<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, 1997

                                       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)

<TABLE>
<CAPTION>
                     PENNSYLVANIA                               23-2828883
<S>                                                       <C>
             (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)
</TABLE>

       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 10, 1998, the aggregate value of the 15,416,612 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
846,166 shares held by all directors and officers of the Registrant as a group,
was approximately $308.3 million. This figure is based on the closing sales
price of $20 per share of the Registrant's Common Stock on March 10, 1998 as
reported by the Nasdaq Stock Market.

Number of shares of Common Stock outstanding as of March 10, 1998: 16,262,778

                       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, 1997 are incorporated into Part II, Items 6 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, 1997 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, 1997, 56
full-service offices located in southeast Pennsylvania.

         ComNet Mortgage Services ("ComNet"), a division of the Bank, also
located in Norristown, conducts business through ten loan origination offices
located in Pennsylvania, Connecticut, New Jersey, and Rhode Island. ComNet also
conducts business through its wholesale network, which includes correspondents
in 29 states. In January 1997, Commonwealth acquired selected assets of
Homestead Mortgage, Inc. ("Homestead Mortgage"), a mortgage company
headquartered in Millersville, Maryland. Among the assets acquired by
Commonwealth were production branches located in Millersville, Bethesda,
Whitemarsh, and Woodlawn, Maryland, and Media, Pennsylvania. The Millersville,
Bethesda, and Whitemarsh branches continue to operate under the trade name of
Homestead Mortgage. The Woodlawn, Maryland and Media, Pennsylvania locations
were closed subsequent to the acquisition as a result of the consolidation of
their operations with other ComNet and Homestead Mortgage branches.

         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
Office of Thrift Supervision (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.


                                       -1-
<PAGE>   3
MARKET AREA

         The Bank's 56 full-service branch offices, which include 17 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,
will enable the Bank to compete effectively with larger regional and national
banks.

         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, 1997, loans held for investment totaled $1.3
billion, which represented 56% 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, 1997, approximately 47%
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,           
                                       -------------------------------------------------------------------------------------

                                                  1997                         1996                         1995               
                                       ---------------------------     -----------------------     -----------------------


                                                        Percent of                    Percent                   Percent of  
                                         Amount           Total        Amount        of Total      Amount         Total     
                                         ------          -------       ------       ----------     ------        -------    
                                                                                                    (dollars in thousands)
<S>                                    <C>              <C>         <C>             <C>          <C>            <C>         
Mortgage loans:
  1-4 family residential (1)           $  958,542         75.51%    $  857,053        76.37%     $655,152          81.08%   
Consumer loans:                                                                                                             
  Equity lines of credit                   41,592          3.28         49,136         4.38        44,432           5.50    
  Second mortgage                          98,934          7.79         77,304         6.89        48,653           6.03    
  Other                                    54,267          4.28         42,867         3.82        18,009           2.23    
                                        ---------        ------      ---------       ------       -------         ------    
    Total consumer loans                  194,793         15.35        169,307        15.09       111,094          13.76    
Commercial loans:                                                                                                           
  SBA  (2)                                 20,016          1.58         25,104         2.24        29,472           3.65    
  Commercial real estate (3)               71,508          5.63         35,452         3.15         9,386           1.16    
  Business loans (3)                       24,456          1.93         35,380         3.15         2,801           0.35    
                                        ---------        ------      ---------       ------       -------         ------    
    Total commercial loans                115,980          9.14         95,936         8.54        41,659           5.16    
                                        ---------        ------      ---------       ------       -------         ------    
    Total loans receivable              1,269,315        100.00%     1,122,296       100.00%      807,905         100.00%   
                                        ---------        ======      ---------       ======       -------         ======   
                                                                                                                            
Less:                                                                                                                       
  (Premium)/Discount on                                                                                                     
    loans purchased                       (2,314)                      (3,655)                      1,004                   
  Allowance for loan losses                 9,024                        9,971                      7,485                   
  Deferred loan fees                        3,009                        2,866                      2,681                   
  Allowance for imputed interest                -                            -                          -                      
                                        ---------                    ---------                    -------                   
Loans receivable, net                  $1,259,596                   $1,113,114                   $796,735                   
                                       ==========                   ==========                   ========                   
</TABLE>

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

                                               1994                           1993
                                       ------------------------    ---------------------------


                                                     Percent of                     Percent of
                                        Amount          Total       Amount            Total
                                        ------         -------     ------            ------
                                       
<S>                                    <C>             <C>         <C>              <C>   
Mortgage loans:
  1-4 family residential (1)           $450,959         75.55%     $369,456          72.02%
Consumer loans:                                                    
  Equity lines of credit                 49,246          8.26        56,862          11.08
  Second mortgage                        42,883          7.18        31,449           6.13
  Other                                  12,013          2.01         9,701           1.89
                                        -------        ------       -------         ------ 
    Total consumer loans                104,142         17.45        98,012          19.10
Commercial loans:                                                  
  SBA  (2)                               35,482          5.94        40,973           7.99
  Commercial real estate (3)              4,679          0.78         4,543           0.89
  Business loans (3)                      1,671          0.28             -              -
                                        -------        ------       -------         ------ 
    Total commercial loans               41,832          7.00        45,516           8.88
                                        -------        ------       -------         ------ 
    Total loans receivable              596,933        100.00%      512,984         100.00%
                                        -------        ======       -------         ====== 
                                                                   
Less:                                                              
  (Premium)/Discount on                                            
    loans purchased                       2,864                       4,007
  Allowance for loan losses               7,307                       7,309
  Deferred loan fees                      3,555                       2,595
  Allowance for imputed interest             63                          99
                                        -------                     -------         
Loans receivable, net                  $583,144                    $498,974
                                       ========                    ========
</TABLE>

(1)      At December 31, 1997, $613.6 million, or 64%, 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, 1997, 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,                                           2001-        2003-        2009-      There-
                                1997          1998        1999         2000        2002         2008         2014        after
                            -----------     ---------   --------    ---------    ---------   ----------    ---------   --------
                                                                   (in thousands)
<S>                         <C>             <C>         <C>         <C>         <C>          <C>          <C>         <C>     
Mortgage loans:
   1-4 family residential   $  958,542      $25,404     $22,775     $23,711     $ 50,986     $166,321     $184,966    $484,379
Consumer                       194,793       35,114      22,199      20,515       31,630       52,101       18,837      14,397
Commercial real estate          71,508        5,121       5,361       5,699       14,411       31,058        9,846          12
Business loans                  24,456        1,943       2,129       2,332        4,236        8,216        5,600           -
SBA                             20,016        1,574       1,186       1,153        2,414        7,157        4,169       2,363
                            ----------      -------     -------     -------     --------     --------    ---------   ---------
     Total  (1)             $1,269,315      $69,156     $53,650     $53,410     $103,677     $264,853     $223,418    $501,151
                             =========       ======      ======      ======      =======      =======      =======     =======
</TABLE>


(1)      Of the $1.2 billion of loan principal repayments contractually due
after December 31, 1998, $496.3 million have fixed rates of interest and $703.8
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,
                                              ------------------------------------------------
                                                  1997               1996              1995
                                              -----------        ------------       ----------
                                                                (in thousands)
<S>                                           <C>                <C>                <C>      
Gross loans held for investment at
  beginning of period                         $ 1,122,296        $   807,905        $ 596,933
Originations of loans held for
  investment:
    1-4 family residential                        107,628             52,304           35,319
    Consumer                                       88,809             58,411           48,432
    Commercial real estate                         32,905             16,848            5,291
    Business loans                                 14,424             16,955            4,766
                                              -----------        -----------        ---------
      Total originations                          243,766            144,518           93,808
Purchases of loans held for investment:
    1-4 family residential (1)                    152,480            257,575          234,963
    Consumer                                         --               45,579             --
    Commercial real estate                           --               26,110             --
    Business loans                                   --               18,269             --
    SBA                                              --                 --               --
                                              -----------        -----------        ---------
      Total purchases                             152,480            347,533          234,963
      Total originations and purchases            396,246            492,051          328,771
Repayments                                       (249,227)          (177,660)        (117,799)
                                              -----------        -----------        ---------
Net activity in loans held for
  investment                                      147,019            314,391          210,972
                                              -----------        -----------        ---------
Gross loans held for investment at end
  of period                                   $ 1,269,315        $ 1,122,296        $ 807,905
                                              ===========        ===========        =========
</TABLE>


(1)      The $152.5 million of 1-4 family residential loans purchased during
1997 consisted of $21.3 million of adjustable rate loans purchased by the
Company from third parties and $131.2 million of loans generated through
Commonwealth's wholesale correspondent network. The $257.6 million of 1-4 family
residential loans purchased during 1996 consisted of $79.9 million of adjustable
rate loans purchased by the Company from third parties, $148.3 million of loans
generated through Commonwealth's wholesale correspondent network, and $29.4
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.

        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.


                                       -5-
<PAGE>   7
         Retail loans are originated by Commonwealth's own sales force of
approximately 52 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, which relocated along with the
Company's headquarters in January 1997 from Malvern, Pennsylvania to 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 195 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.

         Mortgage loan originations totaled $585.1 million and $462.1 million
during 1997 and 1996, respectively, which included $192.4 million and $233.8
million, respectively, of loans originated through the wholesale correspondent
lending network.


                                       -6-
<PAGE>   8
         Commonwealth sells substantially all of the fixed-rate loans it
originates which conform to FNMA/FHLMC requirements to investors in the
secondary market. The Company retains essentially all of the adjustable rate
loans, as well as the 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 $227,150 for loans secured by a
single-family, owner-occupied residence) and loans to employees of the Company.
The Company also has been retaining fully amortizing fixed-rate loans with
maturities of ten years.

         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.

         The Company generally retains the rights to service the conventional
loans it sells, while selling the FHA-insured and VA-guaranteed loans originated
by it on a servicing-released basis. As a result, the loans serviced by
Commonwealth for others do not include any FHA-insured or VA-guaranteed loans.

         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,
                                        ---------------------------------------------------------------------------
                                                  1997                      1996                       1995
                                        ----------------------     ----------------------     ---------------------
                                                       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                          $238,799       1,286       $200,558         979       $208,865       1,086
  FHA/VA                                    --          --             --          --             --          --
                                        --------       -----       --------       -----       --------       -----
    Total Company                        238,799       1,286        200,558         979        208,865       1,086
                                        --------       -----       --------       -----       --------       -----
Originations for others (1):
  Conventional                           249,741       2,081        232,622       2,176        260,300       2,362
  FHA/VA                                  96,606       1,014         28,893         322         25,594         281
                                        --------       -----       --------       -----       --------       -----
    Total Other                          346,347       3,095        261,515       2,498        285,894       2,643
                                        --------       -----       --------       -----       --------       -----
Total Company and others                $585,146       4,381       $462,073       3,477       $494,759       3,729
                                        ========       =====       ========       =====       ========       =====

Retained by the Company (1)(2):
  Conventional                          $238,799       1,286       $200,558         979       $208,865       1,086
  FHA/VA                                    --          --             --          --             --          --
                                        --------       -----       --------       -----       --------       -----
    Total Company                        238,799       1,286        200,558         979        208,865       1,086
                                        --------       -----       --------       -----       --------       -----
Sales to Others (1)(3):
  Conventional                           233,299       2,116        236,190       2,275        264,538       2,332
  FHA/VA                                  94,654         979         29,781         331         14,738         161
                                        --------       -----       --------       -----       --------       -----
    Total Other                          327,953       3,095        265,971       2,606        279,276       2,493
                                        --------       -----       --------       -----       --------       -----
Total Company and Other                 $566,752       4,381       $466,529       3,585       $488,141       3,579
                                        ========       =====       ========       =====       ========       =====
Other adjustments to
  loans held for sale (4)               $  1,845                   $ (4,210)                  $    850
                                        ========                   ========                   ========
Increase/(decrease) in
 mortgage loans held for sale           $ 20,239                   $ (8,666)                  $  7,468
                                        ========                   ========                   ========
</TABLE>


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

                                                  1997                        1996                      1995
                                        ======================      ======================     =====================
                                                        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                             $186,086       1,682       $166,770       1,542       $116,455       1,078
Maryland                                  147,713       1,069              0           0              0           0
New Jersey                                 32,236         222         28,863         220         17,081         146
Rhode Island                               19,776         207         20,328         222         21,950         227
Connecticut                                 6,930          58         10,433          90          9,489          79
Florida                                         0           0          1,894          21         11,805         124
                                         --------       -----       --------       -----       --------       -----
    Total  Retail                         392,741       3,238        228,288       2,095        176,780       1,654
                                         --------       -----       --------       -----       --------       -----

Wholesale:
Pennsylvania                               37,551         276         44,328         336         33,671         255
Maryland                                   35,080         164         50,049         268         82,023         486
Virginia                                   29,624         139         42,326         207         72,794         410
New Jersey                                 19,757         147         17,250         106         17,163         134
North Carolina                             12,276          66          7,570          54         22,533         187
Delaware                                   11,904          95         16,682         133         24,764         201
Arizona                                     8,393          30          3,633          17              0           0
Texas                                       5,407          27          3,768          22          2,924          17
Massachusetts                               4,960          25          1,276           4              0           0
Georgia                                     4,901          25         13,551          60         18,159          85
Illinois                                    3,011          15          6,214          32            749           4
Ohio                                        2,948          18          2,831          14          9,925          81
Colorado                                    2,464          13          1,269           5              0           0
Connecticut                                 2,241          18            234           1          1,934          17
Michigan                                    2,045          13              0           0              0           0
South Carolina                              1,756          13          1,151           6          1,388          13
Indiana                                     1,644          13          1,670          13            149           1
Florida                                     1,559          13          9,156          54         12,023          93
Wisconsin                                   1,150           9            203           1         10,236          49
Louisiana                                   1,065           8            769           2              0           0
Washington, D.C                               633           2            460           2              0           0
Kentucky                                      590           3            264           2            865          10
New York                                      390           4              0           0            274           2
Kansas                                        339           2          1,543           8          1,222           9
Tennessee                                     230           1          1,225           8              0           0
Alabama                                       214           1          6,053          24          3,941          14
West Virginia                                 100           1            171           2            203           1
Rhode Island                                   90           1              0           0              0           0
Missouri                                       83           1            139           1              0           0
California                                      0           0              0           0          1,039           6
                                         --------       -----       --------       -----       --------       -----
    Total Wholesale                       192,405       1,143        233,785       1,382        317,979       2,075
                                         --------       -----       --------       -----       --------       -----
Total Retail and Wholesale (1)           $585,146       4,381       $462,073       3,477       $494,759       3,729
                                         ========       =====       ========       =====       ========       =====
</TABLE>

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

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


                                      -9 -
<PAGE>   11
         CONSUMER LENDING ACTIVITIES. The Company offers consumer loans to its
customers, which are obtained primarily through existing and walk-in customers
and direct advertising. At December 31, 1997, $194.8 million, or 15%, 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 at 80% or less,
and are generally for amounts less than $100,000. At December 31, 1997, second
mortgage loans totaled $98.9 million, or 8%, of the Company's total loan
portfolio.

         The Company's consumer loan portfolio is also comprised of a
significant amount of home equity lines of credit, which 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 at 75% or less, and are
generally for amounts less than $100,000. At December 31, 1997, home equity
lines of credit amounted to $41.6 million, or 3%, of the Company's total loan
portfolio. The Company had $102.7 million of total commitments pursuant to such
equity lines of credit outstanding at year-end 1997.

         The remaining $54.3 million of the Company's consumer loan portfolio at
December 31, 1997 was comprised primarily of loans secured by new and used
automobiles, recreational vehicles, and personal loans and lines of credit. The
Company also commenced marketing credit cards to its deposit customers in 1996.
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. Commencing in late 1993, the Company
expanded its commercial lending activities by developing the capacity to make
commercial business loans directly to small businesses located in its primary
market areas in Pennsylvania, as well as loans secured by owner-occupied
commercial real estate in such areas. 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 range in size from $0.25 million to $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
commercial loans are obtained primarily through loan officer solicitation,
branch referrals, and direct inquiry. As of December 31, 1997, commercial loans
(other than loans generated by the Small


                                      -10-
<PAGE>   12
Business Administration) totaled $96.0 million, or 8%, of the Company's total
loan portfolio. Of that amount, $44.4 million were acquired in conjunction with
the Berks Acquisition. For additional information, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Acquisitions" in
Item 7 hereto. At December 31, 1997, commercial loans (other than SBA loans)
were comprised of $71.5 million of commercial real estate loans and $24.5
million of business loans. During December 1997, Commonwealth reclassified
approximately $11.5 million of business loans to commercial real estate loans.
However, previously reported amounts were not restated.

         Commercial real estate loans originated by the Company generally have
terms of five to fifteen years and 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. Such 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.

         From time to time the Company purchases from other entities
participation interests in loans and securities backed by loans to commercial
businesses which are fully guaranteed by the SBA. At December 31, 1997, the
Company had $20.0 million of such loans or securities, which represented 2% of
the Company's total loan portfolio.

         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, 1997, the Company had $3.0 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


                                      -11-
<PAGE>   13
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 0.375% of the
declining principal amount of the loans, plus any late charges.

         At December 31, 1997, Commonwealth was servicing $1.3 billion of loans
for others, as well as $0.9 billion of loans held by Commonwealth for investment
and sale. The portfolio of loans serviced by Commonwealth at December 31, 1997
consisted of approximately 24,200 loans with an average loan balance of
approximately $90,870, a weighted average service fee of approximately 0.35% per
annum (inclusive of excess servicing associated with loans serviced by
Commonwealth for others) and a weighted average remaining contractual term of
approximately 23.3 years. The Company's loan servicing fees totaled $5.2 million
in 1997, $5.2 million in 1996, and $5.5 million in 1995.

         From time to time, the Company evaluates purchased mortgage servicing
rights ("PMSRs") as a means of enhancing noninterest income. In 1990 and 1991,
Commonwealth paid $19.1 million to acquire the servicing rights related to $1.1
billion of loans. In addition, during 1994, the Company began purchasing whole
loans through a wholesale lending network. In connection with the purchase of
these loans, a premium is paid to the correspondent or broker for the right to
service such loans, which is recorded as PMSRs.

         Commonwealth also has sought to expand its mortgage servicing portfolio
by increasing the amount of loans originated and sold on a servicing-retained
basis. Commonwealth generally retains the rights to service the conventional
loans sold, and sells all FHA-insured and VA-guaranteed loans on a
servicing-released basis.

         During the years ended December 31, 1997, 1996 and 1995, Commonwealth
sold $191.4 million, $226.9 million and, $86.1 million of loans originated on a
servicing-retained basis, respectively, and $136.6 million, $39.1 million, and
$193.2 million on a servicing-released basis, respectively. During 1997, the
percentage of loans sold on a servicing-released basis increased, relating
primarily to servicing-released loan sales by Homestead Mortgage. During 1996,
the percentage of loans sold on a servicing-released basis decreased as a result
of a decrease in loan originations of products which Commonwealth generally
sells servicing-released.

         On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." The Company acquires mortgage servicing rights
through the purchase and origination of mortgage loans which are sold or
securitized, generally with servicing retained. SFAS No. 122 requires the
Company to allocate the total cost of the mortgage loans to the mortgage


                                      -12-
<PAGE>   14
servicing rights and to the loans (exclusive of the 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 on loans sold or securitized commencing January 1, 1996, without
retroactive capitalization of mortgage servicing rights retained in such
transactions before adoption of the pronouncement. For the year ended December
31, 1997, the Company recorded originated mortgage servicing rights ("OMSRs") of
$3.3 million, net of a $1.6 million valuation allowance.

         PMSRs, OMSRs, and capitalized excess servicing fees generally are
adversely affected by current and anticipated prepayments resulting from
decreasing interest rates.

         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, 1997, the principal amount of loans serviced by Commonwealth for others that
were subject to this condition aggregated $1.1 billion, of which $26.0 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.

         Although the Company currently intends to continue to expand its loan
servicing portfolio primarily through the sale of conventional loans on a
servicing-retained basis, the Company may, depending on current mortgage
origination volumes and other factors, elect to sell a portion of
newly-originated loans on a servicing-released basis. Management also may
evaluate the acquisition of PMSRs.


                                      -13-
<PAGE>   15
         The following table presents information regarding loans serviced by
Commonwealth at the dates indicated.


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


                                                                1997             1996            1995
                                                            ----------       ----------       -----------
                                                                            (in thousands)
<S>                                                         <C>              <C>              <C>       
Mortgage loans underlying mortgage-backed securities:
  FNMA                                                      $  748,727       $  714,472       $  708,138
  FHLMC                                                        350,216          340,928          346,765
  Other investors                                                  462              615           20,694
                                                            ----------       ----------       ----------
                                                             1,099,405        1,056,015        1,075,597
Mortgage loans serviced for others:
  FNMA                                                          93,364          102,387          103,184
  Other investors                                              110,747          181,488           85,195
                                                            ----------       ----------       ----------
                                                               204,111          283,875          188,379
                                                            ----------       ----------       ----------
Total loans serviced for others                              1,303,516        1,339,890        1,263,976
                                                            ----------       ----------       ----------

Mortgage loans serviced for the Company:
  Loans held for investment                                    836,955          724,207          560,404
  Loans held for sale by Commonwealth                           58,594           23,610           26,385
                                                            ----------       ----------       ----------
                                                               895,549          747,817          586,789
                                                            ----------       ----------       ----------
    Total loans serviced (1)                                $2,199,065       $2,087,707       $1,850,765
                                                            ==========       ==========       ==========
</TABLE>


(1)      PMSRs accounted for $173.7 million, $205.9 million, and $291.3 million
of total loans serviced at December 31, 1997, 1996, and 1995, respectively.


                                      -14-
<PAGE>   16
         The following table sets forth the coupon distribution of loans
serviced by Commonwealth at December 31, 1997.


<TABLE>
<CAPTION>
    Coupon                              Principal Balance of Serviced Loans Relating to or for
----------------         --------------------------------------------------------------------------------------------
                                              Capitalized Excess Servicing
                               PMSRs            Fees, OMSRs and Other (1)         The Company (2)            Total
                         ---------------    ------------------------------    ----------------------    -------------
                                                             (dollars in thousands)

<S>                      <C>                <C>                               <C>                       <C>         
5.00% or less             $      390              $          831                    $   14,613          $     15,834
5.01 - 6.00%                       -                      14,141                        59,741                73,882
6.01 - 7.00%                   3,606                     245,353                       173,367               422,326
7.01 - 8.00%                  23,418                     537,351                       404,426               965,195
8.01 - 9.00%                  29,368                     258,248                       220,558               508,174
9.01 - 10.00%                 45,741                      53,063                        17,867               116,671
10.01 - 11.00%                55,780                      17,798                         3,429                77,007
11.01 - 12.00%                13,968                       1,532                           584                16,084
12.01 - 13.00%                   661                       1,055                           584                 2,300
13.01 or greater                 806                         406                           380                 1,592
                          ----------               -------------               -     ---------          ------------
                          $  173,738               $   1,129,778                     $ 895,549          $  2,199,065
                          ==========               =============                     =========          ============
</TABLE>


(1)      Includes approximately $128.2 million of loans serviced by Commonwealth
for others which relate neither to capitalized excess servicing fees nor OMSRs.

(2)      Includes loans held for investment and loans held for sale by the
Company.


                                      -15-
<PAGE>   17
         The following table sets forth the geographic distribution of
properties securing the loans serviced by Commonwealth at December 31, 1997.


<TABLE>
<CAPTION>
                                                                   Percentage of Total Principal
      State                         Principal Balance                         Balance
------------------                  -----------------              ------------------------------
                                 (dollars in thousands)
<S>                                 <C>                            <C>   
Pennsylvania                          $1,128,281                               51.31%
New Jersey                               302,844                                13.77
Maryland                                 189,720                                 8.63
Virginia                                 140,312                                 6.38
Connecticut                              103,233                                 4.69
New York                                  49,546                                 2.25
Rhode Island                              45,108                                 2.05
Florida                                   43,643                                 1.99
Delaware                                  39,105                                 1.78
Georgia                                   28,005                                 1.27
North Carolina                            25,842                                 1.18
Washington, D.C.                          13,063                                 0.59
Arizona                                   11,535                                 0.53
Texas                                     10,821                                 0.49
Alabama                                    9,483                                 0.43
Illinois                                   8,543                                 0.39
Massachusetts                              8,264                                 0.38
Ohio                                       7,798                                 0.35
South Carolina                             5,971                                 0.27
Colorado                                   5,075                                 0.23
California                                 3,083                                 0.14
Other                                     19,790                                 0.90
                                      ----------                             --------
Total                                 $2,199,065                              100.00%
                                      ==========                              ======
</TABLE>


                                      -16-
<PAGE>   18
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,
                           ----------------------------------------------------------------------------
                                  1997                         1996                       1995
                           ---------------------       ---------------------      ---------------------
                                                                  (dollars in thousands)
<S>                         <C>            <C>          <C>           <C>         <C>             <C>  
30 to 59 days               $13,083        1.03%        $12,854       1.15%        $ 5,013        0.62%
60 to 89 days                 2,503        0.20           7,980       0.71           2,132        0.26
90 days and over              8,938        0.70           8,058       0.72           6,193        0.77
                            -------        ----         -------       ----         -------        ----
      Total (1)             $24,524        1.93%        $28,892       2.58%        $13,338        1.65%
                            =======        ====         =======       ====         =======        ====
</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, $1.4
million, and $1.4 million at December 31, 1997, 1996, and 1995, respectively.


                                      -17-
<PAGE>   19
         NONPERFORMING ASSETS. The following table sets forth information
relating to the Company's nonperforming assets at the dates indicated.


<TABLE>
<CAPTION>
                                                                             December 31,
                                                     -----------------------------------------------------------------
                                                      1997          1996          1995            1994          1993
                                                     ------        ------        ------          ------        -------
                                                                        (dollars in thousands)
<S>                                                  <C>           <C>           <C>             <C>           <C>    
1-4 family residential mortgage loans                $5,269        $5,240        $5,605          $4,137        $ 5,775
Consumer loans                                        1,324         1,335           221             215            203
Commercial real estate loans                          1,753         1,399           367            --             --
Business loans (1)                                      592            84          --              --             --
                                                     ------        ------        ------          ------        -------
  Total nonperforming loans                           8,938         8,058         6,193           4,352          5,978
Real estate owned, net                                  626         1,090           752           1,927          4,424
Investment securities                                  --            --             420            --            4,420
                                                     ------        ------        ------          ------        -------
  Total nonperforming assets (1)                     $9,564        $9,148        $7,365          $6,279        $14,822
                                                     ======        ======        ======          ======        =======
Nonperforming loans to total loans held for
  investment (1)                                       0.70%         0.72%         0.77%           0.73%          1.17%
                                                     ======        ======        ======          ======        =======
Total nonperforming assets to total assets (1)         0.42%         0.43%         0.51%           0.52%          1.26%
                                                     ======        ======        ======          ======        =======
</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, 1995, 1994, and 1993.

(2)      Consisted of a deposit with a bankers' bank which was in bankruptcy
liquidation. The deposit was received by the Company in 1996.

(3)      Consisted of a $4.4 million nonperforming investment in commercial
paper which was sold in 1994.


                                      -18-
<PAGE>   20
         At December 31, 1997, the Company's $5.3 million of nonperforming
single-family residential loans consisted of 90 loans having an average balance
of $59,000.

         Forgone interest income on nonaccruing loans was $0.7 million for the
year ended December 31, 1997 and $0.6 million for each of the years ended
December 31, 1996 and 1995. The actual amount of interest recorded as income on
such loans amounted to $0.3 million for each of the years ended December 31,
1997, 1996, and 1995.

         At December 31, 1997, the Company's 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 December 31, 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. At
year-end 1995, real estate owned totaled $0.8 million, consisting of ten
single-family residential properties acquired through foreclosure or by
deed-in-lieu of foreclosure.

           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 of foreclosure. 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. During 1995, the Company sold 17
single-family residential properties which were held as real estate owned for a
net gain of $0.1 million, and acquired an additional eight 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" also must be established
and maintained for 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, 1997, the Company had $6.4 million of assets classified special
mention.


                                      -19-
<PAGE>   21
         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,
                                          -----------------------------------------------------------------------
                                            1997           1996            1995            1994            1993
                                            ----           ----            ----            ----            ----
                                                     (dollars in thousands)
<S>                                       <C>             <C>             <C>             <C>             <C>    
Allowance at beginning of year            $ 9,971         $ 7,485         $ 7,307         $ 7,309         $ 6,935
                                          -------         -------         -------         -------         -------
Provision: (1)
  Mortgage                                 (2,497)            119             449             118             590
  Consumer                                  1,720             457             114            (200)            120
  Commercial                                2,377              25              15             250            --
                                          -------         -------         -------         -------         -------
    Total provision                         1,600             601             578             168             710
Charge-offs:
  Mortgage                                   (453)           (189)           (362)           (103)           (226)
  Consumer                                 (1,383)           (478)           (125)           (191)           (215)
  Commercial                                 (963)           --              --              --              --
                                          -------         -------         -------         -------         -------
    Total charge-offs                      (2,799)           (667)           (487)           (294)           (441)
Recoveries:
  Mortgage                                    147             133              68              39              19
  Consumer                                     74              29              19              85              86
  Commercial                                   31              18            --              --              --
                                          -------         -------         -------         -------         -------
    Total recoveries                          252             180              87             124             105
Allowance Acquired in
  Berks Acquisition                          --             2,372            --              --              --
                                          -------         -------         -------         -------         -------
Allowance at end of year                  $ 9,024         $ 9,971         $ 7,485         $ 7,307         $ 7,309
                                          =======         =======         =======         =======         =======

Allowance for loan losses to total
   nonperforming loans at end of
   year                                    100.96%         123.74%         120.86%         167.90%         122.26%
                                          =======         =======         =======         =======         =======
Allowance for loan losses to total
   loans held for investment at end
   of year                                   0.71%           0.89%           0.93%           1.22%           1.42%
                                          =======         =======         =======         =======         =======
</TABLE>


(1) Reflects a reclassification during 1997.


                                      -20-
<PAGE>   22
         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
                                 -------------------------------------------------------------------------------------------------
                                        1997                      1996                    1995                       1994         
                                 ----------------------    --------------------   -----------------------    ---------------------
                                             Percent of             Percent of                Percent of               Percent of 
                                             Loans by                Loans by                  Loans by                  Loans by 
                                 Amount      Category (1)  Amount   Category(1)    Amount    Category (1)    Amount   Category (1)
                                 ------      --------      ------   -----------    ------    ------------    ------   ------------
                                                                               (dollars in thousands)
<S>                              <C>         <C>          <C>       <C>            <C>       <C>            <C>       <C>         
Breakdown of allowance:
  Mortgage loans                 $2,536       0.26%       $5,339       0.63%       $5,228       0.80%       $5,074       1.27%    
  Consumer loans                  2,916       1.50         2,505       1.48         1,992       1.79         1,983       1.90     
  Commercial loans                3,572       3.72         2,127       3.00           265       2.18           250       3.94     
  SBA loans                        --         --            --         --            --         --            --         --       
                                 ------       ----        ------       ----        ------       ----        ------       ----     
  Total allowance for loan
    losses                       $9,024       5.48%       $9,971       5.11%       $7,485       4.77%       $7,307       7.11%    
                                 ======       ====        ======       ====        ======       ====        ======       ====     
</TABLE>

<TABLE>
<CAPTION>
                                      December 31
                                 ----------------------
                                         1993
                                 ----------------------
                                              Percent of
                                               Loans by
                                 Amount      Category (1)
                                 ------      ------------
                                  (dollars in thousands)                                 
<S>                              <C>         <C>  
Breakdown of allowance:
  Mortgage loans                 $5,020          1.36%
  Consumer loans                  2,289          2.33
  Commercial loans                 --             --
  SBA loans                        --             --
                                 ------          ----
  Total allowance for loan
    losses                       $7,309          3.69%
                                 ======          ====
</TABLE>


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

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


                                      -21-
<PAGE>   23
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.

        The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," as of January 1, 1994. In accordance with this
Statement, 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. The effect of the adoption was to increase
shareholders' equity by $7.3 million at January 1, 1994.

        At December 31, 1997, the Company's $735.3 million of mortgage-backed
securities, representing 32% of the Company's $2.3 billion of total assets, were
comprised of $196.2 million and $539.1 million of held-to-maturity and
available-for-sale mortgage-backed securities, respectively. Included in the
Company's $735.3 million of mortgage-backed securities at December 31, 1997 were
$390.8 million of mortgage-backed securities, which were issued and guaranteed
by the FHLMC, the FNMA or the GNMA, and $339.2 million of Collateralized
Mortgage Obligations ("CMOs"). With respect to the CMOs, $88.6 million were
guaranteed by the FNMA and FHLMC, and $250.6 million were rated AAA by national
rating agencies. At December 31, 1997, $562.9 million, or 77%, of the Company's
mortgage-backed securities portfolio had fixed rates of interest, and $172.4
million, or 23%, 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,
1997, $300.8 million, or 41%, of the Company's mortgage-backed securities were
pledged to secure various obligations of the Company.


                                      -22-
<PAGE>   24
        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,
                                                         --------------------------------------------
                                                             1997            1996             1995
                                                            ------          ------            -----
                                                                        (in thousands)
<S>                                                      <C>              <C>              <C>      
Mortgage-backed securities at beginning of year          $ 752,707        $ 463,353        $ 430,119
Purchases                                                  189,818          412,676           85,472
Sales                                                      (41,770)            --               --
Repayments and prepayments                                (166,838)        (122,895)         (64,887)
Unrealized gains or (losses) on available-for-sale
  mortgage-backed securities                                 1,374             (427)          12,649
                                                         ---------        ---------        ---------
Mortgage-backed securities at end of year (1)            $ 735,291        $ 752,707        $ 463,353
                                                         =========        =========        =========
</TABLE>


(1)      At December 31, 1997, 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 $730.8 million and
$738.1 million, respectively.

        At December 31, 1997, 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 the 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 the 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 prepay faster than anticipated, the Company may not be
able to reinvest the proceeds of such repayments and prepayments at a comparable
rate.


                                      -23-
<PAGE>   25
        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 carrying and
market value of the Company's investment securities at the dates indicated.


<TABLE>
<CAPTION>
                                                                December 31,
                                       --------------------------------------------------------------------------
                                              1997                        1996                       1995
                                       -------------------        -----------------------      --------------------
                                        Carry        Market         Carry         Market        Carry        Market
                                        Value        Value          Value         Value         Value        Value
                                        -----        -----          -----         -----         -----        -----
                                                                    (in thousands)
<S>                                    <C>           <C>           <C>           <C>           <C>           <C>    
Held to maturity:
  U.S. Treasury and U.S. 
    Government agency securities       $  --         $  --         $  --         $  --         $  --         $  --
                                       -------       -------       -------       -------       -------       -------

    Total Held to Maturity                --            --            --            --            --            --
                                       -------       -------       -------       -------       -------       -------

Available for sale (at market):
  U.S. Treasury and U.S. 
    Government agency securities        39,980        40,041        47,963        48,089        38,789        39,263
  Corporate and bank notes
    receivable                            --            --            --            --           5,498         5,483
  Mortgage Security Mutual
    Fund                                 2,373         2,404         2,215         2,209         2,077         2,150
  Equity Servicing Partnership           4,819         4,819         2,880         2,880          --            --
  Other Equity Investments               3,256         4,062           757           757          --            --
                                       -------       -------       -------       -------       -------       -------
     Total Available for Sale           50,428        51,326        53,815        53,935        46,364        46,896
                                       -------       -------       -------       -------       -------       -------
     Total                             $50,428       $51,326       $53,815       $53,935       $46,364       $46,896
                                       =======       =======       =======       =======       =======       =======
</TABLE>

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


                                      -24-
<PAGE>   26
          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, 1997.

<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 securities         $35,025              6.12%             $ 5,016               6.02%
Mortgage Security
  Mutual Fund                              --                 --                2,404              10.91
Equity Servicing Partnership               --                 --                4,819                N/A
Other Equity Investments                   --                 --                4,062                N/A
                                       -------                                -------
                                       $35,025              6.12%             $16,301               6.93%
                                       =======                                =======
</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.

  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, 1997, the branch
offices of the Company consisted of 39 traditional full-service offices and 17
full-service offices located in supermarkets. The Company opened its first


                                      -25-
<PAGE>   27
supermarket branch in 1994 and opened an additional nine, four, and three in
1995, 1996, and 1997, respectively. Currently, the Company intends to open three
supermarket branches and one mini-traditional branch in its market area in 1998.

  In addition to the Company's extensive branch network, the Company currently
maintains 55 automated teller machine ("ATM") locations, and expects to further
increase its ATM network during 1998. The Company also maintains a 24 hour
telephone banking service known as COM-LINE.

  Deposit account terms offered by the Company vary according to the minimum
balance required, the length of time the funds must remain on deposit, and the
interest rate, among other factors. 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 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, 1997, total demand deposits and savings deposits amounted to 37%
and 15% of the Company's total deposits, respectively. During 1997, the weighted
average rate paid on the Company's demand deposits and savings deposits amounted
to 2.47% and 2.24%, 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,
                              -----------------------------------------------------------------------------------------
                                       1997                               1996                        1995
                              ---------------------------      -------------------------      -------------------------
                                                 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                  $  172,442           11.11%       $  171,567        11.50%       $  109,756        10.20%
Money market accounts            324,959           20.93           278,527        18.68           264,239        24.54
Noninterest-bearing
 deposit accounts                 81,653(1)         5.26            60,957         4.09            44,651         4.15
                              ----------          ------        ----------       ------        ----------       ------
  Total demand deposits          579,054           37.30           511,051        34.27           418,646        38.89
                              ----------          ------        ----------       ------        ----------       ------
Savings deposits                 229,290           14.77           260,089        17.44           144,163        13.39
Certificate of deposit
  accounts:
  6 months or less               259,519           16.71           304,674        20.43           237,460        22.05
  7-12 months                    220,341           14.19           175,425        11.76            82,637         7.68
  13-36 months                   216,011           13.91           199,292        13.36           141,589        13.15
  More than 36 months             48,609            3.12            40,919         2.74            52,054         4.84
                              ----------          ------        ----------       ------        ----------       ------
  Total certificates             744,480           47.93           720,310        48.29           513,740        47.72
                              ----------          ------        ----------       ------        ----------       ------
  Total deposits              $1,552,824          100.00%       $1,491,450       100.00%       $1,076,549       100.00%
                              ==========          ======        ==========       ======        ==========       ======
</TABLE>

----------------
(1)      Includes $46.2 million of business checking accounts.


                                      -26-
<PAGE>   28
         The following table sets forth the activity in the Company's deposits
during the periods indicated.


<TABLE>
<CAPTION>
                                    Year Ended December 31,
                        -----------------------------------------------
                           1997             1996                1995
                        ----------       -----------         ----------
                                   (dollars in thousands)
<S>                     <C>              <C>                 <C>       
Beginning balance       $1,491,450       $1,076,549          $  853,519
Net increase
  before interest            9,540          371,952(2)          191,808(1)
Interest credited           51,834           42,949              31,222
                        ----------       ----------          ----------
Net increase
  in deposits               61,374          414,901             223,030
                        ----------       ----------          ----------
Ending balance          $1,552,824       $1,491,450          $1,076,549
                        ==========       ==========          ==========
</TABLE>


         (1) Includes $197.4 million of deposits assumed in connection with the
acquisition of four branch offices of Fidelity Federal in July 1995.

         (2) Includes $379.7 million of deposits assumed in connection with the
acquisition of twelve branch offices of Meridian Bank 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,
                                     ---------------------------------------
                                       1997           1996           1995
                                     --------       --------       ---------
                                            (dollars in thousands)
<S>                                  <C>            <C>            <C>     
0.00% to 2.99%                       $  1,166       $  3,132       $    796
3.00% to 3.99%                          6,051         79,101         69,108
4.00% to 4.99%                        125,241        165,704         96,900
5.00% to 6.99%                        608,379        465,258        336,762
7.00% to 8.99%                          3,569          6,833         10,059
9.00% to 10.99%                            74            282            115
11.00% and over                           --             --             --
                                     --------       --------       --------
Total                                $744,480       $720,310       $513,740
                                     ========       ========       ========
</TABLE>


                                      -27-
<PAGE>   29
         The following table sets forth the amount and remaining maturities of
the Company's certificates of deposit at December 31, 1997.


<TABLE>
<CAPTION>
                                               Over Six
                                                Months       Over One         Over Two
                              Six Months     Through One   Year Through     Years Through      Over Three
                               and Less          Year        Two Years       Three Years          Years
                              ----------     -----------   ------------    --------------    -------------
                                                                  (dollars in thousands)
<S>                           <C>            <C>            <C>              <C>              <C>    
0.00% to 1.99%                $  1,131       $   --         $   --            $  --            $  --        
2.00% to 2.99%                      35           --             --               --               --
3.00% to 3.99%                   6,021             10             16               4              --
4.00% to 4.99%                  98,439         13,013          8,988             716            4,085
5.00% to 6.99%                 153,473        207,147        151,574          52,515           43,670
7.00% to 8.99%                     420            171          1,203             990              785
9.00% to 10.99%                   --             --                5            --                 69
11.00% & over                     --             --             --              --                --
                              --------       --------       --------         -------          -------
Total                         $259,519       $220,341       $161,786         $54,225          $48,609
                              ========       ========       ========         =======          =======
                      
</TABLE>

         At December 31, 1997, the Company had $92.2 million of certificates of
deposit in amounts equal to or greater than $100,000, of which $50.1 million was
scheduled to mature within six months, $23.4 million was scheduled to mature in
over six months through 12 months, and $18.7 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,
1997, the Company had $213.0 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, 1997, the Company had $246.1 million of
repurchase agreements outstanding.


                                      -28-
<PAGE>   30
         The following table sets forth the amount and weighted average rate of
the Company's borrowings at the dates indicated.


<TABLE>
<CAPTION>
                                                           December 31,
                         ---------------------------------------------------------------------------
                                  1997                      1996                      1995
                         --------------------      ---------------------      ----------------------
                                                     (dollars in thousands)
<S>                      <C>            <C>         <C>            <C>         <C>            <C>  
FHLB advances            $213,000       5.83%       $175,000       5.48%       $120,614       6.05%
Repurchase
 agreements(1)            246,099       5.73         176,674       5.47          81,112       6.65
Other borrowings             --         --              --         --             1,554       8.75
                         --------                   --------                   --------     
  Total Borrowings       $459.099       5.78%       $351,674       5.48%       $203,280       6.31%
                         ========                   ========                   ======== 
</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,
                               ------------------------------------------------------------------
                                       1997                      1996                    1995
                               -------------------         -----------------       --------------
                                                                       (dollars in thousands)
<S>                            <C>                         <C>                     <C>     
FHLB advances:
  Maximum balance                     $238,000                  $202,500                $121,114
  Average balance                     $211,107                  $138,917               $  77,249
  Weighted average rate:
    at end of period                     5.83%                     5.48%                   6.05%
    during the period                    5.67%                     5.62%                   6.05%

Repurchase agreements:
  Maximum balance                     $264,677                  $176,674                $210,324
  Average balance                     $242,794                  $154,523                $143,313
  Weighted average rate:
    at end of period                     5.73%                     5.47%                   6.65%
    during the period                    5.90%                     5.91%                   6.35%
</TABLE>

----------


                                      -29-
<PAGE>   31
EMPLOYEES

         The Company had 573 full-time employees and 318 part-time employees at
December 31, 1997. 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, 1997, 56 full-service offices, including 17 supermarket
branch offices, located in southeast Pennsylvania. Prior to February, 1997, the
Bank's executive offices were located in Malvern, Pennsylvania. ComNet Mortgage
Services ("ComNet"), a division of the Bank, also located in Norristown,
conducts business through ten loan origination offices located in Pennsylvania,
Connecticut, New Jersey, and Rhode Island. ComNet also conducts business through
its wholesale network, which includes correspondents in 29 states. In January
1997, Commonwealth acquired selected assets of Homestead Mortgage, Inc.
("Homestead Mortgage"), a mortgage company headquartered in Millersville,
Maryland. Among the assets acquired by Commonwealth were production branches
located in Millersville, Bethesda, Whitemarsh, and Woodlawn, Maryland, and
Media, Pennsylvania. The Millersville, Bethesda, and Whitemarsh branches
continue to operate under the trade name of Homestead Mortgage. The Woodlawn,
Maryland and Media, Pennsylvania locations were closed subsequent to the
acquisition as a result of the consolidation of their operations with other
ComNet and Homestead Mortgage branches.

         COMMONWEALTH INVESTMENT CORPORATION OF DELAWARE, INC. At December 31,
1997, $18.6 million, or 3%, 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, 1997, $68.9 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, 1997,
Firstcor had seven investments in such partnerships which had an aggregate
carrying value of $2.8 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.


                                      -30-
<PAGE>   32
         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 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. Competition may increase as a result of the continuing reduction of
restrictions on the interstate operations of financial institutions.


                                      -31-
<PAGE>   33
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


                                      -32-
<PAGE>   34
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. A financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning 1976. At December 31, 1997, 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, 1997, the Company had net loss carryforwards for
state tax purposes totaling $9.2 million, which expire beginning in 1998.


                                      -33-
<PAGE>   35
                                   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 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


                                      -34-
<PAGE>   36
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, 1997, the Bank was in compliance with the above
restrictions.

         RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or


                                      -35-
<PAGE>   37
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).

         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 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.


                                      -36-
<PAGE>   38
         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.

         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.

         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,
1997, the FICO assessments were 6.3 and 1.3 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.

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


                                      -37-
<PAGE>   39
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 $45.2 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; 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 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.


                                      -38-
<PAGE>   40
         At December 31, 1997, the Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 6.6%, 6.6%
and 13.4%, 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 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


                                      -39-
<PAGE>   41
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.

         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


                                      -40-
<PAGE>   42
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, 1997, 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 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


                                      -41-
<PAGE>   43
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, 1997, the Company's liquid asset ratio
was 11.07%.

         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 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
to be 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


                                                       -42-
<PAGE>   44
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, 1997, the Bank was a Tier 1 institution for purposes of
this regulation.

         On December 5, 1994, the OTS published a notice of proposed rulemaking
to amend its capital distribution regulation. Under the proposal, savings
institutions would be 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 proposal would require the Bank to provide
notice to the OTS of its intent to make a capital distribution. The Bank does
not believe that the proposal will adversely affect its ability to make capital
distributions if it is adopted substantially as proposed.

         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.

         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


                                      -43-
<PAGE>   45
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. 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).

         Under recent legislation and applicable regulations, any 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 65% of the
institution's "portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average


                                      -44-
<PAGE>   46
basis in at least nine out of every 12 months. At December 31, 1997, the
qualified thrift investments of the Bank were approximately 106% 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, 1997, the Bank had $14.2 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, 1997,
dividends paid by the FHLB of Pittsburgh to the Bank amounted to $0.9 million,
compared to $0.7 million for the year ended December 31, 1996.

         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, 1997, no
reserves were required to be maintained on the first $4.7 million of transaction
accounts, reserves of 3% were required to be maintained against the next $43.1
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.


                                      -45-
<PAGE>   47
ITEM 2. PROPERTIES
 
OFFICE AND PROPERTIES
 
         At December 31, 1997, the Bank conducted its business from its
corporate offices in Norristown, Pennsylvania and 56 full-service offices,
including 17 supermarket branches, located in southeast Pennsylvania.
 
         The following table sets forth certain information relating to the
Bank's offices at December 31, 1997.
 
 
<TABLE>
<CAPTION>
                                                                                  Net Book Value of
                                                                                      Property &
       (in  thousands)                                                                Leasehold
                                                                     Lease         Improvements at
                                                   Owned or       Expiration         December 31,         Deposits at
              Location                              Leased           Date              1997(1)         December 31, 1997
              --------                              ------           ----              -------         -----------------
<S>                                                 <C>           <C>             <C>                  <C>    
       CORPORATE HEADQUARTERS:
 
 
       NORRISTOWN:                                  Leased           02/12             $1,598              $29,075
       2 West Lafayette Street
       Norristown, PA 19401
 
 
       TRADITIONAL FULL-SERVICE OFFICES:
 
 
       NORRISTOWN:                                  Leased           02/12                357               34,461
       2 West Lafayette Street
       Norristown, PA 19401
 
 
       TRAPPE:                                      Leased           10/10                233               30,021
       Trappe Shopping Center
       130 West Main Street, Suite 158
       Trappe, PA 19426
 
 
       KING OF PRUSSIA:                             Leased           09/03                181               40,310
       DeKalb Plaza Shopping Center
       338 West DeKalb Pike
       King of Prussia, PA 19406
 
 
       PARK RIDGE:                                  Leased           01/03                  1               56,981
       Park Ridge Shopping Center
       2701 West Main Street
       Norristown, PA 19403
 
 
       SWEDE SQUARE:                                Leased           10/01                 90               74,016
       Swede Square Shopping Center
       2947 Swede Road
       Norristown, PA 19401
</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               1997(1)          December 31, 1997
                       --------                     ------           ----               -------          -----------------
<S>                                                 <C>           <C>             <C>                  <C>    

       AUDUBON:                                     Leased           12/09              $82              $39,197
       Audubon Village Shopping Center
       2806 Audubon Village Drive
       Norristown, PA 19403
 
       NEWTOWN SQUARE:                              Owned             --                335               38,213
       3531 West Chester Pike
       Newtown Square, PA 19073
 
       FRANKFORD AVENUE:                            Owned             --                374               57,556
       7149 Frankford Avenue
       Philadelphia, PA 19135
 
       CASTOR AVENUE:                               Owned             --                153               54,994
       6537 Castor Avenue
       Philadelphia, 19149
 
       PENNDEL:                                     Owned             --                133               25,075
       U.S. # 1 & Durham Road
       Penndel, PA 19047
 
       WELSH ROAD:                                  Owned             --                165               58,612
       2501 Welsh Road
       Philadelphia, PA 19114
 
       GLENSIDE:                                    Owned             --                334               61,536
       139 South Easton Road
       Glenside, PA 19038
 
       WESTTOWN:                                    Leased           11/99               15               33,262
       Marketplace Shopping Center
       1502 West Chester Pike
       West Chester, PA 19382
 
       KENNETT SQUARE:                              Leased           12/03              190               22,280
       New Garden Center
       345 Scarlett Road
       Kennett Square, PA 19348
 
       WEST GROVE:                                  Owned             --                143               17,453
       106 West Evergreen Street
       West Grove, PA 19390
 
       WAYNE:                                       Leased           08/01               --               24,085
       Chesterbrook Village Center
       500 Chesterbrook Boulevard, Suite B-5
       Wayne, PA 19087
</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              1997(1)         December 31, 1997
                       --------                     ------           ----              -------         -----------------
<S>                                                 <C>           <C>             <C>                  <C>    
       LANSDALE:                                    Leased           06/99              $37              $45,638
       521 West Main Street
       Lansdale, PA 19446
 
       HILLCREST:                                   Leased           07/02               --               30,698
       Hillcrest Shopping Center
       638 East Main Street
       Lansdale, PA 19446
 
       SUMNEY FORGE:                                Leased           08/99               21               40,384
       Sumney Forge Square
       1601 Valley Forge Road
       Lansdale, PA 19446
 
       SOUDERTON:                                   Owned             --                208               17,519
       705 Route 113
       Souderton, PA 18964
 
       CONSHOHOCKEN:                                Leased           10/09              268               81,028
       Plymouth Square Shopping Center
       200 West Ridge Pike, Suite 108
       Conshohocken, PA 19428
 
       PHOENIXVILLE:                                Leased           03/12              458               18,116
       Maple Lawn Village Center
       1007 Route 113
       Phoenixville, PA 19460
 
       ROYERSFORD:                                  Leased           12/15              327                3,702
       Limerick Square
       70 Buckwalter Road, Suite 650
       Royersford, PA 19468
 
       TACONY:                                      Leased           02/02               --               58,261
       6958 Torresdale Avenue
       Philadelphia, PA 19135
 
       HOLMESBURG:                                  Leased           07/00               23               41,699
       8729 Frankford Avenue
       Philadelphia, PA 19136
 
       ACADEMY:                                     Leased           02/99                9               35,264
       3292 Red Lion Road
       Philadelphia, PA 19114
 
       MAYFAIR:                                     Owned             --                335               29,058
       7425 Frankford Avenue
       Philadelphia, PA 19136
</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              1997(1)         December 31, 1997
                       --------                     ------           ----              -------         -----------------
<S>                                                 <C>           <C>             <C>                  <C>    
       5TH & PENN STREETS:                          Owned             --                $1,039              $43,732
       445 Penn Street
       Reading, PA 19601
 
       9TH & SPRING STREETS:                        Owned             --                   418               31,634
       956 North Ninth Street
       Reading, PA 19604
 
       LANCASTER AVENUE:                            Leased           12/99                  63               39,311
       830 Lancaster Avenue
       Reading, PA 19607
 
       MOHNTON:                                     Owned             --                   408               24,879
       14 West Wyomissing Avenue
       Mohnton, PA 19540
 
       TEMPLE:                                      Owned             --                   331               43,717
       4950 Kutztown Road
       Temple, PA 19560
 
       RIVERSIDE:                                   Owned             --                   340               31,607
       2040 Centre Avenue
       Reading, PA 19605
 
       HEIDELBERG:                                  Leased           06/07                  83               30,355
       4641 Penn Avenue
       Sinking Spring, PA 19608
 
       KUTZTOWN:                                    Owned             --                   281               20,178
       601 East Main Street
       Kutztown, PA 19530
 
       EXETER:                                      Leased           03/00                  70               35,196
       4215 Perkiomen Avenue
       Reading, PA 19606
 
       BIRDSBORO:                                   Leased           09/01                  22               15,384
       350 West Main Street
       Birdsboro, PA 19508
 
       LEBANON VALLEY:                              Owned             --                   281               28,103
       2203 West Cumberland Street
       Lebanon, PA 17042
 
       LEBANON:                                     Owned             --                    99                1,310
       152 North Eighth Street
       Lebanon, PA 17046
</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               1997(1)        December 31, 1997
                       --------                     ------           ----               -------        -----------------
<S>                                                <C>            <C>             <C>                  <C>    
       SUPERMARKET BRANCHES:
 
       GIANT-WHITEHALL:                             Leased           11/99              $73              $10,568
       MacArthur Towne Centre
       2540 MacArthur Road, Suite 200
       Whitehall, PA 18052
 
       REDNER'S COLLEGEVILLE:                       Leased           01/10              104                7,554
       Redner's Warehouse Market
       Marketplace at Collegeville
       201 Second Avenue, Suite 100
       Collegeville, PA 19426
 
       GIANT-FAIRLESS HILLS:                        Leased           01/00               75               10,362
       Fairless Hills Shopping Center
       473 Oxford Road South
       Fairless Hills, PA 19030
 
       GIANT-SINKING SPRING:                        Leased           06/00               91                9,398
       Spring Towne Center
       2643 Shillington Road
       Sinking Spring, PA 19608
 
       GIANT-ALDEN:                                 Leased           12/01              138                2,633
       Providence Village
       543 North Oak Avenue
       Alden, PA 19018
 
       GIANT-BLUE BELL:                             Leased           07/00               87               11,087
       The Shoppes at Blue Bell
       1760 DeKalb Pike
       Blue Bell, PA 19422
 
       GIANT-TREXLERTOWN:                           Leased           03/01              117                2,832
       Trexler Mall
       6900 Hamilton Boulevard, PO Box 977
       Trexlertown, PA 18087
 
       GIANT-TROOPER:                               Leased           03/01              118                6,117
       Audubon Square Shopping Center
       2668 Egypt Road
       Norristown, PA 19403
 
       REDNER'S-DOYLESTOWN:                         Leased           09/10               95                5,141
       Doylestown Pointe
       1661 Easton Road, Suite 2
       Warrington, PA 18976
</TABLE>

 
                                      -50-
<PAGE>   52
 
<TABLE>
<CAPTION>
                                                                                  Net Book Value of
                                                                                      Property &
       (in  thousands)                                                                Leasehold
                                                                     Lease         Improvements at
                                                   Owned or       Expiration         December 31,         Deposits at
                       Location                     Leased           Date              1997(1)         December 31, 1997
                       --------                     ------           ----              -------         -----------------
<S>                                                <C>            <C>             <C>                  <C>    
       GUINTA'S THRIFTWAY:                          Leased           02/10               $89               $7,122
       Bradford Plaza
       700 Downingtown Pike, Suite 130
       West Chester, PA 19380
 
       CLEMENS-EXTON:                               Leased           06/10                85                4,332
       Lionville Shopping Center
       170 Eagleview Boulevard
       Exton, PA 19341
 
       WEIS-POTTSTOWN:                              Leased           07/10                93                9,668
       The Pottstown Center
       223 Shoemaker Road
       Pottstown, PA 19464
 
       THRIFTWAY-PORT RICHMOND:                     Leased           09/10               106                5,386
       Port Richmond Village
       2497 Aramingo Avenue, Suite 2
       Philadelphia, PA 19125
 
       SHOPRITE-FAR NORTHEAST:                      Leased           11/11               145                8,970
       Boulevard Plaza
       11000 Roosevelt Boulevard
       Philadelphia, PA 19116
 
       GIANT-SOUTHAMPTON:                           Leased           02/02               137                3,398
       Southampton Shopping Center
       466 A Second Street Pike
       Southampton, PA 18966
 
       SUPERFRESH-COTTMAN:                          Leased           05/12               163                2,564
       Cottman & Bustleton Center
       2151 Cottman Avenue
       Philadelphia, PA 19149
 
       GIANT-HORSHAM:                               Leased           06/02               149                1,792
       Horsham Point Shopping Center
       314 Horsham Road, Unit A
       Horsham, PA 19044
</TABLE>
 
----------

(1) Does not include furniture, fixtures and equipment.
 
 
                                      -51-
<PAGE>   53
The following table sets forth certain information relating to ComNet's offices
at December 31, 1997.
 
 
<TABLE>
<CAPTION>
                         Location                        Year Opened         Owned or Leased             Lease Expiration Date
                         --------                        -----------         ---------------             ---------------------
<S>                                                      <C>                 <C>                         <C>  
       WARWICK, RHODE ISLAND:                                1988                 Leased                         05/98
       875 Centerville Road
       Warwick, RI 02886
 
       HORSHAM, PENNSYLVANIA:                                1988                 Leased                         11/00
       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
 
       STRATFORD, CONNECTICUT:                               1988                 Leased                         05/98
       3241 Main Street, Suite A
       Stratford, CT 06497
 
       ALLENTOWN, PENNSYLVANIA:                              1996                 Leased                         03/99
       221 North Cedar Crest Boulevard
       Allentown, PA 18104
 
       READING, PENNSYLVANIA:                                1997                 Owned                            --
       Commonwealth Bank Center
       10 North Fifth Street
       Reading, PA 19601
 
       PITTSBURGH, PENNSYLVANIA:                             1997                 Leased                         01/98
       Penn Center West II, Suite 120
       Pittsburgh, PA 15276
 
       NORRISTOWN, PENNSYLVANIA:                             1997                 Leased                         04/12
       2 West Lafayette Street
       Norristown , PA 19401
 
       CONSHOHOCKEN, PENNSYLVANIA:                           1997                 Leased                         12/98
       207 Fayette Street
       Conshohocken, PA 19428
 
       WALL, NEW JERSEY                                      1997                 Leased                         12/99
       1985 Highway 34, Suite A-5A
       Wall, NJ 07719
</TABLE>
 
 
                                      -52-
<PAGE>   54

<TABLE>
<CAPTION>
                         Location                        Year Opened         Owned or Leased             Lease Expiration Date
                         --------                        -----------         ---------------             ---------------------
<S>                                                      <C>                 <C>                         <C>  
       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.
 
 
                                      -53-
<PAGE>   55
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.

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

         Not Applicable


                                      -54-
<PAGE>   56
PART II.

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

         The Common Stock is traded on the National Association of Securities
Dealers Automated Quotation National Market System under the symbol "CMSB." At
December 31, 1997, the 16,247,136 shares of common stock were held by 6,222
holders of record, which does not reflect the number of beneficial owners of the
common stock.
         The following table sets forth the reported high and low sale prices of
a share of the Company's common stock as reported by NASDAQ and cash dividends
paid per share of common stock during the periods indicated.

<TABLE>
<CAPTION>
                                                                                               Dividends Declared
        Quarter Ended                    High(1)                        Low(1)                     Per Share(1)
       ---------------                   -------                       -------                    -------------
<S>                                      <C>                           <C>                     <C> 
1996
  March 31                               11.673                        10.770                         0.06
  June 30                                11.188                         9.500                         0.06
  September 30                           11.875                         9.750                         0.06
  December 31                            15.125                        11.500                         0.06

1997
  March 31                               16.000                        14.625                         0.07
  June 30                                16.625                        13.500                         0.07
  September 30                           19.500                        15.750                         0.07
  December 31                            21.500                        17.375                         0.07
</TABLE>

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

(1)      Adjusted to reflect the June 1996 exchange of 2.0775 shares of Company
         common stock for each share of Bank common stock.

         The closing price of a share of Company common stock was $20 on March
10, 1998, the most recent day on which trading of the Company common stock
occurred preceding the issuance of the 10-K.

ITEM 6.  SELECTED FINANCIAL DATA.

         The information required herein is incorporated by reference from page
12 of the Company's 1997 Annual Report to Stockholders ("1997 Annual Report").

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

         The information required herein is incorporated by reference from pages
13 to 28 of the 1997 Annual Report.


                                      -55-
<PAGE>   57
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The information required herein is incorporated by reference from pages
32 to 58 of the 1997 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.

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.


                                      -56-
<PAGE>   58
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, 1997 and 1996
         Consolidated Statements of Income for the years ended December 31, 
          1997, 1996 and 1995
         Consolidated Statements of Shareholders' Equity for the years ended
          December 31, 1997, 1996 and 1995
         Consolidated Statements of Cash Flows for the years ended December 31,
          1997, 1996 and 1995
         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
-------------
                                                                                          Page
                                                                                          ----
<S>                                                                                       <C>  
3.1          Articles of Incorporation of Commonwealth Bancorp, Inc.                       *
3.2          Bylaws of Commonwealth Bancorp, Inc.                                          *
4.1          Form of Stock Certificate of Commonwealth Bancorp, Inc.                       *
10.1         1993 Stock Incentive Plan***                                                  *
10.2         1993 Directors' Stock Option Plan***                                          *
10.3         1993 Management Recognition Plan for Officers***                              *
10.4         1993 Management Recognition Plan for Directors***                             *
10.5         1996 Stock Option Plan***                                                     **
10.6         1996 Recognition and Retention Plan***                                        **
10.7         Employee Stock Ownership Plan and Trust***                                    *
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***
</TABLE>


                                      -57-
<PAGE>   59

<TABLE>
<S>                                                                                      <C>
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***
10.16        Supplemental Executive Retirement Plan of Commonwealth Bank***
13.0         1997 Annual Report to Stockholders
22.0         Subsidiaries of the Registrant - Reference is made to
               "Item 1.  Business - Subsidiaries" for the required information
</TABLE>


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

** Incorporated herein by reference from the Company's definitive proxy
statement for its special meeting of stockholders on December 17, 1996 filed
with the Commission on November 8, 1996.

***   Management contract or compensatory plan or arrangement.

             (b) REPORTS ON FORM 8-K.

             Not Applicable.


                                      -58-
<PAGE>   60
                                   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 17, 1998
-----------------------
Charles H. Meacham
Chairman of the Board,
 Chief Executive Officer
(principal executive officer)


/s/ Patrick J. Ward                                        March 17, 1998
--------------------
Patrick J. Ward
President, Chief
 Operating Officer


/s/ Charles M. Johnston                                    March 17, 1998
-----------------------
Charles M. Johnston
Senior Vice President, Chief
 Financial Officer
(principal financial and
  accounting officer)


                                      -59-
<PAGE>   61
/s/ George C. Beyer, Jr.                                   March 17, 1998
-------------------------
George C. Beyer, Jr.
Director


                                                           March   , 1998
-------------------------
Joseph E. Colen, Jr.
Director


/s/ William B. Haines, Jr.                                 March 17, 1998
---------------------------
William B. Haines, Jr.
Director


                                                           March   , 1998
---------------------------
Joanne Harmelin
Director


/s/ Michael T. Kennedy                                     March 17, 1998
---------------------------
Michael T. Kennedy
Director


/s/ Harry P. Mirabile                                      March 17, 1998
---------------------------
Harry P. Mirabile
Director


/s/ Nicholas Sclufer                                       March 17, 1998
---------------------------
Nicholas Sclufer
Director


/s/ Matthew T. Welde                                       March 17, 1998
---------------------------
Matthew T. Welde
Director


                                      -60-