                                ================    ==========    ===============    ==========    ===============    ===========
</TABLE>

---------------------
(1) Consists entirely of 1-4 family residential loans.

                                      -9-
<PAGE>   11

         CONSUMER LENDING ACTIVITIES.  The Company offers consumer loans, which
are obtained primarily through existing and walk-in customers and direct
advertising.  The Company's recreational vehicle loans are purchased from a
third party.  At December 31, 1998, $240 million, or 18%, of the Company's
total loan portfolio was comprised of consumer loans.

         A significant portion of the Company's consumer loan portfolio is
comprised of second mortgage loans, which are generally secured by the
underlying equity in a borrower's home or second residence.  These loans are
for a fixed amount, have fixed interest rates, terms of one to 15 years,
loan-to-value ratios of 100% or less, with the majority being 80% or less, and
are generally for amounts less than $100,000.  At December 31, 1998, second
mortgage loans totaled $126 million, or 9%, of the Company's total loan
portfolio.

         The Company's consumer loan portfolio is also comprised of a
significant amount of recreational vehicle loans.  These loans are purchased
from a third party, are for a fixed amount, have fixed interest rates, terms of
four to 15 years, loan-to-value ratios of 100% or less, with the majority being
80% or less, and are generally for amounts less than $75,000.  At December 31,
1998, recreational vehicle loans totaled $40 million, or 3%, of the Company's
total loan portfolio.

         At December 31, 1998, home equity lines of credit amounted to $35
million, or 3%, of the Company's total loan portfolio.  Home equity lines of
credit are a form of revolving credit and are generally secured by the
underlying equity in the borrower's home or second residence.  These loans have
floating interest rates, loan-to-value ratios of 100% or less, with the
majority being 75% or less, and are generally for amounts less than $100,000.
The Company had $92 million of total commitments pursuant to such equity lines
of credit outstanding at year-end 1998.

         The remaining $39 million of the Company's consumer loan portfolio at
December 31, 1998 was comprised primarily of loans secured by new and used
automobiles, personal loans and lines of credit, and credit cards.  Such credit
cards may be secured by the borrower's principal residence or unsecured, and
are serviced  for the Company by a third-party servicer.

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

         COMMERCIAL LENDING ACTIVITIES.  Commonwealth's target market is
comprised of small and lower middle market businesses operating within the
Bank's eight county region.  The Company generally provides loans for
commercial purposes to borrowers only under circumstances where the borrower
also has, or establishes, a deposit relationship with the Company.  The loans
typically are under $1.0 million.  Commercial real estate loans are generally
made in the same amounts and may be secured by office buildings, warehouses,
and other special purpose properties.  Applications for





                                      -10-
<PAGE>   12
commercial loans are obtained primarily through loan officer solicitation,
branch referrals, and direct inquiry.  As of December 31, 1998, commercial
loans totaled $139 million, or 10%, of the Company's total loan portfolio.  At
December 31, 1998, commercial loans were comprised of $83 million of commercial
real estate loans, $41 million of business loans, and $15 million of loans
guaranteed by the SBA.

         Commercial real estate loans originated by the Company generally have
terms of five to fifteen years, with fixed interest rates.  Commercial business
loans originated by the Company generally have terms of one to five years and
interest rates which are fixed or float in accordance with the Company's prime
lending rate.  Commercial loans are generally secured and backed by the
personal guarantees of the principals of the borrower.  Although commercial
loans involve greater credit risk than other types of loans, management
believes that the greater income potential and positive effects on interest
rate risk offset this increased credit risk.  Also, income opportunities are
enhanced through the generation of commercial loan origination fees and
business deposit account fee income.  The Company intends to continue to expand
its commercial lending program.

         LOAN ORIGINATION FEES.  In addition to interest earned on loans, the
Company receives loan origination fees or "points" for originating loans.  Loan
points are a percentage of the principal amount of the loan and are charged to
the borrower in connection with the origination of the loan.

         In accordance with Statement of Financial Accounting  Standards
("SFAS") No. 91, which addresses the accounting for non-refundable fees and
costs associated with originating or acquiring loans, the Company's loan
origination fees and certain related direct loan origination costs have been
offset, and the resulting net amount has been deferred and amortized as
interest income over the contractual life of the related loans as an adjustment
to the yield of such loans.  At December 31, 1998, the Company had $3.6 million
of loan fees related to loans receivable which had been deferred and are being
recognized as income over the estimated maturities of the related loans using
the level-yield method.

LOAN SERVICING ACTIVITIES

         Commonwealth, a qualified seller servicer for the FNMA and the FHLMC,
services residential real estate loans for others as well as loans held by
Commonwealth for investment and sale.  Servicing includes collecting and
remitting loan payments, accounting for principal and interest, holding escrow
funds for the payment of real estate taxes and insurance premiums, contacting
delinquent borrowers, supervising foreclosures in the event of unremedied
defaults, and generally administering the loans.

         When Commonwealth receives the gross loan payment from the individual
mortgagees of serviced loans, it remits to the owner of the loan a
predetermined net amount based on the yield on that loan.  The difference
between the coupon on the underlying loan and the predetermined net amount paid
to the owner of the loan is the gross servicing fee.  As the owner of servicing
rights, Commonwealth retains a net servicing fee which currently ranges from
0.25% to 0.50% of the declining principal amount of the loans, plus any late
charges.





                                      -11-
<PAGE>   13
         At December 31, 1998, Commonwealth was servicing $1.4 billion of loans
for others, as well as $1.0 billion of loans held by Commonwealth for
investment and sale.  The portfolio of loans serviced by Commonwealth at
December 31, 1998 consisted of approximately 24,420 loans with an average loan
balance of approximately $97,263, a weighted average service fee of
approximately 0.34% per annum (inclusive of excess servicing associated with
loans serviced by Commonwealth for others) and a weighted average remaining
contractual term of approximately 23 years.  The Company's loan servicing fees
totaled $3.6 million in 1998, $5.2 million in 1997, and $5.2 million in 1996.

         The Company acquires mortgage servicing rights through the purchase
and origination of mortgage loans which are sold or securitized on either a
servicing retained or servicing released basis. SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," requires the Company to allocate the total cost of the mortgage
loans between the mortgage servicing rights and the loans (exclusive of
mortgage servicing rights) based on their relative fair values.  The Company is
required to periodically assess its capitalized mortgage servicing rights for
impairment, based upon the discounted cash flow of the rights disaggregated
within their predominant risk characteristics. Any impairment would be
recognized through a valuation allowance. Application of this pronouncement was
required for mortgage servicing rights acquired relating to loans sold or
securitized commencing January 1, 1996, without retroactive capitalization of
mortgage servicing rights retained in such transactions before adoption of the
pronouncement.

         At December 31, 1998, capitalized mortgage servicing rights relating
to loans originated by Commonwealth totaled $8.9 million, compared to $6.5
million at December 31, 1997.  The weighted average coupon relating to this
portfolio was 7.2% at year-end 1998.

         Purchased mortgage servicing rights totaled $1.1 million at December
31, 1998, compared to $1.6 million at the end of 1997.  The weighted average
coupon relating to this portfolio was 9.8% at year-end 1998.

         During the years ended December 31, 1998, 1997, and 1996, Commonwealth
sold $444 million, $191 million and, $227 million of loans originated on a
servicing retained basis, respectively, and $251 million, $137 million, and $39
million on a servicing released basis, respectively.

         As part of its responsibilities as a servicer of mortgage-backed
securities, Commonwealth is required to remit to investors the monthly
principal collected and scheduled interest payments on most loans, including
those for which no interest payments have been received due to delinquency.  At
December 31, 1998 the principal amount of loans serviced by Commonwealth for
others that were subject to this condition aggregated $1.2 billion, of which
$21 million, or 2%, were more than 30 days delinquent.  Substantially all of
these loans were sold without recourse and are guaranteed by the FNMA or the
FHLMC.





                                      -12-
<PAGE>   14
         The following table presents information regarding loans serviced by
Commonwealth at the dates indicated.


<TABLE>
<CAPTION>
                                                        December 31,
                                        -------------------------------------------------
                                              1998             1997             1996
                                        ---------------  ---------------  ---------------
                                                       (in thousands)
 <S>                                       <C>         <C>  <C>            <C>


 Mortgage loans underlying pass-
  through securities:

   FNMA                                      $  891,909     $  748,727      $  714,472
   FHLMC                                        300,738        350,216         340,928
   Other investors                                  337            462             615
                                             ----------     ----------      ----------
                                              1,192,984      1,099,405       1,056,015

 Mortgage loan portfolios serviced
 for:
   FNMA                                          76,505         93,364         102,387
   Other investors                               87,730        110,747         181,488
                                             ----------     ----------      ----------
                                                164,235        204,111         283,875
                                             ----------     ----------      ----------
 Total loans serviced for others              1,357,219      1,303,516       1,339,890
                                             ----------     ----------      ----------

 Mortgage loans serviced for the Company:
   Loans held for investment                    892,308        836,955         724,207
   Loans held for sale by Commonwealth          125,646         58,594          23,610
                                             ----------     ----------      ----------

                                              1,017,954        895,549         747,817
                                             ----------     ----------      ----------
     Total loans serviced                    $2,375,173     $2,199,065      $2,087,707
                                              =========     ==========      ==========
</TABLE>

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




                                      -13-
<PAGE>   15





         The following table sets forth the geographic distribution of
properties securing the loans serviced by Commonwealth at December 31, 1998.

<TABLE>
<CAPTION>


                                                                Percentage of Total Principal
          State                    Principal Balance                      Balance
----------------------------------------------------------------------------------------------
                                 (dollars in thousands)
 <S>                                     <C>                              <C>

 Pennsylvania                               $1,253,678                            52.78%
 New Jersey                                    314,554                            13.24
 Maryland                                      268,438                            11.30
 Virginia                                      152,748                             6.43
 Connecticut                                    95,485                             4.02
 Delaware                                       53,164                             2.24
 New York                                       42,308                             1.78
 Rhode Island                                   40,734                             1.71
 Washington, D.C.                               24,702                             1.04
 Georgia                                        19,439                             0.82
 North Carolina                                 19,089                             0.80
 Florida                                        18,035                             0.76
 Massachusetts                                  17,274                             0.73
 Texas                                           8,425                             0.35
 Arizona                                         8,263                             0.35
 Ohio                                            5,358                             0.23
 South Carolina                                  5,043                             0.21
 Alabama                                         4,553                             0.19
 Illinois                                        3,253                             0.14
 California                                      2,636                             0.11
 Colorado                                        2,033                             0.09
 Other                                          15,961                             0.68
                                          ------------                          -------
                  Total                     $2,375,173                           100.00%
                                          ============                          =======
</TABLE>





                                      -14-
<PAGE>   16
ASSET QUALITY

         Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans.  Accrual of interest on loans is discontinued
when reasonable doubt exists as to the full, timely collection of principal and
interest.  When loans are placed on nonaccrual, interest previously accrued but
not collected is reversed against interest income in the current period.  As a
matter of policy, the Company provides an allowance for accrued interest deemed
to be uncollectable when a loan is 90 days delinquent.

         Real estate acquired by the Company as a result of foreclosure or by
deed in lieu of foreclosure, under generally accepted accounting principles
("GAAP"), is classified as real estate owned until sold.  Pursuant to a
statement of position ("SOP 92-3"), such assets are carried at the lower of
fair value less estimated costs to sell the property, or cost (generally the
balance of the loan on the property at the date of acquisition).  After the
date of acquisition, all costs incurred in maintaining the property are
expensed and costs incurred for the improvement or development of such property
are capitalized to the extent of their net realizable value.  The Company's
accounting for its real estate owned complies with the guidance set forth in
SOP 92-3.

         DELINQUENT LOANS.  The following table sets forth information relating
to the Company's delinquent loans held for investment and the relation to the
Company's total loans held for investment at the dates indicated.
<TABLE>
<CAPTION>
                                                     December 31,
                            --------------------------------------------------------------
                                     1998                 1997                1996
                            ---------------------  ------------------  -------------------
                                                 (dollars in thousands)
 <S>                          <C>       <C>        <C>       <C>       <C>       <C>
 30 to 59 days                $ 9,788     0.73%    $13,083    1.03%    $12,854     1.15%
 60 to 89 days                  2,418     0.18       2,503    0.20       7,980     0.71
 90 days and over              10,012     0.74       8,938    0.70       8,058     0.72
                               ------   ------     -------   -----     -------     ----
       Total (1)              $22,218     1.65%    $24,524    1.93%    $28,892     2.58%
                               ======   ======     =======   =====     =======     ====
</TABLE>

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

(1)      Does not include delinquent commercial loans which are fully
guaranteed as to principal and interest by the SBA, which amounted to $1.1
million and $1.4 million at December 31, 1997 and 1996, respectively.  There
were no delinquent SBA loans at December 31, 1998.




                                      -15-
<PAGE>   17
         NONPERFORMING ASSETS.  The following table sets forth information
relating to the Company's nonperforming assets at the dates indicated.

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                         -------------------------------------------------------------------
                                                           1998          1997             1996          1995          1994
                                                         --------      --------         --------      --------      --------
                                                                             (dollars in thousands)

 <S>                                                       <C>           <C>              <C>        <C>              <C>
 Mortgage loans - Residential                              $ 5,119       $5,269           $5,240        $5,605       $4,137
 Consumer loans                                              1,598        1,324            1,335           221          215
 Commercial loans (1)                                        3,295        2,345            1,483           367            -
                                                           -------       ------          -------        ------       ------
   Total nonperforming loans                                10,012        8,938            8,058         6,193        4,352
 Real estate owned, net                                      1,049          626            1,090           752        1,927
 Investment securities                                          -            -                -            420(2)         -
                                                           -------       ------          -------        ------       ------
   Total nonperforming assets (1)                          $11,061       $9,564           $9,148        $7,365       $6,279
                                                            ======        =====            =====         =====       ======
 Nonperforming loans to total loans held for
   investment (1)                                            0.74%        0.70%            0.72%         0.77%         0.73%
                                                             ====         ====             ====          ====          ====
 Total nonperforming assets to total assets (1)              0.49%        0.42%            0.43%         0.51%         0.52%
                                                             ====         ====             ====          ====          ====
</TABLE>

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

(1)   Does not include nonperforming commercial loans which are fully
      guaranteed as to principal and interest by the SBA, which amounted
      to $1.1 million at both December 31, 1997 and 1996.  There were no
      nonperforming SBA loans at December 31, 1998, 1995, and 1994.

(2)   Consisted of a deposit with a financial institution which was in
      bankruptcy liquidation.  The deposit was recovered by the Company in
      1996.





                                      -16-
<PAGE>   18
         At December 31, 1998, the Company's $5.1 million of nonperforming
single-family residential loans consisted of 94 loans having an average balance
of $54,000.

         Forgone interest income on nonaccruing loans totaled $0.9 million at
both December 31, 1998 and 1997.  The actual amount of interest recorded as
income on such loans amounted to $0.3 million for each of  the years ended
December 31, 1998, 1997, and 1996.

         At December 31, 1998, the Company's real estate owned totaled $1.0
million, primarily consisting of 20 single-family residential properties
acquired through foreclosure or by deed-in-lieu of foreclosure.  At December
31, 1997, real estate owned totaled $0.6 million, consisting of 13
single-family residential properties acquired through foreclosure or by
deed-in-lieu of foreclosure.  At year-end 1996, real estate owned totaled $1.1
million, consisting of 23 single-family residential properties acquired through
foreclosure or by deed-in-lieu of foreclosure.

           During 1998, the Company sold 20 single-family residential
properties which were held as real estate owned for a nominal net gain and
acquired an additional 27 single-family residential properties through
foreclosure or deed-in-lieu thereof.  During 1997, the Company sold 27
single-family residential properties which were held as real estate owned for a
net loss of $0.1 million, and acquired an additional 17 single-family
residential properties through foreclosure or deed-in-lieu thereof.  During
1996, the Company sold 11 single-family residential properties which were held
as real estate owned for a net loss of $0.1 million, and acquired an additional
24 single-family residential properties through foreclosure or deed-in-lieu
thereof.

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

         A fourth category, designated "special mention", reflects  those
assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification as substandard, doubtful or loss, but
which represent potential future problem assets.  At December 31, 1998, the
Company had $5.3 million of assets classified as special mention.





                                      -17-
<PAGE>   19
         ALLOWANCE FOR LOAN LOSSES.  It is management's policy to maintain an
allowance for estimated loan losses based upon an assessment of prior loss
experience, the volume and type of lending conducted by the Company, industry
standards, past due loans, general economic conditions, and other factors
related to the collectibility of the loan portfolio.  In management's opinion,
the allowance for loan losses is sufficient to absorb estimated losses in the
loan portfolio.

         The following table sets forth the activity in the Company's allowance
for loan losses during the periods indicated.



<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                      -------------------------------------------------


                                      1998        1997        1996      1995       1994
                                      ----     --------    --------   -------   -------

                                                       (dollars in thousands)
 <S>                                  <C>          <C>      <C>           <C>        <C>


 Allowance at beginning of year        $9,024       $9,971    $7,485       $7,307     $7,309
                                        -----        -----     -----        -----      -----
 Provision                              3,500        1,600       601          578        168
 Charge-offs:
   Mortgage                              (566)        (453)     (189)        (362)      (103)
   Consumer                            (1,857)      (1,383)     (478)        (125)      (191)
   Commercial                            (706)        (963)       -            -          -
                                        -----       ------    ------      -------     ------
     Total charge-offs                 (3,129)      (2,799)     (667)        (487)      (294)
 Recoveries:
   Mortgage                                32          147       133           68         39
   Consumer                                78           74        29           19         85
   Commercial                              84           31        18            -          -
                                        -----       ------    ------      -------     ------
     Total recoveries                     194          252       180           87        124
 Allowance Acquired in
   Berks Acquisition                      -            -       2,372          -           -
                                        -----       ------    ------      -------     ------
 Allowance at end of year              $9,589       $9,024    $9,971       $7,485     $7,307
                                        =====        =====     =====        =====      =====
 Allowance for loan losses to
   total nonperforming loans at end
   of year                              95.78%      100.96%   123.74%      120.86%    167.90%
                                        =====       ======    ======      =======     ======
 Allowance for loan losses to
   total loans held for investment
   at end of year                        0.71%        0.71%     0.89%        0.93%      1.22%
                                         ====         ====      ====         ====     ======
</TABLE>

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





                                      -18-
<PAGE>   20
         The following table presents the Company's allowance for loan losses
allocated by categories of loans held for investment at the dates indicated.

<TABLE>
<CAPTION>
                                                                            December 31
                                           -----------------------------------------------------------------------------
                                                     1998                      1997                       1996
                                           ----------------------    -----------------------  --------------------------
                                                      Percent of                 Percent of                 Percent of
                                                       Loans by                   Loans by                   Loans by
                                           Amount     Category(1)     Amount     Category(1)    Amount      Category (1)
                                           ------     -----------     -------    -----------    ------      ------------
                                                                               (dollars in thousands)
 <S>                                       <C>           <C>          <C>          <C>         <C>             <C>
 Breakdown of allowance:
   Mortgage loans                          $2,207         0.23%       $2,536        0.26%       $5,339          0.63%
   Consumer loans                           3,412         1.42         2,916        1.50         2,505          1.48
   Commercial loans                         3,970         2.86         3,572        3.72         2,127          3.00
   SBA loans                                   -            -             -           -             -             -
                                           ------        -----        ------       -----       -------         -----
   Total allowance for loan
     losses                                $9,589         4.51%       $9,024        5.48%       $9,971          5.11%
                                           ======        ======       ======       ======       ======         ======
</TABLE>


<TABLE>
<CAPTION> 
                                                               December 31
                                           -----------------------------------------------------
                                                       1995                        1994
                                            --------------------------  ------------------------
                                                         Percent of                 Percent of
                                                          Loans by                   Loans by
                                              Amount     Category (1)    Amount     Category(1)
                                              ------     ------------    ------     -----------

 <S>                                         <C>           <C>            <C>          <C>
 Breakdown of allowance:
   Mortgage loans                             $5,228        0.80%         $5,074        1.27%
   Consumer loans                              1,992        1.79           1,983        1.90
   Commercial loans                              265        2.18             250        3.94
   SBA loans                                      -           -                -         -
                                             -------       -----          ------       -----
   Total allowance for loan
     losses                                   $7,485        4.77%         $7,307        7.11%
                                              ======       ======         ======        =====
</TABLE>

---------------
(1)   Total loans exclude mortgage loans held for sale.





                                      -19-
<PAGE>   21
INVESTMENT ACTIVITIES

       MORTGAGE-BACKED SECURITIES.  Mortgage-backed securities (which are also
known as mortgage participation certificates or pass-through certificates)
represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the
mortgage originators, through intermediaries (generally U.S. Government
agencies and U.S. Government sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Company.  Such U.S. Government agencies and U.S. Government sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include the Government National Mortgage Association
("GNMA"), the FHLMC, and the FNMA.

       In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company segregated its mortgage-backed and
investment securities into two categories, those held to maturity and those
available for sale.  Held-to-maturity securities are recorded at amortized
cost.  Available-for sale securities are recorded at fair value, with
unrealized gains and losses, net of related tax effects, excluded from earnings
and reported as a separate component of shareholders' equity.

       At December 31, 1998, the Company's $524 million of mortgage-backed
securities were comprised of $132 million and $392 million of held-to-maturity
and available-for-sale mortgage-backed securities, respectively.  At December
31, 1998, $310 million, or 59%, of the Company's mortgage-backed securities
were issued or guaranteed by GNMA, FHLMC, or FNMA.  As part of its investment
policy, the Company also has the ability to invest in private mortgage-backed
securities. These non-federally insured mortgage-backed securities, which are
generally rated AA or better, yield a higher rate of return and involve a
higher risk of loss than comparable mortgage-backed securities issued by the
GNMA, the FHLMC, or the FNMA, and serve to further diversify the Company's
mortgage-backed securities portfolio.  At December 31, 1998, $215 million, or
41%, of the Company's mortgage-backed securities portfolio were private
mortgage-backed securities.  At December 31, 1998, $444 million, or 85%, of the
Company's mortgage-backed securities portfolio had fixed rates of interest, and
$80 million, or 15%, had adjustable rates of interest.

       Mortgage-backed securities generally increase the quality of the
Company's assets by virtue of the insurance or guarantees related to the
securities, are more liquid than individual mortgage loans, and may be used to
collateralize borrowings or other obligations of the Company.

       At December 31, 1998 and 1997, mortgage-backed securities with an
amortized cost of $164 million and $256 million, respectively, and a market
value of $165 million and $258 million, respectively, collateralized certain
securities sold under agreements to repurchase (see Note 8). Mortgage-backed
securities with an amortized cost at December 31, 1998 and 1997, of $34 million
and $19 million, respectively (market value of $34 million and $19 million,
respectively), were pledged as collateral for depositors.  Mortgage-backed
securities with an amortized cost at December





                                      -20-
<PAGE>   22
31, 1998 and 1997, of $0.2 million and $0.4 million, respectively (market value
of $0.2 million and $0.4 million, respectively), were pledged as collateral for
interest rate swap agreements.


       The following table sets forth the activity in the Company's
mortgage-backed securities portfolio during the periods indicated.


<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                           --------------------------------------------
                                                              1998              1997            1996
                                                           -----------     -------------    -----------
                                                                           (in thousands)

 <S>                                                         <C>             <C>            <C>
 Mortgage-backed securities at beginning of year              $735,291        $752,707       $463,353
 Purchases                                                     156,958         189,818        412,676
 Sales or call                                                 (30,000)        (41,770)          -
 Repayments and prepayments                                   (337,291)       (166,838)      (122,895)
 Unrealized (loss) gain on available-for-sale
   mortgage-backed securities                                     (817)          1,374           (427)
                                                             ---------        --------       --------
 Mortgage-backed securities at end of year (1)                $524,141        $735,291       $752,707
                                                               =======         =======        =======
</TABLE>

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

 (1)   At December 31, 1998, the amortized cost and market value of the
Company's total mortgage-backed securities (including held-to-maturity and
available-for-sale mortgage-backed securities) amounted to $520 million and
$526 million, respectively.

       At December 31, 1998, the contractual maturity of substantially all of
the Company's mortgage-backed securities was in excess of ten years.  The
actual maturity of a mortgage-backed security is less than its stated maturity
due to prepayments of the underlying mortgages.  Prepayments also affect the
yield to maturity.  The yield on a security is based upon the interest income
and the amortization of any premium or accretion of any discount related to the
mortgage-backed security.  In accordance with generally accepted accounting
principles, premiums and discounts are amortized or accreted over the estimated
lives of the loans, which decrease and increase interest income, respectively.
The prepayment assumptions used to determine the amortization period for
premiums and discounts can significantly affect the yield of a mortgage-backed
security, and these assumptions are reviewed periodically to reflect actual and
anticipated prepayments.  Although prepayments of underlying mortgages depend
on many factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages, and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates, generally, is the most significant
determinant of the rate of prepayments.  During periods of falling mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related security.  Under such circumstances, the Company may be subject
to reinvestment risk because to the extent that the Company's mortgage-backed
securities amortize or





                                      -21-
<PAGE>   23
prepay faster than anticipated, the Company may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate.

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

       The following table sets forth information regarding the amortized cost
and market value of the Company's investment securities at the dates indicated.
There were no held  to maturity investment securities at the dates indicated.



<TABLE>
<CAPTION>
                                                      December 31,
                              -----------------------------------------------------------------
                                       1998                 1997                   1996
                              --------------------  -------------------   ---------------------

                               Amortized   Market    Amortized   Market   Amortized     Market
                                  Cost     Value        Cost     Value        Cost      Value
                              ----------  -------   ----------- -------   ----------  ---------
                                                      (in thousands)
<S>                           <C>         <C>         <C>        <C>         <C>       <C>

 Available for sale (at
   market):
   U.S. Treasury and U.S.
     Government agency
     securities                $12,000     $11,999    $39,980     $40,041    $47,963    $48,089
   Corporate Bonds              19,997      20,140         -           -          -          -
   Mortgage Security Mutual
     Fund                           -           -       2,373       2,404      2,215      2,209
   Equity Servicing                                                            2,880      2,880
     Partnership                 1,700       1,700      4,819       4,819
   Other Equity Investments        710         676      3,256       4,062        757        757
                               -------     -------    -------     -------    -------    -------
      Total                    $34,407     $34,515    $50,428     $51,326    $53,815    $53,935
                                ======      ======     ======      ======     ======     ======

</TABLE>







                                      -22-
<PAGE>   24
         The following table sets forth certain information regarding the 
maturities of the Company's investment securities (all of which were classified
as available for sale) at December 31, 1998.

<TABLE>
<CAPTION>
                                                   Contractually Maturing
                              ------------------------------------------------------------------

                                                  Weighted                           Weighted
                                   Under 1        Average                  1-5       Average
                                    Year           Yield                  Years       Yield
                                    ----           -----                  -----       -----
                                                     (dollars in thousands)

 <S>                                 <C>               <C>          <C>                  <C>
 U.S. Treasury and U.S.
   Government agency                  $11,999          5.48%        $     -                 -   %
   securities                            -                -              20,140           5.80
 Corporate Bonds

 Equity Servicing Partnership            -                -               1,700            N/A
 Other Equity Investments                -                -                 676            N/A
                                      -------                           -------
                                      $11,999          5.48%            $22,516           5.80%
                                      =======                           =======
</TABLE>




SOURCES OF FUNDS

         GENERAL.  Deposits are the primary source of the Company's funds for
lending and other investment purposes.  In addition to deposits, the Company
derives funds from loan principal repayments and prepayments, advances from the
FHLB of Pittsburgh, and securities sold under agreements to repurchase.  Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows are influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in
the availability of funds from other sources.  They may also be used on a
longer term basis for general business purposes.

         DEPOSITS.  The Company's deposit products include a broad selection of
deposit instruments, including NOW accounts, money market accounts,
noninterest-bearing checking accounts, savings accounts, and certificate of
deposit accounts.  Deposit account terms vary, with the principal differences
being the minimum balance required, the length of time the funds must remain on
deposit, and the interest rate.  In determining the characteristics of its
deposit accounts, consideration is given to the impact on the profitability of
the Company, matching terms of the deposits with loan products, the
attractiveness to customers, and the rates offered by the Company's
competitors.

         The Company's deposits are obtained primarily from residents and
businesses located  in southeast Pennsylvania.  Management of the Company
estimates that a deminimus portion of the Company's deposits are obtained from
outside southeast Pennsylvania.  The Company does not pay fees to brokers to
solicit funds for deposit with the Company, nor does it actively solicit
negotiable-rate certificates of deposit with balances of $100,000 or more.

         The Company attracts deposits through a network of convenient branch
office locations by offering a wide variety of accounts and services,
competitive interest rates, and extended customer hours.  At December 31, 1998,
the branch offices of the Company consisted of 40 traditional full-





                                      -23-
<PAGE>   25
service offices and 20 full-service offices located in supermarkets.  The
Company opened its first supermarket branch in 1994 and opened an additional
nine, four, three, and three in 1995, 1996,  1997, and 1998 respectively.
Currently, the Company intends to open an additional supermarket branch and one
mini-traditional branch in its market area and address certain underperforming
branches during 1999.

         In addition to the Company's extensive branch network, the Company
currently maintains 58 automated teller machine ("ATM") locations.  The Company
also maintains a 24 hour telephone banking service known as COM-LINE.

         The Company's focus on customer service and convenience has
facilitated its acquisition of lower-cost demand deposits and savings accounts,
which generally have rates which are substantially less than certificates of
deposit.  At December 31, 1998, total demand deposits and savings deposits
amounted to 44% and 14% of the Company's total deposits, respectively.  During
1998, the weighted average rate paid on the Company's demand deposits and
savings deposits amounted to 2.41% and 2.23%, respectively, as compared to a
weighted average rate paid of 5.46% on the Company's certificates of deposit
during this same period.

         The following table sets forth certain information relating to the
Company's deposits at the dates indicated.


<TABLE>
<CAPTION>
                                                               December 31,
                             -------------------------------------------------------------------------------
                                      1998                       1997                      1996
                             ------------------------   ----------------------- ----------------------------


                                              Percent                   Percent                   Percent
                                              of Total                  of Total                  of Total
                                    Amount    Deposits      Amount      Deposits     Amount       Deposits
                                    ------    --------      ------      --------     ------       --------
                                                          (dollars in thousands)

<S>                              <C>           <C>       <C>             <C>      <C>             <C>
 NOW Accounts                     $ 216,668     13.50%    $  172,442      11.11%   $ 171,567        11.50%
 Money market deposits              390,822     24.34        324,959      20.93      278,527        18.68
 Noninterest-bearing
  deposits                          103,327(1)   6.44         81,653       5.26       60,957         4.09
                                   --------    ------     ----------     ------     --------       ------
      Total demand deposits         710,817     44.28        579,054      37.30      511,051        34.27
                                   --------    ------     ----------     ------     --------       ------
 Savings deposits                   227,423     14.17        229,290      14.77      260,089        17.44
 Certificate of deposit
   accounts:
   6 months or less                 317,232     19.76        259,519      16.71      304,674        20.43
   7-12 months                      151,258      9.42        220,341      14.19      175,425        11.76
   13-36 months                     148,958      9.28        216,011      13.91      199,292        13.36
   More than 36 months               49,611      3.09         48,609       3.12       40,919         2.74
                                   --------    ------     ----------     ------     --------       ------
   Total certificates               667,059     41.55        744,480      47.93      720,310        48.29
                                   --------    ------     ----------     ------     --------       ------
   Total deposits                $1,605,299    100.00%    $1,552,824     100.00%  $1,491,450       100.00%
                                  =========    ======      =========     ======    =========       ======
</TABLE>


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

(1)  Includes $57 million of business checking accounts.





                                      -24-
<PAGE>   26
         The following table sets forth the activity in the Company's deposits
during the periods indicated.


<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                      --------------------------------------------
                                          1998             1997            1996
                                      -------------   --------------   -----------
                                                (dollars in thousands)

<S>                                   <C>               <C>            <C>
 Beginning balance                     $1,552,824        $1,491,450     $1,076,549
 Net (decrease) increase
   before interest (1)                     (2,595)            9,540        371,952
 Interest credited                         55,070            51,834         42,949
                                       ----------        ----------     ----------
 Net increase
   in deposits                             52,475            61,374        414,901
                                       ----------        ----------     ----------
 Ending balance                        $1,605,299        $1,552,824     $1,491,450
                                        =========         =========      =========
</TABLE>

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

(1)  Includes $379.7 million of deposits assumed in connection with
     the Berks Acquisition in June 1996.

     The following table sets forth by various interest rate categories the
Company's certificates of deposit at the dates indicated.


<TABLE>
<CAPTION>
                                                            December 31,
                                             -----------------------------------------
                                                 1998           1997           1996
                                             -----------   -------------   -----------
                                                     (dollars in thousands)

<S>                                        <C>             <C>           <C>
 0.00% to 2.99%                               $  1,295        $  1,166       $  3,132
 3.00% to 3.99%                                  1,776           6,051         79,101
 4.00% to 4.99%                                224,329         125,241        165,704
 5.00% to 6.99%                                436,614         608,379        465,258
 7.00% to 8.99%                                  2,965           3,569          6,833
 9.00% to 10.99%                                    80              74            282
 11.00% and over                                    -               -              -
                                               -------         -------        -------
 Total                                        $667,059        $744,480       $720,310
                                               =======         =======        =======
</TABLE>





                                      -25-
<PAGE>   27
         The following table sets forth the amount and remaining maturities of
the Company's certificates of deposit at December 31, 1998.

<TABLE>
<CAPTION>
                                                         
                                            Over Six Months     Over One    Over Two Years
                              Six Months        Through       Year Through     Through       Over Three
                               and Less         One Year       Two Years     Three Years       Years
                            -------------   ---------------  -------------- --------------  ------------
                                                    (dollars in thousands)

 <S>                           <C>              <C>            <C>             <C>           <C>
 0.00% to 1.99%                 $  1,178         $     -        $     -         $     -       $     -
 2.00% to 2.99%                      117               -              -               -             -
 3.00% to 3.99%                    1,756               16              4              -             -
 4.00% to 4.99%                  140,799           43,304         30,734          6,863         2,629
 5.00% to 6.99%                  172,850          107,257         97,367         12,382        46,758
 7.00% to 8.99%                      527              681            960            573           224
 9.00% to 10.99%                       5               -              -              75            -
 11.00% & over                        -                -              -              -             -
                                --------         --------        -------        -------       -------
 Total                          $317,232         $151,258       $129,065        $19,893       $49,611
                                ========          =======        =======         ======        ======
</TABLE>


         At December 31, 1998, the Company had $91 million of certificates of
deposit in amounts equal to or greater than $100,000, of which $64 million was
scheduled to mature within six months, $14 million was scheduled to mature in
over six months through 12 months, and $13 million was scheduled to mature in a
time period greater than 12 months.

         BORROWINGS.  The Company may obtain advances from the FHLB of
Pittsburgh by pledging the common stock it owns in the FHLB and by pledging
certain of its residential mortgage loans, provided certain standards related
to creditworthiness have been met.  Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities.  Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending.  At December
31, 1998, the Company had $241 million of advances from the FHLB of Pittsburgh.

         From time to time the Company enters into agreements to sell
securities under terms which require it to repurchase the same securities by a
specified date.  Repurchase agreements are considered borrowings which are
secured by the sold securities.  At December 31, 1998, the Company had $166
million of repurchase agreements outstanding.





                                      -26-
<PAGE>   28
         The following table sets forth the amount and weighted average rate of
the Company's borrowings at the dates indicated.


<TABLE>
<CAPTION>
                                            December 31,
                     --------------------------------------------------------------
                            1998                  1997                  1996
                     -----------------  -----------------------  ------------------
                                          (dollars in thousands)
 <S>                  <C>        <C>      <C>          <C>        <C>         <C>


 FHLB advances        $240,500   5.32%    $213,000     5.83%      $175,000    5.48%
 Repurchase
  agreements           166,000   6.21      246,099     5.73        176,674    5.47
                       -------             -------                 -------
    Total
     Borrowings(1)    $406.500   5.68%    $459.099     5.78%      $351,674    5.48%
                       =======             =======                 =======
</TABLE>

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

(1)  Does not include interest expense associated with interest rate swaps
     and interest rate caps.


         The following table sets forth certain information relating to the
Company's borrowings at the dates and for the periods indicated.





<TABLE>
<CAPTION>
                                                       At or For the Year Ended December 31,
                                          ------------------------------------------------------------
                                                1998                1997                  1996
                                          ---------------   --------------------   -------------------

                                                               (dollars in thousands)
<S>                                        <C>                    <C>                    <C>
 FHLB advances:
   Maximum balance                          $368,000               $238,000               $202,500
   Average balance                          $285,615               $211,107               $138,917
   Weighted average rate:
     at end of period                          5.32%                  5.83%                  5.48%
     during the period                         5.65%                  5.67%                  5.62%

 Repurchase agreements:
   Maximum balance                          $240,521               $264,677               $176,674
   Average balance                          $205,018               $242,794               $154,523
   Weighted average rate:
     at end of period                          6.21%                  5.73%                  5.47%
     during the period                         5.88%                  5.90%                  5.91%
</TABLE>

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


                                      -27-
<PAGE>   29
EMPLOYEES

         The Company had 680 full-time employees and 241 part-time employees at
December 31, 1998.  None of these employees are represented by a collective
bargaining agent.

SUBSIDIARIES

         A brief description of the activities of the Company's active
subsidiaries is set forth below.

         COMMONWEALTH BANK.  The Bank is a federally chartered stock savings
bank which conducts business from its executive offices in Norristown,
Pennsylvania and, as of December 31, 1998, 60 full-service offices, including
20 supermarket branch offices, located in southeast Pennsylvania.   ComNet
Mortgage Services ("ComNet"), a division of the Bank, also located in
Norristown, conducts business through eight loan origination offices located in
Pennsylvania, New Jersey, Rhode Island, and Virginia.  ComNet also originates
loans through a network of correspondents, primarily in the eastern United
States.  Homestead Mortgage conducts business through three loan origination
offices located in Maryland.

         COMMONWEALTH INVESTMENT CORPORATION OF DELAWARE, INC.  At December 31,
1998, $6 million, or 1%, of the Company's mortgage-backed securities were held
by Commonwealth Investment Corporation of Delaware, Inc., a wholly-owned
subsidiary of the Company which was incorporated under the laws of Delaware in
1996.

         CFSL INVESTMENT CORPORATION.  At December 31, 1998, $47 million, or
9%, of the Company's mortgage-backed securities were held by CFSL Investment
Corporation, a wholly-owned subsidiary of the Bank which was incorporated under
the laws of Delaware in 1987.

         FIRSTCOR, LTD.  The activities of Firstcor, Ltd. ("Firstcor") consist
primarily of investing in limited partnerships which have been formed for the
purpose of investing in real estate for low income families, elderly housing
projects, and/or the preservation or restoration of historically or
architecturally significant buildings or structures.  At December 31, 1998,
Firstcor had nine  investments in such partnerships with an aggregate carrying
value of $4.1 million. The investments held by these partnerships are all
located in southeast Pennsylvania.  In addition, Firstcor, through an
independent brokerage, makes available investments in annuities and mutual
funds to customers of the Company.

         QME, INC.  The activities of QME, Inc. ("QME") consisted of the
ownership and development of a 102 lot subdivision located in Bucks County,
Pennsylvania, which was acquired by the Bank in connection with the acquisition
of another savings association.  The property was developed through the
construction of single-family units.  The development was scheduled to occur in
three phases, the first two of which were financed by QME.  QME entered into
agreements with a builder of the project which covered the sale of the 102
units to be built and three model units built





                                      -28-
<PAGE>   30
by a prior builder. As of December 31, 1997, all of the units had been sold and
closed. The third phase is currently not being developed.

COMPETITION

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

       The Company experiences strong competition for loans principally from
other savings associations, commercial banks, and mortgage banking companies.
The Company competes for loans principally through the interest rates and loan
fees it charges, and through the efficiency and quality of services it provides
borrowers.


                                      -29-
<PAGE>   31
TAXATION

       FEDERAL. The Company is subject to federal income taxation in the same
general manner as other corporations. The following discussion of federal
taxation is intended only to summarize certain pertinent federal income tax
matters and is not a comprehensive description of the tax rules applicable to
the Company. The Company's federal income tax returns have been audited or
closed without audit by the Internal Revenue Service through 1993.

       METHOD OF ACCOUNTING. For federal income tax purposes, the Company
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its federal income tax
returns.

       DISTRIBUTIONS. If the Bank distributes cash or property to its
shareholders, and the distribution is treated as being from its accumulated bad
debt reserves, the distribution will cause the Company to have additional
taxable income. A distribution to shareholders is deemed to have been made from
accumulated bad debt reserves to the extent that the distribution is a
"non-dividend distribution." A distribution in respect of stock is a
non-dividend distribution to the extent that, for federal income tax purposes,
(i) it is in redemption of shares, (ii) it is pursuant to a liquidation of the
institution, or (iii) in the case of a current distribution, together with all
other such distributions during the taxable year, it exceeds the Company's
current and post-1951 accumulated earnings and profits. The amount of additional
taxable income created by a non-dividend distribution is an amount that when
reduced by the tax attributable to it is equal to the amount of the
distribution.

       MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of 20%
of regular taxable income plus certain tax preferences ("alternative minimum
taxable income" or "AMTI"). The alternative minimum tax is payable to the extent
such AMTI is in excess of an exemption amount. Items of tax preference that
constitute AMTI include (a) tax exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) for taxable years beginning after 1989, 75% of the
excess (if any) of (i) adjusted current earnings as defined in the Code, over
(ii) AMTI (determined without regard to this preference and prior to reduction
by net operating losses). Net operating losses ("NOLs") can offset no more than
90% of AMTI. Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years. The Company has not been
subject to the alternative minimum tax and has no such amounts available as
credits for carryover.

       Legislation adopted in August 1996 (i) repealed the provision of the Code
which authorizes use of the percentage method by qualifying savings institutions
to determine deductions for bad debts, effective for taxable years beginning
after 1995, and (ii) required that a savings institution recapture for tax
purposes (i.e. take into income) over a six-year period its applicable excess
reserves, which for a thrift institution such as the Bank generally is the
excess of the balance of its bad debt reserves as of the close of its last
taxable year beginning before January 1,1996 over the balance of such reserves
as of the close of its last taxable year beginning before January 1, 1988, which
recapture would be suspended for any tax year that begins after December 31,
1995


                                      -30-
<PAGE>   32
and before January 1, 1998 (thus a maximum of two years) in which a savings
institution originates an amount of residential loans which is not less than the
average of the principal amount of such loans made by a savings institution
during its six most recent taxable years beginning before January 1, 1996. These
provisions did not have a material adverse effect on the Company's financial
condition or operations.

       NET OPERATING LOSS CARRYOVERS. For losses incurred in taxable years
beginning 1976 through August 6, 1997, a financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. For taxable years beginning after August 6, 1997,
the carryback period is two years and the carryforward period is twenty years.
At December 31, 1998, the Company had no net operating loss carryforwards for
federal income tax purposes.

       CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The capital
gains income tax, which was previously imposed at a rate of 28% of net long-term
capital gains, was repealed effective December 31, 1986. From that time until
January 1, 1993, corporate net capital gains were taxed at a maximum rate of
34%. The Omnibus Budget Reconciliation Act of 1993 increased the maximum
corporate capital gains rate to 35% effective January 1, 1993. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return. Corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf. However, a corporation may deduct 100% of dividends from a member
of the same affiliated group of corporations.

       STATE. The Company is subject to the Pennsylvania corporate net income
tax, which imposes a tax at the rate of 9.99% based on federal taxable income.
The Company is also subject to the Pennsylvania capital stock tax based on the
deemed value of its capital at the rate of 0.01275%.

       The Bank is subject to tax under the Pennsylvania Mutual Thrift
Institutions Tax Act, which imposes a tax at the rate of 11.5% of the Bank's net
earnings, determined in accordance with GAAP. For fiscal years beginning in
1983, and thereafter, NOLs may be carried forward and allowed as a deduction for
three succeeding years. This Act exempts the Bank from all other corporate taxes
imposed by Pennsylvania for state tax purposes, and from all local taxes imposed
by political subdivisions thereof, except taxes on real estate and real estate
transfers. At December 31, 1998, the Company had net loss carryforwards for
state tax purposes totaling $8.9 million, which expire beginning in 1999.


                                      -31-
<PAGE>   33
                                   REGULATION

       Set forth below is a brief description of those laws and regulations
which are deemed material to an understanding of the extent to which the Company
and the Bank are regulated. The description of the laws and regulations
hereunder does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.

THE COMPANY

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

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

       If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary thereof
any business activity, upon prior notice to, and no objection by the OTS, other
than: (i) furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance


                                      -32-
<PAGE>   34
agency or escrow business; (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies. Those activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.

       LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings institution may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings institution.

       In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors, and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the institution's
loans to one borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus). Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1998, the Bank was in compliance with the above
restrictions.


                                      -33-
<PAGE>   35
       RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.

       The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).

       The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") amended provisions of the Bank Holding Company Act of 1956 to
specifically authorize the Federal Reserve Board to approve an application by a
bank holding company to acquire control of a savings institution. FIRREA also
authorized a bank holding company that controls a savings institution to merge
or consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. As a result of these provisions, there have been a number of
acquisitions of savings institutions by bank holding companies in recent years.

       FEDERAL SECURITIES LAWS. The Company's common stock is registered with
the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Company is subject to the information, proxy
solicitation, insider trading restrictions, and other requirements under the
Exchange Act.

THE BANK

       GENERAL. The OTS has extensive authority over the operations of federally
chartered savings institutions. As part of this authority, savings institutions
are required to file periodic reports with the OTS, and are subject to periodic
examinations by the OTS and the Federal Deposit Insurance Corporation ("FDIC").
The investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities


                                      -34-
<PAGE>   36
not permitted by such laws and regulations. Those laws and regulations generally
are applicable to all federally chartered savings institutions and may also
apply to state chartered savings institutions. Such regulation and supervision
is primarily intended for the protection of depositors.

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

       The SAIF and BIF are required by law to attain and maintain a reserve
ratio of 1.25% of insured deposits. On September 30, 1996, legislation was
enacted into law to recapitalize the SAIF through a one-time special assessment
on SAIF-insured deposits as of March 31, 1995. The Bank's assessment amounted to
$6.8 million ($4.5 million, net of income tax benefit). As a result of the
special assessment, the Bank's deposit insurance premiums decreased from the
previous rate of $0.23 per $100 of deposits to approximately $0.05 per $100 of
deposits.

       Beginning January 1, 1997, Financing Corporation ("FICO") assessments of
6.5 and 1.3 basis points were added to the regular assessment for the
SAIF-assessable and the BIF-assessable base, respectively. As of December 31,
1998, the FICO assessments were 6.1 and 1.2 basis points for the SAIF-assessable
and the BIF-assessable base, respectively. The FICO rate is not tied to the FDIC
risk classification, referred to above, and was the result of the Deposit
Insurance Act of 1996. It is anticipated that assessments for BIF and SAIF
members will be the same after 1999.

       Under current FDIC regulations, institutions are assigned to one of three
capital groups based solely on the level of an institution's capital--"well
capitalized," "adequately capitalized," and "undercapitalized." The three groups
are defined in the same manner as per the regulations establishing the prompt
corrective action system under Section 38 of the FDIA, as discussed below.
These three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which are considered to be healthy to
those which are considered to be of substantial supervisory concern. The matrix
so created results in nine assessment risk classifications, with deposit
insurance rates ranging from 0% for well capitalized, healthy institutions to
0.27% for undercapitalized institutions with substantial supervisory concerns.

       The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the


                                      -35-
<PAGE>   37
accounts at the institution at the time of the termination, less subsequent
withdrawals, shall continue to be insured for a period of six months to two
years, as determined by the FDIC. There are no pending proceedings to terminate
the deposit insurance of the Bank.

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

       Current OTS capital standards require savings institutions to satisfy
three different capital requirements. Under these standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3.0% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to at
least 8.0% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits, and is reduced by intangible
assets, with a limited exception for purchased mortgage servicing rights and
originated mortgage servicing rights. Tangible capital is given the same
definition as core capital but does not include qualifying intangible assets.
The Bank had $40 million of goodwill and other intangible assets at December 31,
1997. Both core and tangible capital are further reduced by an amount equal to a
savings institution's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks (other than subsidiaries engaged in
activities undertaken as agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies). These
adjustments do not affect the Bank's regulatory capital. Supplementary capital
generally consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as core capital; subordinated debt and
intermediate-term preferred stock; 45% of any pretax unrealized gains on
available for sale equity securities; and general allowances for loan losses up
to a maximum of 1.25% of risk-weighted assets.

       In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary capital
included does not exceed the savings institution's core capital. In determining
the required amount of risk-based capital, total assets, including certain
off-balance sheet items, are multiplied by a risk weight based on the risks
inherent in the type of assets. The risk weights assigned by the OTS for
principal categories of assets are (i) 0% for cash and securities issued by the
U.S. Government or unconditionally backed by the full faith and credit of the
U.S. Government; (ii) 20% for securities (other than equity securities) issued
by U.S. Government-sponsored agencies and mortgage-backed securities issued by,
or fully guaranteed as to principal and interest by, the FNMA or the FHLMC,
except for those classes with residual characteristics or stripped
mortgage-related securities; (iii) 50% for prudently underwritten permanent one-
to four-family first lien mortgage loans not more than 90 days delinquent and
having a loan-to-value ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by the FNMA


                                      -36-
<PAGE>   38
or the FHLMC, qualifying residential bridge loans made directly for the
construction of one- to four-family residences and qualifying multi-family
residential loans; and (iv) 100% for all other loans and investments, including
consumer loans, commercial loans, and single-family residential real estate
loans more than 90 days delinquent, and for repossessed assets.

       At December 31, 1998, the Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 5.9%, 5.9%
and 11.6%, respectively. For additional information, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Regulatory Capital Requirements" in Item 7 hereto.

       A savings institution which is not in capital compliance or which is
otherwise deemed to require more than normal supervision is subject to
restrictions on its ability to grow pursuant to Regulatory Bulletin 3a-1. In
addition, a provision of HOLA generally provides that the Director of OTS must
restrict the asset growth of savings institutions not in regulatory capital
compliance, subject to a limited exception for growth not exceeding interest
credited.

       A savings institution which is not in capital compliance is also
automatically subject to the following: (i) new directors and senior executive
officers and employment contracts for senior executive officers must be approved
by the OTS in advance; (ii) the savings institution may not accept or renew any
brokered deposits; (iii) the savings institution is subject to higher OTS
assessments as a capital-deficient institution; and (iv) the savings institution
may not make any capital distributions without prior written approval.

       Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations,
termination of federal deposit insurance, and the appointment of a conservator
or receiver. The OTS' capital regulation provides that such actions, through
enforcement proceedings or otherwise, could require one or more of a variety of
corrective actions.

       In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an institution with a greater than "normal" level of interest rate risk is
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating its risk-based capital. As a result, such an
institution is required to maintain additional capital in order to comply with
the risk-based capital requirement. An institution with a greater than "normal"
interest rate risk is defined as an institution that would suffer a loss of net
portfolio value exceeding 2.0% of the estimated economic value of its assets in
the event of a 200 basis point increase or decrease (with certain minor
exceptions) in interest rates. The interest rate risk component is calculated,
on a quarterly basis, as one-half of the difference between an institution's
measured interest rate risk and 2.0%, multiplied by the economic value of its
assets. The rule also authorizes the Director of the OTS, or his designee, to
waive or defer an institution's interest rate risk component on a case-by-case
basis. The final rule was originally to be effective as of January 1, 1994,
subject however to a three quarter "lag" time between the reporting date of the
data used


                                      -37-
<PAGE>   39
to calculate an institution's interest rate risk and the effective date of each
quarter's interest rate risk component. However, in October 1994, the Director
of the OTS indicated that it would waive the capital deduction for institutions
with greater than "normal" interest rate risk until the OTS publishes an appeals
process. In August 1995, the OTS issued Thrift Bulletin No. 67 which allows
eligible institutions to request adjustment to their interest rate risk
component as calculated by the OTS, or to request to use their own models to
calculate their interest rate component. The OTS also indicated that it will
delay invoking its interest rate risk rule requiring institutions with above
normal interest rate risk exposure to adjust their regulatory capital
requirement until new procedures are implemented and evaluated. The OTS has not
yet established an effective date for the capital deduction. In any event,
management of the Bank does not believe that the OTS' adoption of an interest
rate risk component to the risk-based capital requirement will adversely affect
the Bank's regulatory capital position.

       PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA, as amended by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency was required to implement a system of prompt corrective
action for institutions which it regulates. The federal banking agencies,
including the OTS, adopted substantially similar regulations to implement
Section 38 of the FDIA, effective as of December 19, 1992. Under the
regulations, an institution is deemed to be (i) "well capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio
of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more, and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital
ratio of 4.0% or more, and a Tier 1 leverage capital ratio of 4.0% or more (3.0%
under certain circumstances), and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less
than 4.0%, or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital
ratio that is less than 3.0%, or a Tier 1 leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Section 38 of the
FDIA and the regulations promulgated thereunder also specify circumstances under
which a federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized).

       An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60 days after
receiving a capital restoration plan, subject to extensions by the agency.


                                      -38-
<PAGE>   40
       An institution which is required to submit a capital restoration plan
must concurrently submit a performance guaranty by each company that controls
the institution. Such guaranty shall be limited to the lesser of (i) an amount
equal to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary to restore the relevant capital measures of the institution to
the levels required for the institution to be classified as adequately
capitalized. Such a guarantee shall expire after the federal banking agency
notifies the institution that it has remained adequately capitalized for each of
four consecutive calendar quarters. An institution which fails to submit a
written capital restoration plan within the requisite period, including any
required performance guarantee(s), or fails in any material respect to implement
a capital restoration plan, shall be subject to the restrictions in Section 38
of the FDIA which are applicable to significantly undercapitalized institutions.

       Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA (i) restricting payment of
capital distributions and management fees, (ii) requiring that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital, (iii) requiring submission of a capital restoration
plan, (iv) restricting the growth of the institution's assets and (v) requiring
prior approval of certain expansion proposals. The appropriate federal banking
agency for an undercapitalized institution also may take any number of
discretionary supervisory actions if the agency determines that any of these
actions is necessary to resolve the problems of the institution at the least
possible long-term cost to the deposit insurance fund, subject in certain cases
to specified procedures. These discretionary supervisory actions include
requiring the institution to raise additional capital; restricting transactions
with affiliates; restricting interest rates paid by the institution on deposits;
requiring replacement of senior executive officers and directors; restricting
the activities of the institution and its affiliates; requiring divestiture of
the institution or the sale of the institution to a willing purchaser; and any
other supervisory action that the agency deems appropriate. These and additional
mandatory and permissive supervisory actions may be taken with respect to
significantly undercapitalized and critically undercapitalized institutions.

       At December 31, 1998, the Bank was deemed a "well capitalized"
institution for purposes of the above regulations and as such was not subject to
the above mentioned restrictions.

       SAFETY AND SOUNDNESS. FDICIA requires each federal banking regulatory
agency to prescribe, by regulation or guideline, standards for all insured
depository institutions and depository institution holding companies relating to
(i) internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; (vi) compensation, fees and benefits; and (vii) such other
operational and managerial standards as the agency determines to be appropriate.
The compensation standards would prohibit employment contracts or other
compensatory arrangements that provide excess compensation, fees or benefits or
could lead to material financial loss. In addition, each federal banking
regulatory agency must prescribe, by regulation or guideline, standards relating
to asset quality, earnings and stock valuation as the agency determines to be
appropriate. On July 10, 1995, the federal banking agencies, including the OTS,
adopted final rules and proposed guidelines concerning standards for safety and
soundness


                                      -39-
<PAGE>   41
required to be prescribed by regulation pursuant to Section 39 of the FDIA. In
general, the standards relate to (1) operational and managerial matters; (2)
asset quality and earnings; and (3) compensation. The operational and managerial
standards cover (a) internal controls and information systems, (b) internal
audit systems, (c) loan documentation, (d) credit underwriting, (e) interest
rate exposure, (f) asset growth, and (g) compensation, fees and benefits. Under
the proposed asset quality and earnings standards, the Bank would be required to
establish and maintain systems to (i) identify problem assets and prevent
deterioration in those assets, and (ii) evaluate and monitor earnings and ensure
that earnings are sufficient to maintain adequate capital reserves. Finally, the
proposed compensation standard states that compensation will be considered
excessive if it is unreasonable or disproportionate to the services actually
performed by the individual being compensated. If a savings institution fails to
meet any of the standards promulgated by regulation, then such institution will
be required to submit a plan within 30 days to the OTS specifying the steps it
will take to correct the deficiency. In the event that a savings institution
fails to submit or fails in any material respect to implement a compliance plan
within the time allowed by the federal banking agency, Section 39 of the FDIA
provides that the OTS must order the institution to correct the deficiency and
may (1) restrict asset growth; (2) require the savings institution to increase
its ratio of tangible equity to assets; (3) restrict the rates of interest that
the savings institution may pay; or (4) take any other action that would better
carry out the purpose of prompt corrective action. The Bank believes that it has
been and will continue to be in compliance with each of the standards as they
have been adopted by the OTS.

       LIQUIDITY REQUIREMENTS. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 4%. At December 31, 1998, the Company's liquid asset ratio
was 6.25%.

       CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings institution to
make capital distributions. Generally, the regulation creates a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.

       Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier 1
institutions) may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the institution's ratio of total
capital to assets exceeds the ratio of its fully


                                      -40-
<PAGE>   42
phased-in capital requirement to assets. "Fully phased-in capital requirement"
is defined to mean an institution's capital requirement under the statutory and
regulatory standards applicable on December 31, 1994, as modified to reflect any
applicable individual minimum capital requirement imposed upon the institution.
Failure to meet fully phased-in or minimum capital requirements will result in
further restrictions on capital distributions, including possible prohibition
without explicit OTS approval.

       Tier 2 institutions, which are institutions that before and after the
proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions up to 75% of their net income over the most recent
four quarter period.

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

       Tier 3 institutions, which are institutions that do not meet current
minimum capital requirements, or that have capital in excess of either their
fully phased-in capital requirement or minimum capital requirement but which
have been notified by the OTS that it will be treated as a Tier 3 institution
because they are in need of more than normal supervision, cannot make any
capital distribution without obtaining OTS approval prior to making such
distributions.

       At December 31, 1998, the Bank was a Tier 1 institution for purposes of
this regulation.

       The OTS amended its capital distribution regulation effective April 1,
1999. Under the new regulation, savings institutions are permitted to only make
capital distributions that would not result in their capital being reduced below
the level required to remain "adequately capitalized." A savings institution is
adequately capitalized if it has a total risk-based capital ratio of 8.0% or
more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage
capital ratio of 4.0% or more and does not meet the definition of "well
capitalized." Because the Bank is a subsidiary of the Company, the new
regulation still requires the Bank to provide notice to the OTS of its intent to
make a capital distribution.

       LOANS TO ONE BORROWER. FIRREA imposed limitations on the aggregate amount
of loans that a savings institution could make to any one borrower, including
related entities. Under FIRREA, the permissible amount of loans-to-one borrower
now follows the national bank standard for all loans made by savings
institutions, as compared to the pre-FIRREA rule that applied that standard only
to commercial loans made by federally chartered savings institutions. The
regulations promulgated pursuant to FIRREA generally do not permit loans-to-one
borrower to exceed the greater of $0.5 million, or 15% of unimpaired capital and
surplus. Loans in an amount equal to an additional 10% of unimpaired capital and
surplus also may be made to a borrower if the loans are fully secured by readily
marketable securities.


                                      -41-
<PAGE>   43
       BRANCHING BY FEDERAL SAVINGS INSTITUTIONS. Effective May 11, 1992, the
OTS amended its Policy Statement on Branching by Federal Savings Institutions to
permit interstate branching to the full extent permitted by statute (which is
essentially unlimited). Prior policy permitted interstate branching for federal
savings institutions only to the extent allowed for state-chartered institutions
in the states where the institution's home office is located and where the
branch is sought. Prior policy also permitted healthy out-of-state federal
institutions to branch into another state, regardless of the law in that state,
provided the branch office was the result of a purchase of an institution that
was in danger of default.

       Generally, federal law prohibits federal savings institutions from
establishing, retaining or operating a branch outside the state in which the
federal institution has its home office unless the institution meets the IRS's
domestic building and loan test (generally, 60% of a thrift's assets must be
housing-related) ("IRS Test"). The IRS Test requirement does not apply if: (i)
the branch(es) result(s) from an emergency acquisition of a troubled savings
institution (however, if the troubled savings institution is acquired by a bank
holding company, does not have its home office in the state of the bank holding
company bank subsidiary and does not qualify under the IRS Test, its branching
is limited to the branching laws for state-chartered banks in the state where
the savings institution is located); (ii) the law of the state where the branch
would be located would permit the branch to be established if the federal
savings institution were chartered by the state in which its home office is
located; or (iii) the branch was operated lawfully as a branch under state law
prior to the savings institution's conversion to a federal charter.

       Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.

       QUALIFIED THRIFT LENDER TEST ("QTL"). All savings institutions are
required to meet a QTL test set forth in Section 10(m) of the HOLA and
regulations of the OTS thereunder to avoid certain restrictions on their
operations. A savings institution that does not meet the QTL test set forth in
the HOLA and implementing regulations must either convert to a bank charter or
comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution shall
be subject to the rules regarding payment of dividends by a national bank. Upon
the expiration of three years from the date the savings institution ceases to be
a QTL, it must cease any activity and not retain any investment not permissible
for a national bank and immediately repay any outstanding FHLB advances (subject
to safety and soundness considerations).

       A savings institution is a QTL if (i) it qualifies as a domestic building
and loan association under Section 7701(a)(19) of the Internal Revenue Code
(which generally requires that at least 60% of the institution's assets
constitute housing-related and other qualifying assets) or (ii) at least


                                      -42-
<PAGE>   44
65% of the institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in at least nine
out of every 12 months. At December 31, 1998, the qualified thrift investments
of the Bank were approximately 100% of its portfolio assets.

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

       As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At December 31, 1998, the Bank had $18 million in
FHLB stock, which was in compliance with this requirement.

       The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. For the year ended December 31, 1998,
dividends paid by the FHLB of Pittsburgh to the Bank amounted to $1.1 million,
compared to $0.9 million for the year ended December 31, 1997.

       FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts). As of December 31, 1998, no reserves were
required to be maintained on the first $4.9 million of transaction accounts,
reserves of 3% were required to be maintained against the next $41.6 million of
net transaction accounts (with such dollar amounts subject to adjustment by the
Federal Reserve Board), and a reserve of 10% (which is subject to adjustment by
the Federal Reserve Board to a level between 8% and 14%) against all remaining
net transaction accounts. Because required reserves must be maintained in the
form of vault cash or a noninterest-bearing account at a Federal Reserve Bank,
the effect of this reserve requirement is to reduce an institution's earning
assets.


                                      -43-
<PAGE>   45
ITEM 2. PROPERTIES

OFFICE AND PROPERTIES

At December 31, 1998, the Bank conducted its business from its corporate offices
in Norristown, Pennsylvania and 60 full-service offices, including 20
supermarket branches, located in southeast Pennsylvania.

       The following table sets forth certain information relating to the Bank's
offices at December 31, 1998.

<TABLE>
<CAPTION>
                                                                             Net Book Value of
                                                                                Property &
(in  thousands)                                                                 Leasehold
                                                              Lease          Improvements at
                                           Owned or         Expiration         December 31,           Deposits at
                 Location                   Leased             Date               1998(1)           December 31, 1998
-------------------------------------- ----------------- --------------- ------------------------ ---------------------
<S>                                       <C>                 <C>              <C>                     <C>    
CORPORATE HEADQUARTERS:
-----------------------

NORRISTOWN:                                 Leased             02/12            $1,658                    $51,602
2 West Lafayette Street
Norristown, PA 19401

TRADITIONAL FULL-SERVICE OFFICES:
---------------------------------

NORRISTOWN:                                 Leased             02/12               346                     35,707
2 West Lafayette Street
Norristown, PA 19401

TRAPPE:                                     Leased             10/10               201                     31,272
Trappe Shopping Center
130 West Main Street, Suite 158
Trappe, PA 19426

KING OF PRUSSIA:                            Leased             09/03               149                     39,941
DeKalb Plaza Shopping Center
338 West DeKalb Pike
King of Prussia, PA 19406

PARK RIDGE:                                 Leased             01/03                --                     59,398
Park Ridge Shopping Center
2701 West Main Street
Norristown, PA 19403

SWEDE SQUARE:                               Leased             10/01               184                     72,610
Swede Square Shopping Center
2947 Swede Road
Norristown, PA 19401
</TABLE>

                                     -44-

<PAGE>   46

<TABLE>
<CAPTION>
                                                                             Net Book Value of
                                                                                Property &
(in  thousands)                                                                 Leasehold
                                                              Lease          Improvements at
                                           Owned or         Expiration         December 31,           Deposits at
                 Location                   Leased             Date               1998(1)           December 31, 1998
-------------------------------------- ----------------- --------------- ------------------------ ---------------------
<S>                                        <C>               <C>                      <C>                    <C>    
AUDUBON:                                    Leased            08/03                    $52                    $43,807
Audubon Village Shopping Center
2806 Audubon Village Drive
Norristown, PA 19403

NEWTOWN SQUARE:                              Owned             --                      320                     38,200
3531 West Chester Pike
Newtown Square, PA 19073

FRANKFORD AVENUE:                            Owned             --                      348                     56,504
7149 Frankford Avenue
Philadelphia, PA 19135

CASTOR AVENUE:                               Owned             --                      146                     51,800
6537 Castor Avenue
Philadelphia, PA 19149

PENNDEL:                                     Owned             --                      128                     25,806
U.S. # 1 & Durham Road
Penndel, PA 19047

WELSH ROAD:                                  Owned             --                      150                     57,725
2501 Welsh Road
Philadelphia, PA 19114

GLENSIDE:                                    Owned             --                      316                     64,092
139 South Easton Road
Glenside, PA 19038

WESTTOWN:                                   Leased            11/99                      7                     32,496
Marketplace Shopping Center
1502 West Chester Pike
West Chester, PA 19382

KENNETT SQUARE:                             Leased            12/03                    161                     23,596
New Garden Center
345 Scarlett Road
Kennett Square, PA 19348

WEST GROVE:                                  Owned             --                      133                     17,386
106 West Evergreen Street
West Grove, PA 19390

WAYNE:                                      Leased            08/01                     --                     25,491
Chesterbrook Village Center
500 Chesterbrook Boulevard, Suite B-5
Wayne, PA 19087
</TABLE>

                                     -45-
<PAGE>   47

<TABLE>
<CAPTION>
                                                                             Net Book Value of
                                                                                Property &
(in  thousands)                                                                 Leasehold
                                                              Lease          Improvements at
                                           Owned or         Expiration         December 31,           Deposits at
                 Location                   Leased             Date               1998(1)           December 31, 1998
-------------------------------------- ----------------- --------------- ------------------------ ---------------------
<S>                                          <C>             <C>                          <C>                 <C>
LANSDALE:                                    Leased           06/99                         $23               $50,791 
521 West Main Street                                                                                                  
Lansdale, PA 19446                                                                                                    
                                                                                                                      
HILLCREST:                                   Leased           07/02                         --                 31,459 
Hillcrest Shopping Center                                                                                             
638 East Main Street                                                                                                  
Lansdale, PA 19446                                                                                                    
                                                                                                                      
SUMNEY FORGE:                                Leased           08/99                           8                39,102 
Sumney Forge Square                                                                                                   
1601 Valley Forge Road                                                                                                
Lansdale, PA 19446                                                                                                    
                                                                                                                      
SOUDERTON:                                    Owned            --                           198                17,162 
705 Route 113                                                                                                         
Souderton, PA 18964                                                                                                   
                                                                                                                      
CONSHOHOCKEN:                                Leased           10/09                         245                81,304 
Plymouth Square Shopping Center                                                                                       
200 West Ridge Pike, Suite 108                                                                                        
Conshohocken, PA 19428                                                                                                
                                                                                                                      
PHOENIXVILLE:                                Leased           03/12                         426                20,815 
Maple Lawn Village Center                                                                                             
510 Kimberton Road                                                                                                    
Phoenixville, PA 19460                                                                                                
                                                                                                                      
ROYERSFORD:                                  Leased           01/16                         309                 4,934 
Limerick Square                                                                                                       
70 Buckwalter Road, Suite 650                                                                                         
Royersford, PA 19468                                                                                                  
                                                                                                                      
TACONY:                                      Leased           02/02                         --                 57,954 
6958 Torresdale Avenue                                                                                                
Philadelphia, PA 19135                                                                                                
                                                                                                                      
HOLMESBURG:                                  Leased           07/00                          15                39,227 
8729 Frankford Avenue                                                                                                 
Philadelphia, PA 19136                                                                                                
                                                                                                                      
ACADEMY:                                     Leased           02/02                           5                33,404 
3292 Red Lion Road                                                                                                    
Philadelphia, PA 19114                                                                                                
                                                                                                                      
MAYFAIR:                                      Owned            --                           326                25,681 
7425 Frankford Avenue                                                                                         
Philadelphia, PA 19136
</TABLE>

                                     -46-
<PAGE>   48


<TABLE>
<CAPTION>
                                                                             Net Book Value of
                                                                                Property &
(in  thousands)                                                                 Leasehold
                                                              Lease          Improvements at
                                           Owned or         Expiration         December 31,           Deposits at
                 Location                   Leased             Date               1998(1)           December 31, 1998
-------------------------------------- ----------------- --------------- ------------------------ ---------------------
<S>                                        <C>                <C>                      <C>                  <C>
5TH & PENN STREETS:                          Owned              --                       $1,105               $43,733
445 Penn Street
Reading, PA 19601

9TH & SPRING STREETS:                        Owned              --                          404                29,799
956 North Ninth Street
Reading, PA 19604

LANCASTER AVENUE:                           Leased             12/04                         31                38,556
830 Lancaster Avenue
Reading, PA 19607

MOHNTON:                                     Owned              --                          453                25,536
14 West Wyomissing Avenue
Mohnton, PA 19540

TEMPLE:                                      Owned              --                          322                44,643
4950 Kutztown Road
Temple, PA 19560

RIVERSIDE:                                   Owned              --                          330                31,071
2040 Centre Avenue
Reading, PA 19605

HEIDELBERG:                                 Leased             06/07                         75                30,914
4641 Penn Avenue
Sinking Spring, PA 19608

KUTZTOWN:                                    Owned              --                          273                20,316
601 East Main Street
Kutztown, PA 19530

EXETER:                                     Leased             03/00                         35                33,509
4215 Perkiomen Avenue
Reading, PA 19606

BIRDSBORO:                                  Leased             09/01                         18                15,367
350 West Main Street
Birdsboro, PA 19508

LEBANON VALLEY:                              Owned              --                          317                28,966
2203 West Cumberland Street
Lebanon, PA 17042

LEBANON:                                     Owned              --                          149                 1,828
152 North Eighth Street
Lebanon, PA 17046

WYOMISSING:                                 Leased             03/00                          2                 2,554
320 Abington Drive
Wyomissing, PA 19610
</TABLE>

                                     -47-


<PAGE>   49

<TABLE>
<CAPTION>
                                                                             Net Book Value of
                                                                                Property &
(in  thousands)                                                                 Leasehold
                                                              Lease          Improvements at
                                           Owned or         Expiration         December 31,           Deposits at
                 Location                   Leased             Date               1998(1)           December 31, 1998
-------------------------------------- ----------------- --------------- ------------------------ ---------------------

SUPERMARKET BRANCHES:
<S>                                        <C>               <C>                           <C>                <C>
GIANT-WHITEHALL:                            Leased            11/99                          $33               $8,996
MacArthur Towne Centre
2540 MacArthur Road, Suite 200
Whitehall, PA 18052

REDNER'S COLLEGEVILLE:                      Leased            01/10                           52                8,027
Redner's Warehouse Market
Marketplace at Collegeville
201 Second Avenue, Suite 100
Collegeville, PA 19426

GIANT-FAIRLESS HILLS:                       Leased            01/00                           37               11,781
Fairless Hills Shopping Center
473 Oxford Road South
Fairless Hills, PA 19030

GIANT-SINKING SPRING:                       Leased            06/00                           54                7,705
Spring Towne Center
2643 Shillington Road
Sinking Spring, PA 19608

GIANT-ALDEN:                                Leased            12/01                          104                5,249
Providence Village
543 North Oak Avenue
Alden, PA 19018

GIANT-BLUE BELL:                            Leased            07/00                           52               11,798
The Shoppes at Blue Bell
1760 DeKalb Pike
Blue Bell, PA 19422

GIANT-TREXLERTOWN:                          Leased            03/01                           81                7,577
Trexler Mall
6900 Hamilton Boulevard, PO Box 977
Trexlertown, PA 18087

GIANT-TROOPER:                              Leased            03/01                           82                6,208
Audubon Square Shopping Center
2668 Egypt Road
Norristown, PA 19403

REDNER'S-DOYLESTOWN:                        Leased            09/10                           59                6,458
Doylestown Pointe
1661 Easton Road, Suite 2
Warrington, PA 18976
</TABLE>

                                     -48-
<PAGE>   50


<TABLE>
<CAPTION>
                                                                             Net Book Value of
                                                                                Property &
(in  thousands)                                                                 Leasehold
                                                              Lease          Improvements at
                                           Owned or         Expiration         December 31,           Deposits at
                 Location                   Leased             Date               1998(1)           December 31, 1998
-------------------------------------- ----------------- --------------- ------------------------ ---------------------
<S>                                        <C>               <C>                          <C>                 <C>
GUINTA'S THRIFTWAY:                         Leased             02/10                        $48                $8,676
Bradford Plaza
700 Downingtown Pike, Suite 130
West Chester, PA 19380

CLEMENS-EXTON:                              Leased             06/10                         49                 5,366
Lionville Shopping Center
170 Eagleview Boulevard
Exton, PA 19341

WEIS-POTTSTOWN:                             Leased             07/10                         57                 6,158
The Pottstown Center
223 Shoemaker Road
Pottstown, PA 19464

THRIFTWAY-PORT RICHMOND:                    Leased             09/10                         68                 8,737
Port Richmond Village
2497 Aramingo Avenue, Suite 2
Philadelphia, PA 19125

SHOPRITE-FAR NORTHEAST:                     Leased             09/11                        108                11,772
Boulevard Plaza
11000 Roosevelt Boulevard
Philadelphia, PA 19116

GIANT-SOUTHAMPTON:                          Leased             02/02                        104                 5,127
Southampton Shopping Center
466 A Second Street Pike
Southampton, PA 18966

SUPERFRESH-COTTMAN :                        Leased             04/02                        126                 4,592
Cottman & Bustleton Center
2151 Cottman Avenue
Philadelphia, PA 19149

GIANT-HORSHAM:                              Leased             06/02                        107                 3,191
Horsham Point Shopping Center
314 Horsham Road, Unit A
Horsham, PA 19044

GIANT-WARMINSTER:                           Leased             06/03                        190                 1,278
Cedar Pointe Plaza
720-D West Street Road
Warminster, PA 18974

SPRING HOUSE CLEMENS:                       Leased             11/03                        196                   320
Spring House Center/Clemens Market
563 Village Center, Suite - A
Spring House, PA 19477
</TABLE>

                                     -49-
<PAGE>   51

<TABLE>
<CAPTION>
                                                                             Net Book Value of
                                                                                Property &
(in  thousands)                                                                 Leasehold
                                                              Lease          Improvements at
                                           Owned or         Expiration         December 31,           Deposits at
                 Location                   Leased             Date               1998(1)           December 31, 1998
-------------------------------------- ----------------- --------------- ------------------------ ---------------------
<S>                                        <C>               <C>                          <C>                  <C>
OXFORD - SHOPRITE:                          Leased            11/03                        $190                  $225
Lawndale Plaza
6301 Oxford Avenue
Philadelphia, PA 19111
</TABLE>






















--------------------------------------------------------
(1) Does not include furniture, fixtures and equipment.

                                     -50-

<PAGE>   52

The following table sets forth certain information relating to ComNet's offices
at December 31, 1998.



<TABLE>
<CAPTION>
        Location                             Year Opened         Owned or Leased        Lease Expiration Date
---------------------------------------  -------------------  --------------------  ---------------------------
<S>                                               <C>              <C>                       <C>
WARWICK, RHODE ISLAND:                            1988              Leased                    06/99
875 Centerville Road
Warwick, RI 02886

HORSHAM, PENNSYLVANIA:                            1988              Leased                    03/01
Horsham Business Center
300 Welsh Road, Building #4 Suite 150
Horsham, PA 19044

MOUNT LAUREL, NEW JERSEY:                         1988              Leased                    03/99
533 Fellowship Road, Suite 250
Mount Laurel, NJ 08054

LEBANON, NEW JERSEY                               1998              Leased                    01/99
108 Main street
Lebanon, NJ 08833

READING, PENNSYLVANIA:                            1997              Owned                      --
Commonwealth Bank Center
10 North Fifth Street
Reading, PA 19601

FAIRFAX, VIRGINIA:                                1998              Leased                    04/03
10400 Easton Plaza, Suite 103
Fairfax, VA 22030

CONSHOHOCKEN, PENNSYLVANIA:                       1997              Leased                    01/99
207 Fayette Street
Conshohocken, PA 19428

NORRISTOWN, PENNSYLVANIA:                         1997               Owned                      --
104 West Main Street
Norristown, PA 19401

BALTIMORE, MARYLAND: (2)                          1997              Leased                    09/99
7939 Honeygo Boulevard
Building # 3, Suite 224
Baltimore, MD 21236

BETHESDA, MARYLAND: (2)                           1997              Leased                    09/99
4915 St. Elmo Avenue, Suite 205
Bethesda, MD 21236

MILLERSVILLE, MARYLAND: (2)                       1997              Leased                    08/00
1120 Benfield Boulevard, Suite A
Millersville, MD 21108
</TABLE>



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

(2) Operate under the trade name of Homestead Mortgage.




                                     -51-

<PAGE>   53


ITEM 3.  LEGAL PROCEEDINGS.

       The Company is involved in routine legal proceedings occurring in the
ordinary course of business, which in the opinion of management, in the
aggregate, will not have a material adverse effect on the consolidated financial
condition and results of operations of the Company.

       In August 1995, the Bank commenced litigation against the United States
in the U.S. Court of Federal Claims (the "Claims Court") seeking to recover
damages or other monetary relief for the loss of its supervisory goodwill. The
suit alleges that the treatment of such goodwill mandated by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") constitutes
a breach of contract between the Bank and the United States and an unlawful
taking of property by the United States without just compensation or due process
in violation of the U.S. Constitution. The suit emanates from the Bank's
acquisition of First Family Federal Savings and Loan Association of Lansdale,
Pennsylvania in 1982, pursuant to which the government agreed to the use of the
purchase method of accounting under generally accepted accounting principles and
the recording of approximately $61 million of goodwill as an asset resulting
from the voluntary supervisory merger. (There was no financial assistance from
the Federal Savings and Loan Insurance Corporation.) Since the enactment of
FIRREA, numerous suits have been filed on behalf of thrift institutions and
their holding companies alleging similar theories for breach of contract. The
goodwill balance associated with the First Family acquisition at the point of
FIRREA enactment in 1989 was $48 million.

       In the past several years, the Claims Court, the United States Court of
Appeals for the Federal Circuit, and the United States Supreme Court have handed
down decisions relating to the liability portion of the breach of contract
claims brought by other thrift institutions. On July 1, 1996, the United States
Supreme Court ruled in the consolidated cases (United States v. Winstar
Corporation) and determined that when Congress adopted the accounting changes to
supervisory goodwill specified in FIRREA, the government had breached
contractual agreements with these thrift institutions regarding the accounting
rules. As of February 1999, the Claims Court had ruled in favor of thrift
plaintiffs on liability for breach of contract in four additional
Winstar-related cases. In February 1999, the Bank filed a motion for summary
judgement on liability for breach of contract. However, the Courts may determine
that the Bank's claims involve materially different facts and/or legal issues as
to render the Winstar case inapplicable to the litigation and thereby result in
a different conclusion from that of the Winstar case. Moreover, the damages
portion of the claims presented by the Winstar-related plaintiff thrift
institutions is currently being litigated and could take several years to
resolve. There can be no assurance that the Bank will prevail in its action, and
if it does prevail, that the Claims Court will find that the Bank is entitled to
any substantial amount of damages.

       On October 31, 1996, the Bank filed a complaint against CoreStates
Financial Corporation and others in the Court of Common Pleas for Chester
County, Pennsylvania for damages related to Commonwealth's acquisition on June
28, 1996, of twelve former Meridian Bank branch offices from CoreStates. The
complaint alleges, among other things, that CoreStates breached the branch sales
agreement and that Commonwealth's relationships with its new customers were
damaged as a result of negligence and errors committed by CoreStates and its
affiliates in connection with the

                                      -52-


<PAGE>   54



conversion of the former Meridian Bank customers to Commonwealth's banking
system and the reissuance of bank cards for use at Commonwealth's automated
teller machines.

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

         Not Applicable

                                      -53-


<PAGE>   55



PART II.

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

       The information required herein is incorporated by reference from page 59
of the Company's 1998 Annual Report to Stockholders ("1998 Annual Report").

ITEM 6.  SELECTED FINANCIAL DATA.

       The information required herein is incorporated by reference from page 12
of the 1998 Annual Report.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

       The information required herein is incorporated by reference from pages
13 to 28 of the 1998 Annual Report.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

       The information required herein is incorporated by reference from pages
22 to 25 of the 1998 Annual Report.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

       The information required herein is incorporated by reference from pages
32 to 58 of the 1998 Annual Report.

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

       Not Applicable.

PART III.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

       The information required herein is incorporated by reference from the
definitive proxy statement of the Company for the Annual Meeting of Stockholders
to be filed with the Commission ("Definitive Proxy Statement").

ITEM 11.  EXECUTIVE COMPENSATION.

       The information required herein is incorporated by reference from the
Definitive Proxy Statement.

                                      -54-


<PAGE>   56



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

       The information required herein is incorporated by reference from the
Definitive Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       The information required herein is incorporated by reference from the
Definitive Proxy Statement.

PART IV.

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

         (a)  DOCUMENTS FILED AS PART OF THIS REPORT.

  (1) The following financial statements are incorporated by reference from Item
8 hereof (see Exhibit 13):

            Report of Independent Public Accountants
            Consolidated Balance Sheets as of December 31, 1998 and 1997
            Consolidated Statements of Income for the years ended December 31,
            1998, 1997 and 1996
            Consolidated Statements of Shareholders' Equity for the years ended
            December 31, 1998, 1997 and 1996
            Consolidated Statements of Cash Flows for the years ended
            December 31, 1998, 1997 and 1996
            Notes to Consolidated Financial Statements

  (2) All schedules for which provision is made in the applicable accounting
regulation of the Commission are omitted because of the absence of conditions
under which they are required or because the required information is included in
the financial statements and related notes thereto.

  (3) The following exhibits are filed as part of this Form 10-K and this list
includes the Exhibit Index.

<TABLE>
<CAPTION>
Exhibit Index
--------------
                                                                                   Location
                                                                                   --------
<S>       <C>                                                                      <C>
3.1       Articles of Incorporation of Commonwealth Bancorp, Inc.                  (1)
3.2       Bylaws of Commonwealth Bancorp, Inc.                                     (1)
4.1       Form of Stock Certificate of Commonwealth Bancorp, Inc.                  (1)
10.1      1993 Amended Stock Incentive Plan**                                      (2)
10.2      1993 Amended Directors' Stock Option Plan**                              (2)
10.3      1993 Amended Management Recognition Plan for Officers**                  (2)
</TABLE>

                                      -55-


<PAGE>   57



<TABLE>
<S>       <C>                                                                       <C>
10.4      1993 Amended Management Recognition Plan for Directors**                  (2)
10.5      1996 Amended Stock Option Plan**                                          (2)
10.6      1996 Amended Recognition and Retention Plan**                             (2)
10.7      Employee Stock Ownership Plan and Trust**                                 (1)
10.8      Employment Agreements between Commonwealth Bancorp
            and Commonwealth Bank and Charles H. Meacham**                          *
10.9      Employment Agreements between Commonwealth Bancorp
            and Commonwealth Bank and Patrick J. Ward**                             *
10.10     Employment Agreements between Commonwealth Bancorp
            and Commonwealth Bank and Charles M. Johnston**                         *
10.11     Employment Agreement between Commonwealth Bank and William J. Monnich**   *
10.12     Employment Agreement between Commonwealth Bank and Peter A. Kehoe**       *
10.13     Employment Agreement between Commonwealth Bank and David K. Griest**      *
10.14     Employment Agreement between Commonwealth Bank and Brian C. Zwaan**       *
10.15     Excess Benefit Plan of Commonwealth Bank**                                (3)
10.16     Supplemental Executive Retirement Plan of Commonwealth Bank**             (3)
13.0      1998 Annual Report to Stockholders                                        *
22.0      Subsidiaries of the Registrant - Reference is made to
            "Item 1.  Business - Subsidiaries" for the required information
23.0      Consent of Independent Public Accountants                                 *
27.0      Financial Data Schedule                                                   *
</TABLE>

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

*   Filed hereto

**  Management contract or compensatory plan or arrangement.

(1) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 filed with the Commission on December 18, 1995, as amended.

(2) Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the three months ended March 31, 1998 filed with the Commission on May
14, 1998.

(3) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1997 filed with the Commission on March 18,
1998.

          (b) REPORTS ON FORM 8-K.

          Not Applicable.

                                     -56-


<PAGE>   58



                                  SIGNATURES

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

                                     COMMONWEALTH BANCORP, INC.

                                     By:         /s/ Charles H. Meacham
                                                 -----------------------
                                                 Charles H. Meacham
                                                 Chairman of the Board,
                                                  Chief Executive Officer

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



/s/ Charles H. Meacham                                  March 16, 1999
-----------------------
Charles H. Meacham
Chairman of the Board,
 Chief Executive Officer
(principal executive officer)


/s/ Patrick J. Ward                                     March 16, 1999
--------------------
Patrick J. Ward
President, Chief
 Operating Officer


/s/ Charles M. Johnston                                 March 16, 1999
-----------------------
Charles M. Johnston
Senior Vice President, Chief
 Financial Officer
(principal financial and
  accounting officer)

                                     -57-


<PAGE>   59


/s/ George C. Beyer, Jr.                               March 16, 1999
-------------------------
George C. Beyer, Jr.
Director


/s/ Joseph E. Colen, Jr.                               March 16, 1999
-------------------------
Joseph E. Colen, Jr.
Director


/s/ Joanne Harmelin                                    March 16, 1999
-----------------------
Joanne Harmelin
Director


/s/ Michael T. Kennedy                                 March 16, 1999
-----------------------
Michael T. Kennedy
Director


/s/ Harry P. Mirabile                                  March 16, 1999
----------------------
Harry P. Mirabile
Director


/s/ Nicholas Sclufer                                   March 16, 1999
----------------------
Nicholas Sclufer
Director





                                     -58-