<PAGE>

                       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, 2001

                                       OR

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

             For the transition period from __________ to __________

                          Commission File No.: 0-27942

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

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

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

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

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

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

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

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

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

As of March 7, 2002, the aggregate value of the 9,463,644 shares of Common Stock
of the Registrant outstanding on such date, which excludes 670,448 shares held
by all directors and officers of the Registrant as a group, was approximately
$223 million. This figure is based on the closing sales price of $23.56 per
share of the Registrant's Common Stock on March 7, 2002 as reported by the
Nasdaq Stock Market.

Number of shares of Common Stock outstanding as of March 7, 2002: 10,134,092

                       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, 2001 are incorporated into Part II, Items 5 through 8 of this Form
      10-K.

(2)   Portions of the definitive proxy statement for the Annual Meeting of
      Stockholders to be filed within 120 days of December 31, 2001 are
      incorporated into Part III, Items 10 through 13 of this Form 10-K.
<PAGE>
PART I

ITEM 1. BUSINESS

GENERAL

      Commonwealth Bancorp, Inc. ("Commonwealth" or the "Company"), a
Pennsylvania corporation, is the holding company for Commonwealth Bank (the
"Bank"). During January 2001, the Bank converted from a federally chartered
savings bank to a Pennsylvania chartered savings bank, primarily regulated by
the Pennsylvania Department of Banking and the Federal Deposit Insurance
Corporation ("FDIC"). The Bank conducts business from its executive offices in
Norristown, Pennsylvania and 59 full-service branches located in Southeast
Pennsylvania.

      On February 9, 2001, Commonwealth announced the restructuring of its
residential mortgage banking division, ComNet Mortgage Services ("ComNet"). As
part of this restructuring, ComNet's Pennsylvania and Maryland loan production
offices were sold to American Home Mortgage Holdings, Inc. on March 30, 2001. As
an additional part of this restructuring, Commonwealth outsourced the servicing
function relating to its portfolio of residential mortgage loans during the
second quarter of 2001. Commonwealth continues to provide residential mortgage
loans and services to its customers through agreements with American Home
Mortgage Holdings, Inc. and a third party servicer.

      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
Pennsylvania Department of Banking and the FDIC. The Pennsylvania Department of
Banking is the Bank's primary state authority and the FDIC is the Bank's primary
federal regulator. Also, the FDIC, 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>
MARKET AREA

      At December 31, 2001, the Bank had 59 full-service branch offices located
throughout Berks, Bucks, Chester, Delaware, Montgomery, and Philadelphia
Counties, Pennsylvania. Of the 59 full-service branch offices, 20 were located
in supermarkets. 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. The Company's strategy is
based on the expansion and strengthening of its banking franchise in Southeast
Pennsylvania. In this regard, the Company's focus has been directed toward
building a full-service institution, emphasizing localized decision-making and
superior customer service. As part of this strategy, Commonwealth has developed
a wide variety of products and services which meet the needs of its retail and
commercial customer base. The Company generally has sought to achieve long-term
financial strength by increasing the amount and stability of its net interest
income and noninterest income, while limiting growth in operating expense. In
pursuit of these goals, Commonwealth has adopted a number of complementary
business strategies, including expansion of the retail branch network through
internal growth and acquisition; increased focus on consumer lending and
commercial banking; maintenance of sound asset quality and strong capital
levels; and prudent management of interest rate risk.

LENDING ACTIVITIES

      GENERAL. At December 31, 2001, loans held for investment totaled $1.3
billion, which represented 73% of total assets. The Company's loan portfolio
consists of loans secured by first liens on single-family residences, as well as
consumer loans and commercial loans. Consumer loans include loans secured by
second liens on single-family residences, loans secured by recreational vehicles
and other secured and unsecured loans. Commercial loans include business loans,
commercial real estate loans and loans which are guaranteed by the Small
Business Administration ("SBA").


                                      -2-
<PAGE>
      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,
                                        ----------------------------------------------------------------------------------------
                                                 2001                          2000                              1999
                                        ---------------------        ----------------------           --------------------------
                                           Amount     Percent           Amount      Percent             Amount           Percent
                                        -----------   -------        -----------    -------          ------------        -------
                                                                       (dollars in thousands)
<S>                                     <C>           <C>            <C>            <C>              <C>                 <C>
Residential mortgage loans:
   Fixed rate                           $   417,402     31.68%       $   495,384      34.68%         $   528,383          38.49%
   Adjustable rate                          176,572     13.40            304,498      21.32              332,367          24.21
                                        -----------    ------        -----------     ------          -----------         ------
     Total residential mortgage loans       593,974     45.08            799,882      56.00              860,750          62.70

Consumer loans:
  Second mortgages                          269,672     20.46            257,971      18.06              184,844          13.47
  Equity lines of credit                     36,672      2.78             26,667       1.87               30,496           2.22
  Recreational vehicles                      38,879      2.95             51,194       3.58               60,998           4.44
  Other                                      39,805      3.02             48,619       3.40               45,448           3.31
                                        -----------    ------        -----------     ------          -----------         ------
    Total consumer loans                    385,028     29.21            384,451      26.91              321,786          23.44

Commercial loans:
  Business loans                            211,523     16.05            157,643      11.04              113,178           8.24
  Commercial real estate                    120,877      9.17             78,435       5.49               66,158           4.82
  Small Business Administration               6,445      0.49              8,087       0.56               10,971           0.80
                                        -----------    ------        -----------     ------          -----------         ------
    Total commercial loans                  338,845     25.71            244,165      17.09              190,307          13.86
                                        -----------    ------        -----------     ------          -----------         ------
    Total loans receivable                1,317,847    100.00%         1,428,498     100.00%           1,372,843         100.00%
                                        -----------    ======        -----------     ======          -----------         ======

Less:
  Allowance for loan losses                  14,227                       11,078                          10,478
  Deferred loan fees                          2,469                        3,159                           3,378
  Net premium on loans purchased             (1,317)                      (1,849)                         (2,443)
                                        -----------                  -----------                     -----------
Loans receivable, net                   $ 1,302,468                  $ 1,416,110                     $ 1,361,430
                                        ===========                  ===========                     ===========
</TABLE>

<TABLE>
<CAPTION>

                                                             December 31,
                                        ---------------------------------------------------
                                                 1998                          1997
                                        -----------------------      ----------------------
                                           Amount       Percent         Amount      Percent
                                        -----------     -------      -----------    -------
                                                         (dollars in thousands)
<S>                                     <C>             <C>          <C>              <C>
Residential mortgage loans:
   Fixed rate                           $   566,096       41.98%     $   344,898      27.17%
   Adjustable rate                          403,521       29.92          613,644      48.34
                                        -----------      ------      -----------     ------
     Total residential mortgage loans       969,617       71.90          958,542      75.51

Consumer loans:
  Second mortgages                          126,360        9.37           98,934       7.79
  Equity lines of credit                     34,845        2.58           41,592       3.28
  Recreational vehicles                      39,920        2.96           22,182       1.75
  Other                                      38,781        2.88           32,085       2.53
                                        -----------      ------      -----------     ------
    Total consumer loans                    239,906       17.79          194,793      15.35

Commercial loans:
  Business loans                             79,490        5.90           37,207       2.93
  Commercial real estate                     45,021        3.34           58,757       4.63
  Small Business Administration              14,491        1.07           20,016       1.58
                                        -----------      ------      -----------     ------
    Total commercial loans                  139,002       10.31          115,980       9.14
                                        -----------      ------      -----------     ------
    Total loans receivable                1,348,525      100.00%       1,269,315     100.00%
                                        -----------      ======      -----------     ======

Less:
  Allowance for loan losses                   9,589                        9,024
  Deferred loan fees                          3,639                        3,009
  Net premium on loans purchased             (2,880)                      (3,559)
                                        -----------                  -----------
Loans receivable, net                   $ 1,338,177                  $ 1,260,841
                                        ===========                  ===========
</TABLE>


                                      -3-
<PAGE>
      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, 2001, 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,                                                                         2007
                                           2001              2002        2003        2004        2005        2006        and Beyond
                                       ------------        --------     -------     -------     -------     -------      ----------
                                                                                 (in thousands)
<S>                                    <C>                 <C>          <C>         <C>         <C>         <C>          <C>
Residential mortgage loans              $  593,974         $ 20,275     $18,292     $18,357     $19,092     $19,833       $498,125
Consumer                                   385,028           49,986      31,698      30,477      27,966      25,601        219,300
Business loans                             211,523           21,309      22,892      24,594      26,422      28,388         87,918
Commercial real estate                     120,877           13,720      14,644      16,864      10,327      17,578         47,744
SBA                                          6,445              632         619         605         637         626          3,326
                                        ----------         --------     -------     -------     -------     -------       --------
  Total (1)                             $1,317,847         $105,922     $88,145     $90,897     $84,444     $92,026       $856,413
                                        ==========         ========     =======     =======     =======     =======       ========
</TABLE>

----------

(1)   Of the $1.2 billion of loan principal repayments contractually due after
      December 31, 2002, $748 million have fixed rates of interest and $464
      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 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>
         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,
                                          -----------------------------------------
                                              2001           2000           1999
                                          -----------    -----------    -----------
                                                        (in thousands)
<S>                                       <C>            <C>            <C>
Gross loans held for investment at
  beginning of period                     $ 1,428,498    $ 1,372,843    $ 1,348,525
Originations of loans held for
  investment:
    Residential mortgage                       30,232         59,073         74,970
    Consumer                                  133,352        156,372        159,330
    Commercial                                122,446         84,564         78,114
                                          -----------    -----------    -----------
      Total originations                      286,030        300,009        312,414
Purchases of loans held for investment:
    Residential mortgage                          258         15,287         24,999
    Consumer (1)                               10,174         16,827         34,096
    Commercial                                     --             --             --
                                          -----------    -----------    -----------
      Total purchases                          10,432         32,114         59,095
      Total originations and purchases        296,462        332,123        371,509
Repayments                                   (407,113)      (276,468)      (347,191)
                                          -----------    -----------    -----------
Net activity in loans held for
  investment                                 (110,651)        55,655         24,318
                                          -----------    -----------    -----------
Gross loans held for investment at end
  of period                               $ 1,317,847    $ 1,428,498    $ 1,372,843
                                          ===========    ===========    ===========
</TABLE>

----------

(1)   Represents purchases of home equity loans during 2001 and 2000 and
      recreational vehicle loans during 2000 and 1999.


                                      -5-
<PAGE>
      RESIDENTIAL LOAN ORIGINATIONS AND SALES. During the first quarter of 2001,
Commonwealth announced the restructuring of its residential mortgage banking
division, ComNet Mortgage Services. As part of this restructuring, ComNet's
Pennsylvania and Maryland loan production offices were sold to American Home
Mortgage Holdings, Inc. on March 30, 2001. As an additional part of this
restructuring, Commonwealth outsourced the servicing function relating to its
portfolio of residential mortgage loans during the second quarter of 2001.
Commonwealth continues to provide residential mortgage loans and services to its
customers through agreements with American Home Mortgage Holdings, Inc. and a
third party servicer. The ComNet restructuring resulted in a $2.3 million
pre-tax charge for severance and other related expenses, of which $0.2 million
was included in accrued expenses at December 31, 2001.

      Prior to the restructuring of its residential mortgage banking business
during the first quarter of 2001, a primary lending activity of the Company had
been the origination and sale, without recourse, of conventional and
insured/guaranteed real estate loans secured by first liens on 1-4 family
residences.

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

      The retail loan production office originating a loan was responsible for
taking the loan application and coordinating information flow between the
applicant and Commonwealth's processing center in Norristown, Pennsylvania.
Retail loan applications were approved by Commonwealth's underwriting department
for compliance with underwriting criteria. Upon approval, Commonwealth issued 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 expired.

      Wholesale loans were purchased from correspondents/brokers or funded by
Commonwealth on behalf of correspondents and brokers. The correspondent or
broker was responsible for the processing of the loan application. When a
wholesale loan entered the underwriting stage, for the majority of
correspondents and brokers, the underwriting was performed by Commonwealth
similar to retail loan originations above. In certain instances, Commonwealth
delegated the underwriting function to correspondents and brokers. Such
delegated underwriting met Commonwealth's criteria of underwriting standards.
Once the underwriting approval was complete, the purchase or funding was
initiated.


                                      -6-
<PAGE>
      Commonwealth originated conventional loans and, to a lesser extent,
Federal Housing Administration ("FHA") insured and Veterans Administration
("VA") guaranteed loans. The vast majority of conventional loans were originated
under terms and documentation which conformed to the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA")
guidelines and, as such, were eligible for sale in the secondary market.

      Mortgage loans originated and purchased totaled $171 million and $415
million during 2001 and 2000, respectively, which included $71 million and $141
million, respectively, of loans originated through the wholesale correspondent
lending network. The decrease in mortgage originations in 2001, relative to
2000, was related to the restructuring of the Company's mortgage banking
business in 2001.

      Commonwealth sold substantially all of the fixed-rate loans it originated
which conformed to FHLMC/FNMA requirements to investors in the secondary market
on a servicing released basis. The Company retained the majority of the
adjustable rate loans, as well as certain loans which did not conform to FHLMC
and FNMA requirements, and loans to employees of the Company.

      The Company's mortgage loans sold to others generally were sold in groups
through mortgage-backed securities issued by the FHLMC or the FNMA, 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 were grouped in pools
of $1.0 million or more and certain documents were delivered to the FHLMC or the
FNMA, which issued a mortgage-backed security representing an undivided interest
in the loan pool. For issuing the security, the FHLMC or the FNMA received an
annual guarantor fee of approximately 0.11% to 0.27% of the declining principal
amount of the loan pool. Commonwealth, through investment bankers, arranged to
sell mortgage-backed securities to investors.

      A period of 30 to 90 days generally lapsed between Commonwealth's
commitment to make a mortgage loan and the ultimate sale of the loan to an
investor. During this period, Commonwealth employed various hedging techniques,
such as mandatory forward commitments and put and call 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 was deducted from the net gain or loss on the sale of
mortgage loans. Fluctuations in prevailing interest rates may have resulted 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 had
not obtained prior commitments by investors to purchase such loans or otherwise
hedged the value of the loans against changes in interest rates. The amount of
unhedged loans could have increased as a result of increases in interest rates,
which could have resulted in greater than anticipated closings of loans in
process.


                                      -7-
<PAGE>
      The principal means by which Commonwealth hedged its mortgage production
was through the use of mandatory forward commitments and put and call options on
U.S. Treasury bond futures, 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. As a result of
the restructuring of its mortgage banking business in 2001, the Company was not
a party to mandatory forward commitments or put and call options on U.S.
Treasury bond futures at December 31, 2001.

      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,
                                                 -----------------------------------------------------------------------------------
                                                          2001                           2000                          1999
                                                 ----------------------         ----------------------         ---------------------
                                                                 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                                   $ 16,544          161           $ 66,798         378           $ 96,568         549
  FHA/VA                                               --           --                 --          --                 --          --
                                                 --------        -----           --------       -----           --------       -----
    Total Company                                  16,544          161             66,798         378             96,568         549
                                                 --------        -----           --------       -----           --------       -----
Originations for others: (1)
  Conventional                                    131,027          823            287,122       2,068            448,616       3,513
  FHA/VA                                           23,762          208             61,335         540             75,531         676
                                                 --------        -----           --------       -----           --------       -----
    Total other                                   154,789        1,031            348,457       2,608            524,147       4,189
                                                 --------        -----           --------       -----           --------       -----
Total Company and others                         $171,333        1,192           $415,255       2,986           $620,715       4,738
                                                 ========        =====           ========       =====           ========       =====

Retained by the Company: (1)(2)
  Conventional                                   $ 16,544          161           $ 66,798         378           $ 96,568         549
  FHA/VA                                               --           --                 --          --                 --          --
                                                 --------        -----           --------       -----           --------       -----
    Total Company                                  16,544          161             66,798         378             96,568         549
                                                 --------        -----           --------       -----           --------       -----
Sales to others: (1)(3)
  Conventional                                    171,633          809            273,276       2,089            544,881       3,342
  FHA/VA                                           25,285          222             57,081         519             88,588         847
                                                 --------        -----           --------       -----           --------       -----
    Total other                                   196,918        1,031            330,357       2,608            633,469       4,189
                                                 --------        -----           --------       -----           --------       -----
Total Company and others                         $213,462        1,192           $397,155       2,986           $730,037       4,738
                                                 ========        =====           ========       =====           ========       =====
Other adjustments to
  loans held for sale (4)                        $    118                        $    902                       $ 12,685
                                                 ========                        ========                       ========
(Decrease)/increase in
  mortgage loans held for sale                   $(42,011)                       $ 19,002                       $(96,637)
                                                 ========                        ========                       ========
</TABLE>

----------

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

(2)   Consists primarily of 1-4 family residential loans which have adjustable
      rates, are nonconforming due to the size of the loan, or are made to an
      employee of the Company.

(3)   Includes loans converted into mortgage-backed securities.

(4)   Consists of repayments of loans held for sale, net gain on sale of loans,
      and deferred loan fees.


                                      -8-
<PAGE>
      CONSUMER LENDING ACTIVITIES. The Company originates consumer loans
directly through its network of 59 full-service branches. In addition, certain
home equity loans are purchased on an indirect basis from third parties. At
December 31, 2001, $385 million, or 29%, 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, and
loan-to-value ratios of 100% or less. At December 31, 2001, second mortgage
loans totaled $270 million, or 20%, of the Company's total loan portfolio.

      The Company's consumer loan portfolio is also comprised of recreational
vehicle loans. These loans were purchased from a third party, are for a fixed
amount, have fixed interest rates, terms of three to 20 years, and generally
have loan-to-value ratios of 100% or less. At December 31, 2001, recreational
vehicle loans totaled $39 million, or 3%, of the Company's total loan portfolio.
As a result of the unsatisfactory performance of this portion of the portfolio,
the Company discontinued purchases of recreational vehicle loans in 2000.

      At December 31, 2001, home equity lines of credit amounted to $37 million,
or 3%, of the Company's total loan portfolio. Home equity lines of credit are a
form of revolving credit and are generally secured by the underlying equity in
the borrower's home or second residence. These loans have floating interest
rates, and loan-to-value ratios of 100% or less. The Company had $114 million of
total commitments pursuant to such equity lines of credit outstanding at
year-end 2001.

      The remaining $40 million of the Company's consumer loan portfolio at
December 31, 2001 was comprised primarily of personal loans and lines of credit,
loans secured by new and used automobiles, and credit card loans. Such credit
card loans 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
residential mortgage loans, and are generally considered to have greater risk
than residential mortgage loans because the risk of borrower default is greater.
In addition, certain consumer loans are unsecured or involve collateral which is
more likely to decline in value than single-family residences. Management
believes that the greater income potential and positive effects on interest rate
risk offset this increased credit risk. The Company intends to continue to
expand its consumer loan portfolio.


                                      -9-
<PAGE>
      COMMERCIAL LENDING ACTIVITIES. Commonwealth's target market is comprised
of small and lower middle market businesses in Southeast Pennsylvania. The
typical commercial customer has annual revenues of up to $50 million, with
credit requirements of $10 million or less. Although the Bank has the legal
lending capacity to extend credit in larger amounts, most of Commonwealth's
approximately 700 business credit relationships are under $1.0 million,
reflecting the Company's prudent risk management and the relatively modest
credit needs, in absolute terms, of small business borrowers. Applications for
commercial loans are obtained primarily through loan officer solicitation,
branch referrals, and direct inquiry. As of December 31, 2001, commercial loans
totaled $339 million, or 26%, of the Company's total loan portfolio. At December
31, 2001, commercial loans were comprised of $212 million of business loans,
$121 million of commercial real estate loans, and $6 million of loans guaranteed
by the SBA.

      Commercial business loans originated by the Company generally have terms
of one to five years and interest rates which are fixed or float in accordance
with the Company's prime lending rate. Commercial real estate loans originated
by the Company generally have terms of five to 15 years, with fixed interest
rates. Commercial loans are generally secured and backed by the personal
guarantees of the principals of the borrower. Commercial loans are generally
considered to have greater risk than residential mortgage loans because the risk
of borrower default is greater. In addition, certain commercial loans are
unsecured or involve collateral which may be more likely to decline in value and
may be more difficult to liquidate than single-family residences. Management
believes that the greater income potential and positive effects on interest rate
risk offset this increased credit risk. Also, income opportunities are enhanced
through the generation of commercial loan origination fees and business deposit
account fee income. The Company intends to continue to expand its commercial
lending program.

      LOAN ORIGINATION FEES. In addition to interest earned on loans, the
Company receives loan origination fees which are paid by 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, 2001, the Company had $2.5 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.


                                      -10-
<PAGE>
LOAN SERVICING ACTIVITIES

      During 1999, Commonwealth Bank exited substantially all of the third party
mortgage servicing business, and sold its $1.0 billion FHLMC and FNMA mortgage
servicing portfolio to National City Mortgage.

      During the first quarter of 2001, Commonwealth announced the restructuring
of its residential mortgage banking division, ComNet Mortgage Services. As part
of this restructuring, ComNet's Pennsylvania and Maryland loan production
offices were sold to American Home Mortgage Holdings, Inc. on March 30, 2001. As
an additional part of this restructuring, Commonwealth outsourced the servicing
function relating to its portfolio of residential mortgage loans during the
second quarter of 2001. Commonwealth continues to provide residential mortgage
loans and services to its customers through agreements with American Home
Mortgage Holdings, Inc. and a third party servicer. The ComNet restructuring
resulted in a $2.3 million pre-tax charge for severance and other related
expenses, of which $0.2 million was included in accrued expenses at December 31,
2001.

      Prior to the restructuring of its residential mortgage banking business in
2001, Commonwealth serviced residential real estate loans for others, primarily
related to mortgage production which was awaiting transfer to the ultimate
servicer, as well as loans which were held by Commonwealth for investment and
sale. Servicing included collecting and remitting loan payments, accounting for
principal and interest, holding escrow funds for the payment of real estate
taxes and insurance premiums, contacting delinquent borrowers, supervising
foreclosures in the event of unremedied defaults, and generally administering
the loans.

      When Commonwealth received the gross loan payment from the individual
mortgagees of serviced loans, it remitted 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 was the gross servicing fee. Commonwealth retained a net
servicing fee, plus any late charges, on mortgage production awaiting sale to
the ultimate servicer. Commonwealth retained a monthly sub-servicing fee on
mortgage production which had been sold to the ultimate servicer but was
awaiting final transfer.

      At December 31, 2001, Commonwealth was not servicing any residential
mortgage loans. At December 31, 2000 and 1999, Commonwealth was servicing $0.1
billion and $0.2 billion of loans for others, respectively, as well as $0.8
billion and $0.9 billion of loans held by Commonwealth for investment or sale,
respectively. The servicing of $0.1 billion of loans for others at December 31,
2000 was primarily mortgage production awaiting transfer to the ultimate
servicer. The Company's loan servicing fees totaled $0.5 million in 2001, $0.8
million in 2000, and $3.3 million in 1999.

      During the year ended December 31, 2001, Commonwealth sold $197 million of
loans originated on a servicing released basis and no loans on a servicing
retained basis. During the years ended December 31, 2000 and 1999, Commonwealth
sold $150 million and $214 million of loans originated on a servicing released
basis, respectively, and $180 million and $419 million on a servicing retained
basis, respectively.


                                      -11-
<PAGE>
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. The
Company provides an allowance for accrued interest deemed to be uncollectible
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 Statement of Position
92-3 ("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,
                                          -----------------------------------------------------------
                                           2001         2000         1999         1998         1997
                                          -------      -------      -------      -------      -------
                                                             (dollars in thousands)
<S>                                       <C>          <C>          <C>          <C>          <C>
30 to 59 days                             $13,881      $12,866      $ 8,867      $ 9,788      $13,083
60 to 89 days                               4,035        2,611        3,163        2,418        2,503
90 days and over                            8,471        7,995        7,779       10,012        8,938
                                          -------      -------      -------      -------      -------
  Total                                   $26,387      $23,472      $19,809      $22,218      $24,524
                                          =======      =======      =======      =======      =======
Total delinquent loans to total loans
  held for investment                        2.00%        1.64%        1.45%        1.65%        1.93%
                                             ====         ====         ====         ====         ====
</TABLE>


                                      -12-
<PAGE>
      NONPERFORMING ASSETS. The following table sets forth information relating
to the Company's nonperforming assets at the dates indicated.

<TABLE>
<CAPTION>

                                                                                              December 31,
                                                                 ------------------------------------------------------------------
                                                                   2001          2000            1999           1998          1997
                                                                 -------        -------        -------        -------        ------
                                                                                        (dollars in thousands)
<S>                                                              <C>            <C>            <C>            <C>            <C>
Residential mortgage loans                                       $ 3,553        $ 4,193        $ 4,044        $ 5,119        $5,269
Consumer loans                                                     3,588          2,782          2,355          1,598         1,324
Commercial loans (1)                                               1,330          1,020          1,380          3,295         2,345
                                                                 -------        -------        -------        -------        ------
  Total nonperforming loans (1)                                    8,471          7,995          7,779         10,012         8,938
Real estate owned and other acquired assets, net                   2,379          1,003            923          1,049           626
Investment securities (2)                                          1,000          1,700          1,700             --            --
                                                                 -------        -------        -------        -------        ------
  Total nonperforming assets (1)                                 $11,850        $10,698        $10,402        $11,061        $9,564
                                                                 =======        =======        =======        =======        ======
Nonperforming loans to total loans held for
  investment (1)                                                    0.64%          0.56%          0.57%          0.74%         0.70%
                                                                    ====           ====           ====           ====          ====
Total nonperforming assets to total assets (1)                      0.66%          0.57%          0.54%          0.49%         0.42%
                                                                    ====           ====           ====           ====          ====
</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
      December 31, 1997. There were no nonperforming SBA loans at December 31,
      2001, 2000, 1999, and 1998.

(2)   Represents an equity investment in a mortgage servicing partnership.

      At December 31, 2001, the Company's $3.6 million of nonperforming
single-family residential loans consisted of 63 loans having an average balance
of $56,393.

      Interest of $0.6 million was not recognized as interest income due to the
nonaccrual status of loans during 2001 and 2000. The actual amount of interest
recorded as income on such loans amounted to $0.2 million, $0.3 million, and
$0.3 million for the years ended December 31, 2001, 2000, and 1999,
respectively.

      At December 31, 2001, the Company's real estate owned and other assets
acquired totaled $2.4 million, primarily consisting of 14 single-family
residential properties acquired through foreclosure or by deed-in-lieu of
foreclosure and 31 recreational vehicle loans. At December 31, 2000, real estate
owned and other assets acquired totaled $1.0 million, primarily consisting of 12
single-family residential properties acquired through foreclosure or by
deed-in-lieu of foreclosure and 29 recreational vehicle loans. At year-end 1999,
real estate owned and other assets acquired totaled $0.9 million, primarily
consisting of 15 single-family residential properties acquired through
foreclosure or by deed-in-lieu of foreclosure and 11 recreational vehicle loans.

      During 2001, the Company sold 29 single-family residential properties
which were held as real estate owned resulting in a nominal net loss and
acquired an additional 31 single-family residential properties through
foreclosure or deed-in-lieu of foreclosure. During 2000, the Company sold 23
single-family residential properties which were held as real estate owned
resulting in a nominal net loss and acquired an additional 20 single-family
residential properties through foreclosure or deed-in-lieu of foreclosure.
During 1999, the Company sold 28 single-family residential properties which were
held as real estate owned resulting in a nominal net gain and acquired an
additional 23 single-family residential properties through foreclosure or
deed-in-lieu of foreclosure.


                                      -13-
<PAGE>
      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.
Loss assets are considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Classified assets
of the Company were essentially comprised of its nonperforming assets, as
discussed above.

      A fourth category, designated "special mention," reflects those assets
which do not currently expose an insured institution to a sufficient degree of
risk to warrant classification as substandard, doubtful or loss, but which
represent potential future problem assets. At December 31, 2001, the Company had
$4.2 million of assets classified as special mention.


                                      -14-
<PAGE>
      ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an
allowance for estimated loan losses based upon the probable losses inherent in
the loan portfolio which have occurred as of the date of the financial
statements. In determining the allowance for loan losses, Commonwealth assesses
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.

      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,
                                      ----------------------------------------------------------
                                        2001         2000         1999        1998         1997
                                      --------     --------     --------     -------     -------
                                                         (dollars in thousands)
<S>                                   <C>          <C>          <C>          <C>         <C>
Allowance at beginning of year        $ 11,078     $ 10,478     $  9,589     $ 9,024     $ 9,971
                                      --------     --------     --------     -------     -------
Provision                                8,750        5,250        4,000       3,500       1,600

Charge-offs:
  Residential mortgage                     (71)        (135)        (344)       (566)       (453)
  Consumer                              (5,038)      (4,456)      (2,138)     (1,857)     (1,383)
  Commercial                              (826)        (298)      (1,190)       (706)       (963)
                                      --------     --------     --------     -------     -------
    Total charge-offs                   (5,935)      (4,889)      (3,672)     (3,129)     (2,799)
Recoveries:
  Residential mortgage                       2           14           27          32         147
  Consumer                                 181          170          237          78          74
  Commercial                               151           55          297          84          31
                                      --------     --------     --------     -------     -------
    Total recoveries                       334          239          561         194         252
                                      --------     --------     --------     -------     -------
Allowance at end of year              $ 14,227     $ 11,078     $ 10,478     $ 9,589     $ 9,024
                                      ========     ========     ========     =======     =======

Allowance for loan losses to total
   loans held for investment at end
   of year                                1.08%        0.78%        0.76%       0.71%       0.71%
                                          ====         ====         ====        ====        ====
</TABLE>

      The increase in the allowance for loan losses reflects Commonwealth's
on-going strategy to increase consumer and commercial lending, while
de-emphasizing residential mortgage lending. Consumer and commercial loans
generally involve greater credit risk than residential mortgage loans because
the risk of borrower default is greater. In addition, certain commercial and
consumer loans are unsecured or involve collateral which may be more likely to
decline in value and/or may be more difficult to liquidate than single-family
residences. At December 31, 2001, consumer and commercial loans represented 55%
of total loans, compared to 44% at December 31, 2000. Management will continue
to evaluate its loan portfolio and record additional allowance for loan losses
in the future as necessary.


                                      -15-
<PAGE>
      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,
                                           --------------------------------------------------------------------------------------
                                                      2001                          2000                          1999
                                           --------------------------     ------------------------      -------------------------
                                                           Percent of                   Percent of                     Percent of
                                                            Loans by                     Loans by                       Loans by
                                                            Category                     Category                       Category
                                           Amount             (1)         Amount            (1)         Amount            (1)
                                           ------          ----------     ------        ----------      ------         ----------
                                                                           (dollars in thousands)
<S>                                        <C>             <C>           <C>            <C>            <C>             <C>
Breakdown of allowance:
  Residential mortgage loans               $ 1,412            0.24%      $ 1,662           0.21%       $ 2,442            0.28%
  Consumer loans                             7,666            1.99         6,323           1.64          4,966            1.54
  Commercial loans                           5,149            1.52         3,093           1.27          3,070            1.61
                                           -------                       -------                       -------
  Total allowance for loan
    losses                                 $14,227            1.08%      $11,078           0.78%       $10,478            0.76%
                                           =======                       =======                       =======
</TABLE>

<TABLE>
<CAPTION>

                                                                 December 31,
                                           -------------------------------------------------------
                                                      1998                          1997
                                           --------------------------     ------------------------
                                                         Percent of                   Percent of
                                                          Loans by                     Loans by
                                                          Category                     Category
                                           Amount           (1)         Amount            (1)
                                           ------        ----------     ------        ----------
                                                         (dollars in thousands)
<S>                                        <C>           <C>            <C>           <C>
Breakdown of allowance:
  Residential mortgage loans              $ 2,207           0.23%      $ 2,536           0.26%
  Consumer loans                            3,412           1.42         2,916           1.50
  Commercial loans                          3,970           2.86         3,572           3.72
                                          -------                      -------
  Total allowance for loan
    losses                                $ 9,589           0.71%      $ 9,024           0.71%
                                          =======                      =======
</TABLE>

----------

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


                                      -16-
<PAGE>
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 FHLMC, the FNMA, and the Government National Mortgage
Association ("GNMA").

      In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company segregated its mortgage-backed and
investment securities into two categories, those held to maturity and those
available for sale. During the third quarter of 2000, Commonwealth reclassified
certain mortgage-backed securities from the held to maturity category to the
available for sale category. This reclassification resulted in the entire
portfolio being classified as available for sale and a $0.2 million increase in
shareholders' equity. The categorization of Commonwealth's entire portfolio as
available for sale was consistent with the Company's strategy to reduce the
relative proportion of residential mortgage-related assets on its balance sheet.

      Mortgage-backed securities classified as held to maturity are carried at
amortized cost and are adjusted for amortization of premiums and accretion of
discounts over the life of the related security pursuant to the level-yield
method. Mortgage-backed securities classified as available for sale are reported
at fair value, with unrealized gains and losses, net of tax, excluded from
earnings and reported as a separate component of shareholders' equity. The net
unrealized gain on available for sale mortgage-backed securities was $2.5
million at year-end 2001, compared to a net unrealized gain of $1.3 million at
year-end 2000.

      At December 31, 2001, the Company's entire mortgage-backed securities
portfolio totaling $171 million was categorized as available-for-sale. At
December 31, 2001, $136 million, or 79%, of the Company's mortgage-backed
securities were insured or guaranteed by the FHLMC, the FNMA, or the GNMA. As
part of its investment policy, the Company also has the ability to invest in
private mortgage-backed securities. These non-federally insured mortgage-backed
securities, which are generally rated AA or better, yield a higher rate of
return and involve a higher risk of loss than comparable mortgage-backed
securities issued by the FHLMC, the FNMA, or the GNMA. At December 31, 2001, $35
million, or 21%, of the Company's mortgage-backed securities were private
mortgage-backed securities. At December 31, 2001, $144 million, or 84%, of the
Company's mortgage-backed securities portfolio had fixed rates of interest, and
$27 million, or 16%, had adjustable rates of interest.


                                      -17-
<PAGE>
      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, 2001 and 2000, mortgage-backed securities with both an
amortized cost and market value of $10 million and $37 million, respectively,
collateralized certain securities sold under agreements to repurchase. At
December 31, 2001 and 2000, mortgage-backed securities with an amortized cost of
$38 million and $25 million, respectively, (market value of $39 million and $25
million, respectively), collateralized commercial repurchase agreements.
Mortgage-backed securities with an amortized cost at December 31, 2001 and 2000,
of $61 million and $41 million, respectively, (market value of $62 million and
$41 million, respectively), were pledged as collateral for depositors.

      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,
                                                  -----------------------------------
                                                     2001         2000         1999
                                                  ---------    ---------    ---------
                                                             (in thousands)
<S>                                               <C>          <C>          <C>
Mortgage-backed securities at beginning of year   $ 202,700    $ 290,954    $ 524,141
Purchases                                            48,426           --           --
Sales or call                                            --      (21,883)      (5,170)
Repayments                                          (81,486)     (72,823)    (219,534)
Unrealized gain (loss) on available-for-sale
  mortgage-backed securities                          1,220        6,452       (8,483)
                                                  ---------    ---------    ---------
Mortgage-backed securities at end of year (1)     $ 170,860    $ 202,700    $ 290,954
                                                  =========    =========    =========
</TABLE>

----------

(1)   At December 31, 2001, the amortized cost and market value of the Company's
      total mortgage-backed securities amounted to $168 million and $171
      million, respectively.

      At December 31, 2001, the contractual maturity of substantially all of the
Company's mortgage-backed securities was in excess of ten years. The actual
maturity of a mortgage-backed security is less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments also affect the yield to
maturity. The yield on a security is based upon the interest income and the
amortization of any premium or accretion of any discount related to the
mortgage-backed security. In accordance with accounting principles generally
accepted in the United States, premiums and discounts are amortized or accreted
over the estimated lives of the loans, which decrease and increase interest
income, respectively. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of a mortgage-backed security, and these assumptions are reviewed
periodically to reflect actual and anticipated prepayments. Although prepayments
of underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of the
underlying real estate collateralizing the mortgages, and general levels of
market interest rates, the


                                      -18-
<PAGE>
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.

      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, the
Company may also invest a portion of its assets in commercial paper, corporate
debt securities, mutual funds, the assets of which conform to the investments
that Commonwealth is otherwise authorized to make directly, and certain equity
investments.

      The Company classifies its debt and equity securities as either held to
maturity or available for sale. There were no securities held to maturity at
December 31, 2001 or December 31, 2000.

      Securities classified as held to maturity are those securities which the
Company has the intent and ability to hold to maturity, subject to the continued
creditworthiness of the issuers. Accordingly, these securities are carried at
amortized cost and are adjusted for amortization of premiums and accretion of
discounts over the life of the related security pursuant to the level-yield
method.

      Securities classified as available for sale are intended to be held for
indefinite periods of time and include those securities that management may
employ as part of its asset/liability management strategy and that may be sold
in response to changes in interest rates, resultant prepayment risk, and other
factors related to interest rate and resultant prepayment risk changes.
Investment securities classified as available for sale are reported at fair
value, with unrealized gains and losses, net of tax, excluded from earnings and
reported as a separate component of shareholders' equity. Realized gains or
losses on the sale of securities are computed by comparing the sales proceeds
with the cost of the securities, as calculated by the specific identification
method.


                                      -19-
<PAGE>
      The following table sets forth information regarding the amortized cost
and market value of the Company's investment securities at the dates indicated.

<TABLE>
<CAPTION>

                                                                                    December 31,
                                                  ----------------------------------------------------------------------------------
                                                           2001                         2000                          1999
                                                  ----------------------       -----------------------        ----------------------
                                                  Amortized       Market       Amortized        Market        Amortized       Market
                                                     Cost         Value           Cost          Value            Cost         Value
                                                  ---------      -------       ---------       -------        ---------      -------
                                                                                    (in thousands)
<S>                                               <C>            <C>           <C>             <C>            <C>            <C>
Available for sale:
  Corporate Bonds                                 $10,505        $10,419        $    --        $    --        $34,996        $34,925
  Fixed Income Mutual Funds                        50,211         50,211             --             --         20,751         20,479
  Equity Investment--Mortgage
      Servicing Partnership                         1,000          1,047          1,700          2,417          1,700          1,700
  Other Equity Investments                         15,326         15,459         11,650         11,634         10,854         11,115
                                                  -------        -------        -------        -------        -------        -------
       Total                                      $77,042        $77,136        $13,350        $14,051        $68,301        $68,219
                                                  =======        =======        =======        =======        =======        =======
</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, advances from the FHLB of
Pittsburgh, securities sold under agreements to repurchase, and commercial
repurchase agreements. Loan repayments are a relatively stable source of funds,
while deposit inflows and outflows are influenced by general interest rates and
money market conditions. Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources. They
may also be used on a longer term basis for general business purposes.

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

      The Company's deposits are obtained primarily from residents and
businesses located in Southeast Pennsylvania. Management of the Company
estimates that a de minimus 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.


                                      -20-
<PAGE>
      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, 2001,
the branch offices of the Company consisted of 39 traditional full-service
offices and 20 full-service offices located in supermarkets.

      In addition to the Company's extensive branch network, the Company
currently maintains 59 automated teller machine ("ATM") locations. The Company
also maintains a 24 hour telephone banking service known as ComLine and an
internet banking service known as Commonwealth OnLine.

      The Company's strategy is to emphasize growth in relatively low-cost core
deposits (demand, money market, and savings deposits) through its retail and
commercial banking activities, while deemphasizing growth of relatively
high-cost certificates of deposit. The Company's focus on customer service and
convenience has facilitated its acquisition of lower-cost demand deposits and
savings accounts. At December 31, 2001, total demand deposits and savings
deposits amounted to 56% and 15% of the Company's total deposits, respectively.
During 2001, the weighted average rate paid on the Company's demand deposits and
savings deposits amounted to 1.89% and 1.86%, respectively, as compared to a
weighted average rate paid of 5.09% 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,
                                   -------------------------------------------------------------------------------------------------
                                             2001                               2000                                1999
                                   ------------------------          --------------------------          ---------------------------
                                                    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                       $  228,165         15.27%         $  208,076           14.30%         $  188,003          12.50%
Money market deposits                 407,171         27.25             360,669           24.80             388,605          25.85
Noninterest bearing
  deposits (1)                        204,461         13.68             178,423           12.27             146,477           9.74
                                   ----------        ------          ----------          ------          ----------         ------
    Total demand deposits             839,797         56.20             747,168           51.37             723,085          48.09
                                   ----------        ------          ----------          ------          ----------         ------
Savings deposits                      218,661         14.63             212,946           14.64             221,074          14.70
Certificate of deposit
   accounts:
   6 months or less                   231,306         15.48             207,282           14.25             279,109          18.56
   7-12 months                        111,041          7.43              69,768            4.79             157,895          10.50
   13-36 months                        73,365          4.91             190,797           13.12              88,110           5.86
   More than 36 months                 20,237          1.35              26,631            1.83              34,473           2.29
                                   ----------        ------          ----------          ------          ----------         ------
   Total certificates                 435,949         29.17             494,478           33.99             559,587          37.21
                                   ----------        ------          ----------          ------          ----------         ------
   Total deposits                  $1,494,407        100.00%         $1,454,592          100.00%         $1,503,746         100.00%
                                   ==========        ======          ==========          ======          ==========         ======
</TABLE>

----------

(1)   Includes business checking accounts totaling $135 million, $108 million,
      and $72 million at December 31, 2001, 2000, and 1999, respectively.


                                      -21-
<PAGE>
      The following table sets forth the activity in the Company's deposits
during the periods indicated.
<TABLE>
<CAPTION>

                                              Year Ended December 31,
                                      ----------------------------------------
                                          2001           2000          1999
                                      -----------    -----------    -----------
                                                (dollars in thousands)
<S>                                   <C>            <C>            <C>
Beginning balance                     $ 1,454,592    $ 1,503,746    $ 1,605,299
Net decrease before interest               (3,834)       (98,168)      (153,462)
Interest credited                          43,649         49,014         51,909
                                      -----------    -----------    -----------
Net increase (decrease)
  in deposits                              39,815        (49,154)      (101,553)
                                      -----------    -----------    -----------
Ending balance                        $ 1,494,407    $ 1,454,592    $ 1,503,746
                                      ===========    ===========    ===========
</TABLE>

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

<TABLE>
<CAPTION>

                                                    December 31,
                                    ------------------------------------------
                                      2001             2000             1999
                                    --------         --------         --------
                                               (dollars in thousands)
<S>                                 <C>              <C>              <C>
0.00% to 1.99%                      $ 48,561         $    859         $    808
2.00% to 2.99%                        44,699              505              171
3.00% to 3.99%                        79,685              122            1,541
4.00% to 4.99%                        85,162          234,341          321,421
5.00% to 6.99%                       177,577          255,058          234,091
7.00% to 8.99%                           265            3,503            1,473
9.00% and over                            --               90               82
                                    --------         --------         --------
Total                               $435,949         $494,478         $559,587
                                    ========         ========         ========
</TABLE>


                                      -22-
<PAGE>
      The following table sets forth the amount and remaining maturities of the
Company's certificates of deposit at December 31, 2001.

<TABLE>
<CAPTION>
                                                                   Over Six                               Over Two
                                                                    Months             Over One            Years
                                              Six Months          Through One        Year Through          Through        Over Three
                                               or less               Year              Two Years         Three Years         Years
                                              ----------          -----------        ------------        -----------      ----------
                                                                              (dollars in thousands)
<S>                                           <C>                 <C>                <C>                 <C>              <C>
0.00% to 1.99%                                 $ 46,513            $  2,012            $    20            $     5            $    11
2.00% to 2.99%                                   26,482              10,990              6,863                340                 24
3.00% to 3.99%                                   41,458              23,088             12,213              2,596                330
4.00% to 4.99%                                   30,929              19,433             21,887              7,185              5,728
5.00% to 6.99%                                   85,828              55,518             14,660              7,525             14,046
7.00% to 8.99%                                       96                  --                 71                 --                 98
9.00% and over                                       --                  --                 --                 --                 --
                                               --------            --------            -------            -------            -------
Total                                          $231,306            $111,041            $55,714            $17,651            $20,237
                                               ========            ========            =======            =======            =======
</TABLE>

      At December 31, 2001, the Company had $55 million of certificates of
deposit in amounts equal to or greater than $100,000, of which $38 million was
scheduled to mature within six months, $9 million was scheduled to mature in
over six months through 12 months, and $8 million was scheduled to mature in a
time period greater than 12 months.

      BORROWINGS. The Company may obtain secured advances from the FHLB of
Pittsburgh by pledging certain assets, 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. At December 31, 2001, the Company had $74 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, 2001, the Company had $10 million of repurchase
agreements outstanding.

      At December 31, 2001, the Company also had $39 million of repurchase
agreements outstanding with commercial customers.


                                      -23-
<PAGE>
      The Company's borrowings are used to fund lending and investment
activities, withdrawals from deposit accounts, and other disbursements which
occur in the normal course of business.

      The following table sets forth the amount and weighted average rate of the
Company's borrowings at the dates indicated.

<TABLE>
<CAPTION>

                                                                              December 31,
                                  --------------------------------------------------------------------------------------------------
                                            2001                                 2000                                1999
                                  -------------------------            -------------------------           -------------------------
                                                                         (dollars in thousands)
<S>                               <C>                 <C>              <C>                 <C>             <C>                 <C>
FHLB advances                     $ 74,123            6.88%            $171,666            6.36%           $127,000            5.49%
Repurchase agreements               10,000            6.88               35,000            6.19             100,000            5.81
Commercial repurchase
 agreements                         39,027            1.45               17,830            4.94               9,076            4.32
                                  --------            ----             --------            ----            --------            ----
  Total borrowings                $123,150            5.16%            $224,496            6.22%           $236,076            5.58%
                                  ========                             ========                            ========
</TABLE>

      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,
                                      ------------------------------------------------------------------
                                        2001                         2000                         1999
                                      --------                     --------                     --------
                                                             (dollars in thousands)
<S>                                   <C>                          <C>                          <C>
FHLB advances:
  Maximum balance                     $181,500                     $180,100                     $225,500
  Average balance                     $114,808                     $138,714                     $159,929
  Weighted average rate:
    At end of period                     6.88%                        6.36%                        5.49%
    During the period                    6.44%                        6.21%                        5.31%

Repurchase agreements:
  Maximum balance                     $ 35,000                     $100,000                     $154,000
  Average balance                     $ 18,260                     $ 65,646                     $132,657
  Weighted average rate:
    At end of period                     6.88%                        6.19%                        5.81%
    During the period                    6.56%                        6.04%                        5.92%

Commercial repurchase
  agreements:
  Maximum balance                     $ 39,752                     $ 22,590                     $ 14,363
  Average balance                     $ 22,566                     $ 14,453                     $  6,869
  Weighted average rate:
    At end of period                     1.45%                        4.94%                        4.32%
    During the period                    3.13%                        4.88%                        4.30%
</TABLE>


                                      -24-
<PAGE>
EMPLOYEES

      The Company had 540 full-time employees and 223 part-time employees at
December 31, 2001. 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. During January 2001, the Bank converted from a
federally chartered savings bank to a Pennsylvania chartered savings bank,
primarily regulated by the Pennsylvania Department of Banking and the FDIC. The
Bank conducts business from its executive offices in Norristown, Pennsylvania
and 59 full-service branches, including 20 supermarket branch offices, located
in Southeast Pennsylvania. As of December 31, 2000, ComNet Mortgage Services was
a division of the Bank which conducted business through loan origination offices
located in Pennsylvania, Maryland, and New Jersey.

      CFSL INVESTMENT CORPORATION. CFSL Investment Corporation, a wholly-owned
subsidiary of the Bank incorporated in Delaware, invests primarily in
mortgage-backed securities. At December 31, 2001, CFSL Investment Corporation
held $24 million of mortgage-backed securities.

      COMLIFE, INC. ComLife, Inc., a wholly-owned subsidiary of the Company
incorporated in Pennsylvania, held a $1,000 equity investment at December 31,
2001.

      COMMONWEALTH INVESTMENT CORPORATION OF DELAWARE, INC. Commonwealth
Investment Corporation of Delaware, Inc., a wholly-owned subsidiary of the
Company incorporated in Delaware, held cash and investment securities totaling
$1.3 million at December 31, 2001.

      CS CORPORATION. CS Corporation, a wholly-owned subsidiary of the Company
incorporated in Pennsylvania, held a $1.9 million equity investment at December
31, 2001.

      FIRSTCOR, LTD. The activities of Firstcor, Ltd. ("Firstcor"), a
wholly-owned subsidiary of the Bank incorporated in Pennsylvania, 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, 2001,
Firstcor had nine investments in such partnerships with an aggregate carrying
value of $4.1 million. The investments held by these partnerships are all
located in Southeast Pennsylvania. In addition, Firstcor, through an independent
brokerage, makes available investments in annuities and mutual funds to
customers of the Bank.

      TYLER WEALTH COUNSELORS, INC. Tyler Wealth Counselors, Inc., a
wholly-owned subsidiary of the Bank incorporated in Pennsylvania, offers
financial planning and investment advisory services to individuals and small
businesses in Southeast Pennsylvania.


                                      -25-
<PAGE>
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 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 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 and commercial banks. 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.


                                      -26-
<PAGE>
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 1997.

      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. These
provisions did not have a material adverse effect on the Company's financial
condition or operations.


                                      -27-
<PAGE>
      NET OPERATING LOSS CARRYOVERS. For losses incurred in taxable years
beginning 1976 through August 6, 1997, a financial institution may carryback net
operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. For taxable years beginning after August 6, 1997,
the carryback period is two years and the carryforward period is twenty years.
At December 31, 2001, 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 1.099%.

      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, including certain statutory
adjustments. 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,
2001, the Company had a $1.8 million net loss carryforward for state tax
purposes, which expires in 2003.


                                      -28-
<PAGE>
                                   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 Office of Thrift
Supervision ("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 the 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 regulatory
authorities, other than: (i) furnishing or performing management services for a
subsidiary savings institution; (ii) conducting an insurance


                                      -29-
<PAGE>
agency or escrow business; (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies. Those activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.

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

      In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors, and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the institution's
loans to one borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus). Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 2001, the Bank was in compliance with the above
restrictions.


                                      -30-
<PAGE>
      RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.

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

      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.


                                      -31-
<PAGE>
THE BANK

      GENERAL. During January 2001, the Bank converted from a federally
chartered savings bank to a Pennsylvania chartered savings bank, primarily
regulated by the Pennsylvania Department of Banking and the FDIC. The
Pennsylvania Department of Banking and the FDIC have extensive authority over
the operations of state chartered savings institutions. As part of this
authority, savings institutions are required to file periodic reports with the
FDIC, and are subject to periodic examinations by the Pennsylvania Department of
Banking and the FDIC.

      The Bank is subject to extensive regulation and examination by the
Pennsylvania Department of Banking and by the FDIC, which insures its deposits
to the maximum extent permitted by law. The federal and state laws and
regulations which are applicable to banks regulate, among other things, the
scope of their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds and the nature and amount of and
collateral for certain loans. There are periodic examinations by the
Pennsylvania Department of Banking and the FDIC to test the Bank's compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulation, whether by the
Pennsylvania Department of Banking, the FDIC or the Congress could have a
material adverse impact on the Bank and their operations.

      PENNSYLVANIA SAVINGS BANK LAW. The Pennsylvania Banking Code of 1965, as
amended (the "Banking Code") contains detailed provisions governing the
organization, location of offices, rights and responsibilities of directors,
officers, employees and members, as well as corporate powers, savings and
investment operations and other aspects of the Bank and its affairs. The Banking
Code delegates extensive rulemaking power and administrative discretion to the
Pennsylvania Department of Banking so that the supervision and regulation of
state-chartered savings banks may be flexible and readily responsive to changes
in economic conditions and in savings and lending practices.

      One of the purposes of the Banking Code is to provide savings banks with
the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania savings bank may locate or change the location of
its principal place of business and establish an office anywhere in
Pennsylvania, with the prior approval of the Pennsylvania Department of Banking.

      The Pennsylvania Department of Banking generally examines each savings
bank not less frequently than once every two years. Although the Pennsylvania
Department of Banking may accept the examinations and reports of the FDIC in
lieu of their examination, the present practice is for the Pennsylvania
Department of Banking to conduct individual examinations. The Pennsylvania
Department of Banking may order any savings bank to discontinue any violation of
law or unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee


                                      -32-
<PAGE>
of a savings bank engaged in an objectionable activity, after the Pennsylvania
Department of Banking has ordered the activity to be terminated, to show cause
at a hearing before the Pennsylvania Department of Banking why such person
should not be removed.

      INTERSTATE ACQUISITIONS. The Interstate Banking Act allows federal
regulators to approve mergers between adequately capitalized banks from
different states regardless of whether the transaction is prohibited under any
state law, unless one of the banks' home states has enacted a law expressly
prohibiting out-of-state mergers before June 1997. This act also allows a state
to permit out-of-state banks to establish and operate new branches in this
state. The Commonwealth of Pennsylvania has "opted in" to this interstate merger
provision. Therefore, the prior requirement that interstate acquisitions would
only be permitted when another state had "reciprocal" legislation that allowed
acquisitions by Pennsylvania-based bank holding companies has been eliminated.
The new Pennsylvania legislation, however, retained the requirement that an
acquisition of a Pennsylvania institution by a Pennsylvania or a
non-Pennsylvania-based holding company must be approved by the Pennsylvania
Department of Banking.

      FDIC INSURANCE OF DEPOSITS. The FDIC administrators the SAIF and BIF, and
insures the Bank's deposits up to applicable limits. Under 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." These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with deposit insurance rates ranging from 0% for well
capitalized, healthy institutions to 0.27% for undercapitalized institutions
with substantial supervisory concerns. The deposits of Commonwealth Bank were
not subject to this potential premium since the FDIC classified the Bank as a
well capitalized, healthy institution.

      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. As of December 31, 2001, the FICO
debt service assessment was 1.8 basis points for both the SAIF-assessable and
the BIF-assessable base. The FICO debt service assessment 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.


                                      -33-
<PAGE>
      CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, are not members of the Federal Reserve System. The FDIC's
capital regulations establish a minimum 3.0% Tier I leverage capital requirement
for the most highly-rated state-chartered, non-member banks, with an additional
cushion of at least 100 to 200 basis points for all other state-chartered,
non-member banks, which effectively will increase the minimum Tier I leverage
ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC's regulation,
highest-rated banks are those that the FDIC determines are not anticipating or
experiencing significant growth and have well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and, in general, which are considered a strong banking organization,
rated composite 1 under the Uniform Financial Institutions Rating System.
Leverage or core capital is defined as the sum of common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, and minority interests in consolidated subsidiaries, minus all
intangible assets other than certain qualifying supervisory goodwill, and
certain purchased mortgage servicing rights and purchased credit and
relationships.

      The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital which is defined as Tier I capital and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, plus certain off-balance-sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.

      The components of Tier I capital are equivalent to those discussed above
under the 3% leverage standard. The components of supplementary (Tier 2) capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At December 31, 2001,
the Bank met each of its capital requirements.


                                      -34-
<PAGE>
      A bank which has less than the minimum leverage capital requirement shall,
within 60 days of the date as of which it fails to comply with such requirement,
submit to its FDIC regional director for review and approval a reasonable plan
describing the means and timing by which the bank shall achieve its minimum
leverage capital requirement. A bank which fails to file such plan with the FDIC
is deemed to be operating in an unsafe and unsound manner, and could subject the
bank to a cease-and-desist order from the FDIC. The FDIC's regulation also
provides that any insured depository institution with a ratio of Tier I capital
to total assets that is less than 2.0% is deemed to be operating in an unsafe or
unsound condition pursuant to Section 8(a) of the FDIA and is subject to
potential termination of deposit insurance. However, such an institution will
not be subject to an enforcement proceeding thereunder solely on account of its
capital ratios if it has entered into and is in compliance with a written
agreement with the FDIC to increase its Tier I leverage capital ratio to such
level as the FDIC deems appropriate and to take such other action as may be
necessary for the institution to be operated in a safe and sound manner. The
FDIC capital regulation also provides, among other things, for the issuance by
the FDIC or its designee(s) of a capital directive, which is a final order
issued to a bank that fails to maintain minimum capital to restore its capital
to the minimum leverage capital requirement within a specified time period. Such
directive is enforceable in the same manner as a final cease-and-desist order.

      The Bank is also subject to more stringent Pennsylvania Department of
Banking capital guidelines. Although not adopted in regulation form, the
Pennsylvania Department of Banking utilizes capital standards requiring a
minimum of 6% leverage capital and 10% risk-based capital. The components of
leverage and risk-based capital are substantially the same as those defined by
the FDIC.

      LOANS-TO-ONE BORROWER LIMITATION. Under federal regulations, with certain
limited exceptions, a Pennsylvania chartered savings bank may lend to a single
or related group of borrowers on an "unsecured" basis an amount equal to 15% of
its unimpaired capital and surplus. An additional amount may be lent, equal to
10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain securities
and bullion, but generally does not include real estate.

      ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. Section 24 of
the FDIA, as amended by the FDICIA, generally limits the activities and equity
investments of FDIC-insured, state-chartered banks to those that are permissible
for national banks. Under regulations dealing with equity investments, an
insured state bank generally may not directly or indirectly acquire or retain
any equity investment of a type, or in an amount, that is not permissible for a
national bank. An insured state bank is not prohibited from, among other things,
(i) acquiring or retaining a majority interest in a subsidiary, (ii) investing
as a limited partner in a partnership the sole purpose of which is direct or
indirect investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors',
trustees' and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions, and (iv) acquiring
or retaining the


                                      -35-
<PAGE>
voting shares of a depository institution if certain requirements are met.

      The FDIC has adopted final regulations pertaining to the other activity
restrictions imposed upon insured savings banks and their subsidiaries by
Section 24. Pursuant to such regulations, insured savings banks engaging in
impermissible activities may seek approval from the FDIC to continue such
activities. Savings banks not engaging in such activities but that desire to
engage in otherwise impermissible activities may apply for approval from the
FDIC to do so, however, if such bank fails to meet the minimum capital
requirements or the activities present a significant risk to the FDIC insurance
funds, such application will not be approved by the FDIC.

      REGULATORY ENFORCEMENT AUTHORITY. The enforcement powers available to
federal banking regulators include, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities. The federal banking regulators also have the authority
to impose significant civil money penalties and requires, except under certain
circumstances, public disclosure of final enforcement actions by the federal
banking agencies.

      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, 2001, the Bank had $13 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, 2001,
dividends paid by the FHLB of Pittsburgh to the Bank amounted to $0.9 million,
compared to $1.3 million for the year ended December 31, 2000.


                                      -36-
<PAGE>
      FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
interest-bearing checking accounts). As of December 31, 2001, no reserves were
required to be maintained on the first $5.7 million of transaction accounts,
reserves of 3% were required to be maintained against the next $35.6 million of
net transaction accounts (with such dollar amounts subject to adjustment by the
Federal Reserve Board), and a reserve of 10% (which is subject to adjustment by
the Federal Reserve Board to a level between 8% and 14%) against all remaining
net transaction accounts. Because required reserves must be maintained in the
form of vault cash or a noninterest-bearing account at a Federal Reserve Bank,
the effect of this reserve requirement is to reduce an institution's earning
assets.


                                      -37-
<PAGE>
ITEM 2. PROPERTIES.

OFFICE AND PROPERTIES

      At December 31, 2001, the Bank conducted business from its corporate
offices in Norristown, Pennsylvania and 59 full-service offices, including 20
supermarket branches, located in Southeast Pennsylvania.

      The following table sets forth certain information relating to the Bank's
offices at December 31, 2001.

<TABLE>
<CAPTION>

                                                                              Net Book Value of
                                                                                 Property and
                                                                                  Leasehold
                                                                   Lease       Improvements at
                                                    Owned or     Expiration      December 31,               Deposits at
         Location                                    Leased         Date            2001(1)              December 31, 2001
---------------------------------                   --------     ----------   -----------------          -----------------
                                                                                             (in thousands)
<S>                                                 <C>          <C>          <C>                        <C>
CORPORATE HEADQUARTERS:

NORRISTOWN:                                         Leased         02/12           $1,133                      $6,696
2 West Lafayette Street
Norristown, PA 19401

TRADITIONAL FULL-SERVICE OFFICES:

NORRISTOWN:                                         Leased         02/12              115                      41,701
2 West Lafayette Street
Norristown, PA 19401

TRAPPE:                                             Leased         10/10              106                      34,285
Trappe Shopping Center
130 West Main Street, Suite 158
Trappe, PA 19426

KING OF PRUSSIA:                                    Leased         09/03               55                      37,890
DeKalb Plaza Shopping Center
338 West DeKalb Pike
King of Prussia, PA 19406

PARK RIDGE:                                         Leased         02/03               --                      68,709
Park Ridge Shopping Center
2701 West Main Street
Norristown, PA 19403

EAST NORRITON:                                      Leased         05/19              876                      79,636
East Norriton Crossing
5 West Germantown Pike
Norristown, PA 19401

AUDUBON:                                            Leased         08/03               13                      40,609
Audubon Village Shopping Center
2806 Audubon Village Drive
Norristown, PA 19403
</TABLE>


                                      -38-
<PAGE>
<TABLE>
<CAPTION>
                                                                              Net Book Value of
                                                                                 Property and
                                                                                  Leasehold
                                                                   Lease       Improvements at
                                                    Owned or     Expiration      December 31,               Deposits at
         Location                                    Leased         Date            2001(1)              December 31, 2001
---------------------------------                   --------     ----------   -----------------          -----------------
                                                                                             (in thousands)
<S>                                                 <C>          <C>          <C>                        <C>
NEWTOWN SQUARE:                                     Owned           --               $304                    $47,099
3531 West Chester Pike
Newtown Square, PA 19073

FRANKFORD AVENUE:                                   Owned           --                308                     49,984
7149 Frankford Avenue
Philadelphia, PA 19135

CASTOR AVENUE:                                      Owned           --                164                     42,668
6537 Castor Avenue
Philadelphia, PA 19149

PENNDEL:                                            Owned           --                143                     24,532
U.S. # 1 & Durham Road
Penndel, PA 19047

WELSH ROAD:                                         Owned           --                110                     39,294
2501 Welsh Road
Philadelphia, PA 19114

GLENSIDE:                                           Owned           --                265                     69,400
139 South Easton Road
Glenside, PA 19038

WESTTOWN:                                           Leased         08/04                1                     30,690
Marketplace Shopping Center
1502 West Chester Pike
West Chester, PA 19382

KENNETT SQUARE:                                     Leased         12/03               61                     19,544
New Garden Center
345 Scarlett Road
Kennett Square, PA 19348

WEST GROVE:                                         Owned           --                114                     16,131
106 West Evergreen Street
West Grove, PA 19390

WAYNE:                                              Leased         08/06                7                     23,628
Chesterbrook Village Center
500 Chesterbrook Boulevard, Suite B-5
Wayne, PA 19087

PAUL'S RUN:                                         Leased         05/04                1                      6,568
9896 Bustleton Ave.
Philadelphia, PA 19115

LANSDALE:                                           Leased         06/04                8                     40,378
521 West Main Street
Lansdale, PA 19446
</TABLE>


                                      -39-
<PAGE>
<TABLE>
<CAPTION>
                                                                              Net Book Value of
                                                                                 Property and
                                                                                  Leasehold
                                                                   Lease       Improvements at
                                                    Owned or     Expiration      December 31,            Deposits at
         Location                                    Leased         Date            2001(1)            December 31, 2001
---------------------------------                   --------     ----------   -----------------        -----------------
                                                                                            (in thousands)
<S>                                                 <C>          <C>          <C>                      <C>
 HILLCREST:                                         Leased         07/07             $ --                  $26,226
 Hillcrest Shopping Center
 638 East Main Street
 Lansdale, PA 19446

 SUMNEY FORGE:                                      Leased         07/04               --                   30,409
 Sumney Forge Square
 1601 Valley Forge Road
 Lansdale, PA 19446

 SOUDERTON:                                         Owned           --                231                   16,673
 705 Route 113
 Souderton, PA 18964

 CONSHOHOCKEN:                                      Leased         10/09              178                   74,965
 Plymouth Square Shopping Center
 200 West Ridge Pike, Suite 108
 Conshohocken, PA 19428

 CENTER CITY:                                       Leased         09/08              385                   12,703
 One Penn Square West
 30 South 15th Street, Suite 102
 Philadelphia, PA 19103

 PHOENIXVILLE:                                      Leased         07/12              335                   19,635
 Maple Lawn Village Center
 510 Kimberton Road
 Phoenixville, PA 19460

 ROYERSFORD:                                        Leased         01/16              255                   10,182
 Limerick Square
 70 Buckwalter Road, Suite 650
 Royersford, PA 19468

 PROTESTANT HOME:                                   Leased         03/04                1                    6,524
 6500 Tabor Road
 Philadelphia, PA 19111

 TACONY:                                            Leased         02/07               --                   44,360
 6958 Torresdale Avenue
 Philadelphia, PA 19135

 HOLMESBURG:                                        Leased         07/05              159                   32,075
 8423 Frankford Avenue
 Philadelphia, PA 19136

 MAYFAIR:                                           Owned           --                303                   18,549
 7425 Frankford Avenue
 Philadelphia, PA 19136
</TABLE>


                                      -40-
<PAGE>
<TABLE>
<CAPTION>
                                                                              Net Book Value of
                                                                                 Property and
                                                                                  Leasehold
                                                                   Lease       Improvements at
                                                    Owned or     Expiration      December 31,               Deposits at
         Location                                    Leased         Date            2001(1)              December 31, 2001
---------------------------------                   --------     ----------   -----------------          -----------------
                                                                                             (in thousands)
<S>                                                 <C>          <C>          <C>                        <C>
5TH & PENN STREETS:                                 Owned           --           $1,150                      $33,749
445 Penn Street
Reading, PA 19601

9TH & SPRING STREETS:                               Owned           --              365                       30,164
956 North Ninth Street
Reading, PA 19604

LANCASTER AVENUE:                                   Leased         12/04              4                       35,588
830 Lancaster Avenue
Reading, PA 19607

MOHNTON:                                            Owned           --              417                       24,207
14 West Wyomissing Avenue
Mohnton, PA 19540

TEMPLE:                                             Owned           --              294                       44,489
4950 Kutztown Road
Temple, PA 19560

RIVERSIDE:                                          Owned          03/04            298                       28,043
2040 Centre Avenue
Reading, PA 19605

HEIDELBERG:                                         Leased         06/07             52                       25,846
4641 Penn Avenue
Sinking Spring, PA 19608

KUTZTOWN:                                           Owned           --              294                       18,922
601 East Main Street
Kutztown, PA 19530

EXETER:                                             Leased         03/05              5                       58,868
4215 Perkiomen Avenue
Reading, PA 19606

WYOMISSING:                                         Leased         08/02            152                        2,454
70 Commerce Drive
Wyomissing, PA 19610
</TABLE>


                                      -41-
<PAGE>
<TABLE>
<CAPTION>
                                                                              Net Book Value of
                                                                                 Property and
                                                                                  Leasehold
                                                                   Lease       Improvements at
                                                    Owned or     Expiration      December 31,               Deposits at
         Location                                    Leased         Date            2001(1)              December 31, 2001
---------------------------------                   --------     ----------   -----------------          -----------------
                                                                                             (in thousands)
<S>                                                 <C>          <C>          <C>                        <C>
SUPERMARKET BRANCHES:

GIANT-MONTGOMERYVILLE:                              Leased         01/05              $122                  $3,274
Giant Food Store
1201 Knapp Road
Montgomeryville, PA 19454

REDNER'S COLLEGEVILLE:                              Leased         01/05                 1                   9,207
Redner's Warehouse Market
Marketplace at Collegeville
201 Second Avenue, Suite 100
Collegeville, PA 19426

GIANT-FAIRLESS HILLS:                               Leased         01/05                 3                  11,277
Fairless Hills Shopping Center
473 Oxford Road South
Fairless Hills, PA 19030

GIANT-SINKING SPRING:                               Leased         06/05                --                   8,042
Spring Towne Center
2643 Shillington Road
Sinking Spring, PA 19608

GIANT-ALDEN:                                        Leased         12/06                --                   9,378
Providence Village
543 North Oak Avenue
Alden, PA 19018

GIANT-BLUE BELL:                                    Leased         07/05                --                  13,093
The Shoppes at Blue Bell
1760 DeKalb Pike
Blue Bell, PA 19422

GIANT-HORSHAM:                                      Leased         06/07                16                   5,297
Horsham Point Shopping Center
314 Horsham Road, Unit A
Horsham, PA 19044

GIANT-SOUTHAMPTON:                                  Leased         02/07                18                   7,563
Southampton Shopping Center
466 A Second Street Pike
Southampton, PA 18966

GIANT-TROOPER:                                      Leased         03/06                --                   9,654
Audubon Square Shopping Center
2668 Egypt Road
Norristown, PA 19403

REDNER'S-DOYLESTOWN:                                Leased         09/05                --                   6,932
Doylestown Pointe
1661 Easton Road, Suite 2
Warrington, PA 18976
</TABLE>


                                      -42-
<PAGE>
<TABLE>
<CAPTION>
                                                                            Net Book Value of
                                                                               Property and
                                                                                Leasehold
                                                                 Lease       Improvements at
                                                  Owned or     Expiration      December 31,            Deposits at
         Location                                  Leased         Date            2001(1)            December 31, 2001
---------------------------------                 --------     ----------   -----------------        -----------------
                                                                                          (in thousands)
<S>                                               <C>          <C>          <C>                       <C>
GUINTA'S THRIFTWAY:                               Leased         02/05            $ --                   $11,090
Bradford Plaza
700 Downingtown Pike, Suite 130
West Chester, PA 19380

CLEMENS-EXTON:                                    Leased         06/05              --                     7,002
Lionville Shopping Center
170 Eagleview Boulevard
Exton, PA 19341

GIANT-POTTSTOWN:                                  Leased         01/08              90                     5,306
Pottstown Plaza
799 State Street
Pottstown, PA 19464

THRIFTWAY-PORT RICHMOND:                          Leased         09/05              32                    13,580
Port Richmond Village
2497 Aramingo Avenue, Suite 2
Philadelphia, PA 19125

SHOPRITE-FAR NORTHEAST:                           Leased         09/02              35                    13,326
Boulevard Plaza
11000 Roosevelt Boulevard
Philadelphia, PA 19116

SUPERFRESH-COTTMAN :                              Leased         05/07              15                     8,913
Cottman & Bustleton Center
2151 Cottman Avenue
Philadelphia, PA 19149

GIANT-WARMINSTER:                                 Leased         06/03              57                     3,812
Cedar Pointe Plaza
720-D West Street Road
Warminster, PA 18974

SPRING HOUSE CLEMENS:                             Leased         11/03              73                     2,696
Spring House Center/Clemens Market
563 Village Center, Suite - A
Spring House, PA 19477

SHOPRITE-OXFORD:                                  Leased         11/03              74                     4,608
Lawndale Plaza
6301 Oxford Avenue
Philadelphia, PA 19111

ACME-ACADEMY SHOPPING CENTER:                     Leased         10/06             188                    26,284
3200-92 Red Lion Road
Philadelphia, PA 19114
</TABLE>

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


                                      -43-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.

      There are no material legal proceedings, other than as described below, to
which the Company or any of its subsidiaries is a party, or to which any of
their property is subject, other than proceedings routine to the business of the
Company and its subsidiaries.

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

      In recent years, the Claims Court, the United States Court of Appeals for
the Federal Circuit ("Federal Circuit"), and the United States Supreme Court
("Supreme Court") have handed down decisions relating to the liability portion
of the breach of contract claims brought by other thrift institutions. On July
1, 1996, the Supreme Court ruled in the consolidated cases (United States v.
Winstar Corporation) and determined that when Congress adopted the accounting
changes to supervisory goodwill specified in FIRREA, the government had breached
contractual agreements with these thrift institutions regarding the accounting
rules.

      In 1999, the Bank filed a motion of summary judgement on liability for
breach of contract. The Claims Court has yet to rule on the motion. The Court
recently ordered that discovery in the case will commence on June 7, 2002, but
could start earlier if all parties in the case agreed to do so. A separate trial
on damages will be required to determine the monetary remedy due the Bank as a
result of the government's breach.

      By year-end 2001, the Claims Court completed damage trials in nine similar
Winstar-related cases in which contract liability determinations have been made
in favor of plaintiffs. Damages decisions have been issued in eight of those
cases, seven of which were appealed to the Federal Circuit. The Federal Circuit
has issued decisions in five of the appealed cases, which were favorable to
plaintiffs on some damages theories but unfavorable on others. The Federal
Circuit remanded two of these cases back to the Claims Court to reconsider
damages issues. One of the remanded cases decided by the Federal Circuit also
has a petition for certiorari pending before the Supreme Court on liability and
general damages issues. Accordingly, we cannot predict the outcome of the
appeals or the remaining cases awaiting damages decisions.


                                      -44-
<PAGE>
      The Courts may determine that the Bank's claims involve materially
different facts and/or legal issues as to render the Winstar case inapplicable
to the litigation and thereby result in a different conclusion from that of the
Winstar case. Moreover, given that the damages portion of the claims presented
by the Winstar-related plaintiff thrift institutions are currently being
litigated both at the trial and appellate stages, it could take several years to
resolve the damages issues. As a result, there can be no assurance that the Bank
will prevail in its action, and if it does prevail, that the Courts will find
that the Bank is entitled to any substantial amount of damages.

      On October 31, 1996, the Bank filed a complaint against CoreStates
Financial Corporation and others in the Court of Common Pleas for Chester
County, Pennsylvania for damages related to Commonwealth's acquisition on June
28, 1996, of twelve former Meridian Bank branch offices from CoreStates. The
complaint alleges, among other things, that CoreStates breached the branch sales
agreement and that Commonwealth's relationships with customers were damaged as a
result of negligence and errors committed by CoreStates and its affiliates in
connection with the conversion of the former Meridian Bank customers to
Commonwealth's banking system and the reissuance of bank cards for use at
Commonwealth's automated teller machines. The litigation and related activities
are proceeding. Management believes the outcome of these proceedings will not
result in a material impact to the Company's financial position or results of
operations.

      During the first quarter of 2000, Fiserv Solutions, Inc. ("Fiserv"), the
Company's previous item processing provider, brought an arbitration action
against the Company. This arbitration action claimed that the Company is liable
to Fiserv for liquidated damages related to the termination of an Item
Processing and Asset Transfer Agreement. Management believes that the outcome of
this arbitration action will not result in a material impact to the Company's
financial position or results of operations.

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

      Not Applicable


                                      -45-
<PAGE>
PART II.

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

      The information required herein is incorporated by reference from page 56
and 57 of the Company's 2001 Annual Report to Stockholders ("2001 Annual
Report").

ITEM 6. SELECTED FINANCIAL DATA.

      The information required herein is incorporated by reference from page 10
of the 2001 Annual Report.

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

      The information required herein is incorporated by reference from pages 11
to 25 of the 2001 Annual Report.

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

      The information required herein is incorporated by reference from pages 21
to 23 of the 2001 Annual Report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

      The information required herein is incorporated by reference from pages 29
to 56 of the 2001 Annual Report.

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

      On January 22, 2002, the Company filed a Current Report on Form 8-K to
report under Item 4, the change in its independent auditors effective with the
completion of Arthur Andersen LLP's report on the Company's financial statements
for the fiscal year ended December 31, 2001.


                                      -46-
<PAGE>
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 2002 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.


                                      -47-
<PAGE>
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, 2001 and 2000
            Consolidated Statements of Income for the years ended December 31,
              2001, 2000 and 1999
            Consolidated Statements of Shareholders' Equity for the years ended
              December 31, 2001, 2000 and 1999
            Consolidated Statements of Cash Flows for the years ended December
              31, 2001, 2000 and 1999
            Notes to Consolidated Financial Statements

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

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

<TABLE>
<CAPTION>
Exhibit Index                                                                        Location
-------------                                                                       -----------
<S>                                                                                 <C>
  3.1    Articles of Incorporation of Commonwealth Bancorp, Inc.                        (1)
  3.2    Bylaws of Commonwealth Bancorp, Inc.                                           (1)
  4.1    Form of Stock Certificate of Commonwealth Bancorp, Inc.                        (1)
 10.1    1993 Amended Stock Incentive Plan**                                            (2)
 10.2    1993 Amended Directors' Stock Option Plan**                                    (2)
 10.3    1993 Amended Management Recognition Plan for Officers**                        (2)
 10.4    1993 Amended Management Recognition Plan for Directors**                       (2)
</TABLE>

                                      -48-
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index                                                                        Location
-------------                                                                       -----------
<S>                                                                                 <C>
 10.5    1996 Amended Stock Option Plan**                                               (2)
 10.6    1996 Amended Recognition and Retention Plan**                                  (2)
 10.7    Employee Stock Ownership Plan and Trust**                                      (1)
 10.8    Agreement among Commonwealth Bancorp and
           Commonwealth Bank and Charles H. Meacham**                                    *
 10.9    Employment Agreements between Commonwealth Bancorp
           and Commonwealth Bank and Patrick J. Ward**                                  (4)
 10.10   Employment Agreements between Commonwealth Bancorp
           and Commonwealth Bank and Charles M. Johnston**                              (4)
 10.11   Employment Agreement between Commonwealth Bank and William J. Monnich**        (4)
 10.12   Employment Agreement between Commonwealth Bank and David K. Griest**           (4)
 10.13   Employment Agreement between Commonwealth Bank and Brian C. Zwaan**             *
 10.14   Excess Benefit Plan of Commonwealth Bank**                                     (3)
 10.15   Supplemental Executive Retirement Plan of Commonwealth Bank**                  (3)
 10.16   Directors' Stock Retainer Plan**                                               (5)
 10.17   2000 Incentive Stock Option Plan**                                             (6)
 13.0    2001 Annual Report to Stockholders                                              *
 22.0    Subsidiaries of the Registrant - Reference is made to
           "Item 1. Business - Subsidiaries" for the required information               --
 23.0    Consent of Independent Public Accountants                                       *
</TABLE>

----------

*     Filed hereto

**    Management contract or compensatory plan or arrangement.

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

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

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

(4)   Incorporated herein by reference from the Company's Annual Report on Form
      10-K for the year ended December 31, 1998 filed with the Commission on
      March 17, 1999.

(5)   Incorporated herein by reference from the Company's Registration Statement
      on Form S-8 filed with the Commission on April 22, 1999.

(6)   Incorporated by reference from the Company's Definitive Proxy Statement
      dated March 17, 2000, filed with the commission.


                                      -49-
<PAGE>
      (b) REPORTS ON FORM 8-K.

      On October 16, 2001, the Company filed a Current Report on Form 8-K to
report under Item 5, its earnings for the third quarter of 2001. On October 17,
2001, the Company filed a Current Report on Form 8-K to report under Item 5, the
completion of its previously announced stock repurchase program and the
commencement of a new stock repurchase program. On October 24, 2001, the Company
filed a Current Report on Form 8-K to report under Item 5, a presentation to
analysts prepared by the Company, which appeared on its web site. On November
21, 2001, the Company filed a Current Report on Form 8-K to report under Item 5,
a presentation to analysts prepared by the Company, which appeared on its web
site. On November 27, 2001, the Company filed a Current Report on Form 8-K to
report under Item 5, that it would participate in and provide a presentation at
the Ryan, Beck & Co. Annual Financial Institution Investors Conference on
November 29, 2001. On December 18, 2001, the Company filed a Current Report on
Form 8-K to report under Item 5, its declared cash dividend. On December 21,
2001, the Company filed a Current Report on Form 8-K to report under Item 5, the
completion of its previously announced stock repurchase program and the
commencement of a new stock repurchase program. The Company also announced that
James D. Danella had been appointed to its Board of Directors.


                                      -50-
<PAGE>
                                   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, hereunto duly authorized.

                                            COMMONWEALTH BANCORP, INC.


                                            By: /s/ Charles H. Meacham
                                                --------------------------------
                                                Charles H. Meacham
                                                Chairman of the Board

      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 14, 2002
----------------------------------
Charles H. Meacham
Chairman of the Board


/s/ Patrick J. Ward                                   March 14, 2002
----------------------------------
Patrick J. Ward
Director, President,
Chief Executive Officer
(principal executive officer)


/s/ Charles M. Johnston                               March 14, 2002
----------------------------------
Charles M. Johnston
Executive Vice President,
Chief Financial Officer
(principal financial and
accounting officer)


                                   -51-
<PAGE>
/s/ George C. Beyer, Jr.                              March 14, 2002
----------------------------------
George C. Beyer, Jr.
Director


/s/ Joseph E. Colen, Jr.                              March 14, 2002
----------------------------------
Joseph E. Colen, Jr.
Director


/s/ James D. Danella                                  March 14, 2002
----------------------------------
James D. Danella
Director


/s/ Joanne Harmelin                                   March 14, 2002
----------------------------------
Joanne Harmelin
Director


/s/ Michael T. Kennedy                                March 14, 2002
----------------------------------
Michael T. Kennedy
Director


/s/ Martin E. Kenney, Jr.                             March 14, 2002
----------------------------------
Martin E. Kenney, Jr.
Director


/s/ Harry P. Mirabile                                 March 14, 2002
----------------------------------
Harry P. Mirabile
Director

                                   -52-