<PAGE>   1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS


GENERAL

     BostonFed Bancorp, Inc. (the "Company") was incorporated on July 11, 1995,
and at such time became the holding company for Boston Federal Savings Bank (the
"Bank"). On October 24, 1995, the Bank completed its conversion from a mutual
savings bank to a stock form of ownership, while simultaneously the Company
issued 6,589,617 shares of common stock, utilizing a portion of the proceeds to
acquire all of the outstanding stock of the Bank.

     The Company's business has been conducted primarily through its ownership
of the Bank which operates its administrative/branch office located in
Burlington, Massachusetts and its seven other branch offices located in
Arlington, Bedford, Billerica, Boston, Lexington, Peabody and Wellesley, all of
which are located in the greater Boston metropolitan area. As a result of its
acquisition of Broadway Capital Corp. and its subsidiary, Broadway National
Bank, (collectively "Broadway National Bank") the Company added two banking
offices (Chelsea and Revere) to its franchise in the greater Boston metropolitan
area. The Company's primary business is attracting retail deposits from the
general public and investing those deposits and other borrowed funds in loans,
mortgage-backed securities, U.S. Government and federal agency securities and
other securities. The Company originates loans for investment and loans for sale
in the secondary market, generally retaining the servicing rights for loans
sold. Loan sales are made from loans held in the Company's portfolio designated
as being held for sale or originated for sale during the period. The Company's
revenues are derived principally from interest on its mortgage loans, and to a
lesser extent, interest and dividends on its investment and mortgage-backed
securities, fees and loan servicing income. The Company's primary sources of
funds are deposits, principal and interest payments on loans and mortgage-backed
securities, Federal Home Loan Bank of Boston ("FHLB") advances, repurchase
agreements and proceeds from the sale of loans.

     The Company's results of operations are primarily dependent on net interest
income, which is the difference between the income earned on its loan and
investment portfolios and its cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
Company's provision for loan losses, real estate operations expense, investment
and loan sale activities and loan servicing. The Company's non-interest expense
principally consists of compensation and benefits, occupancy and equipment
expense, deposit insurance premiums, advertising, data processing expense, real
estate operations and other expenses. Results of operations of the Company are
also significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities.

     On February 7, 1997, the Company acquired Broadway National Bank, a
national bank chartered commercial bank. As a result of the acquisition the
Company became a bank holding company subject to regulation by the Federal
Reserve Bank ("FRB"). Since the acquisition was consummated after December 31,
1996, the financial statements of the Company and the following discussion
regarding the Company's financial condition and results of operations at and for
the years ended December 31, 1996 and 1995, do not include information and data
related to Broadway National Bank.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and related securities FHLB advances and
repurchase agreements. While maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
However, the Bank has maintained the required minimum levels of liquid assets as
defined by Office of Thrift Supervision ("OTS") regulations. This requirement,
which may be varied at the direction of the OTS depending upon economic
conditions and deposit flows, is based upon a percentage of the Bank's deposits
and short-term borrowings. The Bank's currently required liquidity ratio is 5%.
At December 31, 1996 and 1995, the Bank's liquidity ratio was 8.0% and 5.3%
respectively. Management has maintained liquidity close to the minimum
requirement so that it may invest any excess liquidity in higher yielding
interest-earning assets or use such

                                        9
<PAGE>   2

funds to repay higher cost FHLB advances or repurchase agreements.

     The Company's most liquid assets are cash, daily fed funds sold, short-term
investments and investments available for sale. The levels of these assets are
dependent on the Company's operating, financing, lending and investing
activities during any given period. At December 31, 1996, cash, short-term
investments and investment securities available for sale totaled $19.4 million
or 2.4% of total assets. Additional investments were available which qualified
for regulatory liquidity requirements.

     The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At December 31, 1996, the Bank had $296.5
million in advances outstanding from the FHLB and had an additional $133.6
million in overall borrowing capacity from the FHLB. The Company also borrowed
$3.5 million through a repurchase agreement (collateralized borrowing). The
Company generally avoids paying the highest deposit rates in its market and
accordingly utilizes alternative sources of funds such as FHLB advances and
repurchase agreements to supplement cash flow needs.

     At December 31, 1996, the Company had commitments to originate loans and
unused outstanding lines of credit totaling $60.9 million. The Company
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificate accounts which are scheduled to mature
in less than one year from December 31, 1996, totaled $135.0 million. The
Company expects that a substantial majority of the maturing certificate accounts
will be retained by the Company at maturity.

     At the time of conversion, the Bank was required to establish a liquidation
account in an amount equal to its retained earnings as of June 30, 1995. The
liquidation account will be reduced to the extent that eligible account holders
reduce their qualifying deposits. In the unlikely event of a complete
liquidation of the Bank, each eligible account holder will be entitled to
receive a distribution from the liquidation account. The Bank is not permitted
to declare or pay dividends on its capital stock, or repurchase any of its
outstanding stock, if the effect thereof would cause its stockholders' equity to
be reduced below the amount required for the liquidation account or applicable
regulatory capital requirements. The balance of the liquidation account at
December 31, 1996 was approximately $13.4 million.

     Prior to the Company's acquisition of Broadway National Bank, the Company
as a savings and loan holding company was not required to maintain a minimum
level of capital for regulatory purposes. As a result of the Company's status as
a bank holding company, the Company is required to maintain a ratio of capital
to assets, on a consolidated basis, which is substantially equal to that
required to be maintained by the Bank. At December 31, 1996, the consolidated
capital to assets ratio of the Company was 10.5% which would have exceeded the
minimum regulatory capital requirements for the Company. As of December 31,
1996, the Bank exceeded all of its regulatory capital requirements with
tangible, core and risk-based capital ratios of 6.8%, 6.8% and 13.2%,
respectively, as compared to the minimum regulatory requirements of 1.5%, 3.0%
and 8.0%, respectively.

     On August 20, 1996, the provisions repealing the current thrift bad debt
rules were passed by Congress as part of "The Small Business Job Protection Act
of 1996". The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts beginning after December
31, 1995. These rules also require that all thrift institutions recapture all or
a portion of their bad debt reserves added since the base year (last taxable
year beginning before January 1, 1988). The Company has previously recorded a
deferred tax liability equal to the bad debt recapture and as such, the new
rules will have no effect on net income or federal income tax expense. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to provision of
present law that require recapture in the case of certain excess distributions
to shareholders. The tax effect of pre-1988 bad debt reserves subject to
recapture in the case of certain excess distributions is approximately $5.5
million.

IMPACT OF INFLATION AND CHANGING PRICES

     The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with Generally Accepted Accounting Principles
("GAAP"), which require the measurement of financial position and operating
results in terms of historical dollar amounts without considering the changes in
the relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates

                                       10
<PAGE>   3

have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.

MANAGEMENT OF INTEREST RATE RISK

     The principal objective of the Company's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given the Company's business
strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with Board of Directors'
approved guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors has established a management
Asset/Liability Committee which is responsible for reviewing the Company's
asset/liability policies and interest rate risk position. The Committee meets at
least quarterly and reports trends and interest rate risk position to the Board
of Directors on a quarterly basis. The extent of the movement of interest rates
is an uncertainty that could have a negative impact on the earnings of the
Company.

     In recent years, the Company has utilized the following strategies to
manage interest rate risk: (1) emphasizing the origination and retention of
adjustable-rate, one- to four-family mortgage loans; (2) generally selling in
the secondary market substantially all fixed-rate mortgage loans originated with
terms greater than 10 years while generally retaining the servicing rights
thereof; (3) primarily investing in short-term investment securities or
mortgage-backed securities with adjustable interest rates; and (4) attempting to
reduce the overall interest rate sensitivity of liabilities by emphasizing
longer-term deposits and utilizing FHLB advances to replace rate sensitive
deposits. The volatile and generally rising rate environment of 1996 allowed the
Bank to originate record loan volume, the majority of loans originated were
adjustable-rate loans which were primarily retained for the Bank's portfolio.
Many of these loans, however, do not reprice until the third or fifth year of
their term.

     The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring the Company's interest rate sensitivity "gap." An asset or liability
is said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. Accordingly, during a period of rising interest rates, an
institution with a positive gap position would be in a better position to invest
in higher yielding assets which, consequently, may result in the yield on its
assets increasing at a pace more closely matching the increase in the cost of
its interest-bearing liabilities than if it had a negative gap. During a period
of falling interest rates, an institution with a positive gap would tend to have
its assets repricing at a faster rate than one with a negative gap which,
consequently, may tend to restrain the growth of, or reduce, its net interest
income.

     The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "GAP Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The Gap Table
sets forth an approximation of the projected repricing of assets and liabilities
at December 31, 1996, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a three-month period and
subsequent selected time intervals. Annual prepayment rates for adjustable-rate
and fixed-rate residential loans are assumed to be 11.0% and 13.8%,
respectively. Annual prepayment rates for adjustable-rate and fixed-rate
mortgage-backed securities are assumed to be 10.5% and 13.8%, respectively.
Money market deposit accounts are assumed to be immediately rate-sensitive,
while passbook accounts and negotiable order of withdrawal ("NOW") accounts are
assumed to have decay rates of 12% annually. These assumptions may or may not be
indicative of actual prepayment and withdrawals experienced by the Company. The
table does not necessarily indicate the impact of general interest rate
movements on the Company's net interest income because the actual repricing
dates of various

                                       11
<PAGE>   4

assets and liabilities is subject to customer discretion
and competitive and other pressures and, therefore, actual experience may vary
from that indicated.

     The following table shows the gap position of the Company at December 31,
1996:

<TABLE>
<CAPTION>
                                                                                      MORE THAN
                                        3        MORE THAN    MORE THAN   MORE THAN    3 YEARS      MORE
                                      MONTHS     3 MONTHS     6 MONTHS    1 YEAR TO      TO         THAN      TOTAL
                                     OR LESS    TO 6 MONTHS   TO 1 YEAR    3 YEARS     5 YEARS    5 YEARS     AMOUNT
                                     --------   -----------   ---------   ---------   ---------   --------   --------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                  <C>        <C>           <C>         <C>         <C>         <C>        <C>
INTEREST-EARNING ASSETS
Short-term investments.............  $  2,930    $      13    $      0    $      0    $      0    $      0   $  2,943
Investment securities..............     5,339          250           0       3,670       9,996       1,000     20,255
Loans(1)...........................    87,546       88,292     177,295     179,066     117,480      33,859    683,538
Mortgage-backed securities.........    27,051        1,432       9,827       4,442       3,695      20,165     66,612
Stock in FHLB-Boston...............    16,295            0           0           0           0           0     16,295
                                     --------      -------    --------    --------    --------    --------   --------
         Total Interest-earning
           assets..................  $139,161    $  89,987    $187,122    $187,178    $131,171    $ 55,024   $789,643
                                     --------      -------    --------    --------    --------    --------   --------
INTEREST-BEARING LIABILITIES
Money market deposit accounts......    45,788            0           0           0           0           0     43,787
Savings accounts...................     2,643        2,643       5,286      24,668      28,192      24,668     88,100
NOW accounts.......................     2,356        2,356       4,711      14,918      10,207      43,969     78,517
Certificate accounts...............    84,920       24,684      29,305      42,000      19,215           0    202,125
FHLB Advances......................    39,000       34,000      92,000     114,000      16,500       1,000    296,500
Securities sold under agreement to
  repurchase.......................         0            0       3,500           0           0           0      3,500
                                     --------      -------    --------    --------    --------    --------   --------
         Total interest-bearing
           liabilities.............   174,707       63,683     134,802     195,586      74,114      69,637    712,529
                                     --------      -------    --------    --------    --------    --------   --------
Interest-earning assets less
  interest-bearing liabilities.....  $(35,546)   $  26,304    $ 52,320    $ (8,408)   $ 57,057    $(14,613)  $ 77,114
                                     ========      =======    ========    ========    ========    ========   ========
Cumulative interest rate
  sensitivity gap..................  $(35,546)   $  (9,242)   $ 43,078    $ 34,670    $ 91,727    $ 77,114
                                     ========      =======    ========    ========    ========    ========
Cumulative interest rate gap as a
  percentage of total assets at
  December 31, 1996................     (4.33)%      (1.13)%      5.25%       4.23%      11.18%       9.40%
Cumulative interest rate gap as a
  percentage of total interest-
  earning assets at December 31,
  1996.............................     (4.50)%      (1.17)%      5.46%       4.39%      11.62%       9.77%
Cumulative interest-earning assets
  as a percentage of cumulative
  interest-bearing liabilities at
  December 31, 1996................     79.65%       96.12%     111.54%     106.10%     114.27%     110.82%
</TABLE>

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

(1) Includes totals loans net of non-performing loans.

     Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.

     The Company's interest rate sensitivity is also monitored by management
through the use of a model which internally generates estimates of the change in
net portfolio value ("NPV") over a range of interest rate change scenarios. NPV
is the present value of expected cash flows from assets, liabilities, and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario. The OTS also produces a similar analysis using its own model,
based upon

                                       12
<PAGE>   5

data submitted on the Company's quarterly Thrift Financial Reports, the results
of which may vary from the Company's internal model primarily due to differences
in assumptions utilized between the Company's internal model and the OTS model,
including estimated loan prepayment rates, reinvestment rates and deposit decay
rates. For purposes of the NPV table, prepayment speeds similar to those used in
the Gap table were used, reinvestment rates were those in effect for similar
products currently being offered and rates on core deposits were modified to
reflect recent trends. The following table sets forth the Company's NPV as of
December 31, 1996, as calculated by the Company.

<TABLE>
<CAPTION>
                                                PORTFOLIO
    RATES         NET PORTFOLIO VALUE        VALUE OF ASSETS
   IN BASIS    --------------------------   -----------------
    POINTS        $         $        %       NPV        %
 (RATE SHOCK)  AMOUNT    CHANGE    CHANGE   RATIO   CHANGE(1)
-------------- -------   -------   ------   -----   ---------
                           (DOLLAR IN THOUSANDS)
<S>            <C>       <C>       <C>      <C>       <C>
400........... 76,445    (33,413)  (30.4)%   9.3      (30.6)
300........... 84,133    (25,725)  (23.4)   10.3      (23.1)
200........... 91,864    (17,994)  (16.4)   11.2      (16.4)
100........... 99,915    (9,943)    (9.1)   12.2       (9.0)
Static........ 109,858                      13.4
(100)......... 113,504    3,646      3.3    13.8        3.0
(200)......... 119,621    9,763      8.9    14.6        9.0
(300)......... 125,090   15,232     13.9    15.2       13.4
(400)......... 137,278   27,420     25.0    16.7       24.6
</TABLE>

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

(1) Based on the portfolio value of the Company's assets assuming no change in
    interest rates.

     As in the case with the Gap Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Company's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Company's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on the Company's net interest income and will differ from actual
results.

ANALYSIS OF NET INTEREST INCOME

     Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.

     The following table sets forth certain information relating to the Company
for the years ended December 31, 1996, 1995 and 1994. The average yields and
costs are derived by dividing income or expense by the average balance of
interest earning assets or interest bearing liabilities, respectively, for the
periods shown. For 1996, the average balance data is derived from daily balances
and for 1995 and 1994, average balance data is derived from average month-end
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and costs include fees, premiums and discounts
which are considered adjustments to yields.

                                       13
<PAGE>   6
<TABLE>
<CAPTION>
                                                        AT                            FOR THE YEAR ENDED DECEMBER 31,
                                                   DECEMBER 31,       ------------------------------------------------------------
                                                       1996                     1996                            1995
                                                 ----------------     ---------------------------    -----------------------------
                                                                                        AVERAGE                          AVERAGE
                                                           YIELD/    AVERAGE             YIELD/     AVERAGE               YIELD/
                                                 BALANCE    COST     BALANCE   INTEREST   COST      BALANCE     INTEREST   COST
                                                 --------  ------    --------  --------  -------    --------    --------  -------
                                                                              (DOLLARS IN THOUSANDS)
<S>                                              <C>       <C>       <C>       <C>         <C>      <C>         <C>        <C>
ASSETS:
Interest-earning assets:
 Investment securities(1)......................  $ 39,493   6.14%    $ 36,678  $ 2,167     5.91%    $ 33,558    $ 1,945     5.80%
 Loan, net and mortgage loans held for
   sale(2).....................................   680,640   7.67      603,585   45,513     7.54      503,920     38,079     7.56
 Mortgage-backed securities(3).................    66,612   6.83       72,287    4,998     6.91       39,454      2,430     6.16
                                                 --------  -----     --------  -------     ----     --------    -------     ----
   Total interest-earning assets...............   786,745   7.52      712,550   52,678     7.39      576,932     42,454     7.36
                                                           -----               -------     ----                 -------     ----
Non-interest-earning assets....................    33,822              28,354                         23,590
                                                 --------            --------                       --------
   Total assets................................  $820,567            $740,904                       $600,522
                                                 ========            ========                       ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market deposit accounts..................  $ 45,788   3.00     $ 46,540    1,395     3.00     $ 49,693      1,472     2.96
Savings accounts...............................    88,100   2.50       90,763    2,258     2.49       99,498      2,485     2.50
NOW accounts...................................    72,503   1.25       66,336      890     1.34       65,661        931     1.42
Certificate accounts...........................   200,124   5.54      199,598   11,155     5.59      189,080     10,235     5.41
                                                 --------  -----     --------  -------     ----     --------    -------     ----
   Total.......................................   406,515   3.83      403,237   15,698     3.89      403,932     15,123     3.74
Borrowed Funds(4)..............................   300,000   5.97      225,124   13,193     5.86      133,268      8,429     6.32
                                                 --------  -----     --------  -------     ----     --------    -------     ----
   Total interest-bearing liabilities..........   706,515   4.74      628,361   28,891     4.60      537,200     23,552     4.38
                                                           -----               -------     ----                 -------     ----
Non-interest-bearing liabilities...............    27,697              21,030                         19,145
                                                 --------            --------                       --------
   Total liabilities...........................   734,212             649,391                        556,345
                                                 --------            --------                       --------
Stockholders' equity...........................    86,355              91,513                         44,177
                                                 --------            --------                       --------
   Total liabilities and stockholders'
     equity....................................  $820,567            $740,904                       $600,522
                                                 ========            ========                       ========
Net interest rate spread(5)....................             2.78%              $23,787     2.79%                $18,902     2.98%
                                                           =====               =======     ====                  ======     ====
Net interest margin(6).........................                                            3.34%                            3.28%
                                                                                           ====                             ====
Ratio of interest-earning assets to
 interest-bearing liabilities..................    111.36%             113.40%                        107.40%
                                                 ========            ========                       ========

<CAPTION>

                                                            1994
                                                 ---------------------------
                                                                     AVERAGE
                                                 AVERAGE             YIELD/
                                                 BALANCE   INTEREST   COST
                                                 --------  --------  -------

<S>                                              <C>       <C>         <C>
ASSETS:
Interest-earning assets:
 Investment securities(1)......................  $ 26,157  $ 1,522     5.82%
 Loan, net and mortgage loans held for
   sale(2).....................................   441,959   32,578     7.37
 Mortgage-backed securities(3).................    42,306    2,427     5.74
                                                 --------  -------     ----
   Total interest-earning assets...............   510,422   36,527     7.16
                                                           -------     ----
Non-interest-earning assets....................    24,864
                                                 --------
   Total assets................................  $535,286
                                                 ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market deposit accounts..................    59,699    1,442     2.42
Savings accounts...............................   119,253    3,185     2.67
NOW accounts...................................    64,875    1,017     1.57
Certificate accounts...........................   168,572    7,043     4.18
                                                 --------  -------     ----
   Total.......................................   412,399   12,687     3.08
Borrowed Funds(4)..............................    77,645    4,335     5.58
                                                 --------  -------     ----
   Total interest-bearing liabilities..........   490,044   17,022     3.47
                                                           -------     ----
Non-interest-bearing liabilities...............    17,630
                                                 --------
   Total liabilities...........................   507,674
                                                 --------
Stockholders' equity...........................    27,612
                                                 --------
   Total liabilities and stockholders'
     equity....................................  $535,286
                                                 ========
Net interest rate spread(5)....................            $19,505     3.69%
                                                           =======     ====
Net interest margin(6).........................                        3.82%
                                                                       ====
Ratio of interest-earning assets to
 interest-bearing liabilities..................    104.16%
                                                 ========
</TABLE>

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

(1) Includes investment securities available for sale and held to maturity,
    short-term investments, stock in FHLB-Boston and daily federal funds sold.

(2) Amount is net of deferred loan origination costs, construction loans in
    process, net unearned discount on loans purchased and allowance for loan
    losses and includes non-performing loans.

(3) Includes mortgage-backed securities available for sale and held to maturity.

(4) Interest paid on borrowed funds for the periods presented includes interest
    expense on FNMA deposits held in escrow accounts with the Company related to
    the Company's FNMA servicing, which, if such interest expense was excluded,
    would result in an average cost of borrowed funds of 5.81%, 6.31%, and 5.46%
    for the years ended December 31, 1996, 1995 and 1994, respectively.

(5) Net interest rate spread represents the difference between the weighted
    average yield on interest-earning assets and the weighted average cost of
    interest-bearing liabilities.

(6) Net interest margin represents net interest income as a percentage of
    average interest-earning assets.

Note:  Average balances for 1996 are calculated on a daily basis, while for 1995
     and 1994 average balances are based on average monthly balances.

                                       14
<PAGE>   7

RATE/VOLUME ANALYSIS

     The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated to
changes due to rate.

<TABLE>
<CAPTION>
                        YEAR ENDED                     YEAR ENDED
                    DECEMBER 31, 1996               DECEMBER 31, 1995
                       COMPARED TO                     COMPARED TO
                        YEAR ENDED                     YEAR ENDED
                    DECEMBER 31, 1995               DECEMBER 31, 1994
               ----------------------------    ---------------------------
                   INCREASE                        INCREASE
                  (DECREASE)                      (DECREASE)
                    DUE TO                          DUE TO
               -----------------               -----------------
               VOLUME     RATE        NET      VOLUME     RATE       NET
               -------   -------    -------    ------    -------    ------
                                     (IN THOUSANDS)
<S>            <C>        <C>       <C>        <C>       <C>        <C>
INTEREST-EARNING ASSETS:
 Investment
 securities..  $  181     $   41    $   222    $ 431     $    (8)   $  423
 Loan, net
   and
   mortgage
   loans held
   for
   sale......   7,535       (101)     7,434    4,567         934     5,501
 Mortgage-
   backed
 securities..   2,023        545      2,568     (164)        167         3
               ------    -------    -------    -----     -------    ------
   Total
    interest-
     earning
     assets..   9,739        485     10,224    4,834       1,093     5,927
               ------    -------    -------    -----     -------    ------

INTEREST-BEARING LIABILITIES:
 Money market
   deposit
   accounts..     (93)        16        (77)    (242)        272        30
 Savings
   accounts..    (218)        (9)      (227)    (527)       (173)     (700)
 NOW
   accounts..      10        (51)       (41)      12         (98)      (86)
 Certificate
   accounts..     569        351        920      857       2,335     3,192
               ------    -------    -------    -----     -------    ------
   Total.....     268        307        575      100       2,336     2,436
 Borrowed
   funds.....   5,805     (1,041)     4,764    3,104         990     4,094
               ------    -------    -------    -----     -------    ------
   Total
    interest-
     bearing
liabilities..   6,073       (734)     5,339    3,204       3,326     6,530
               ------    -------    -------    -----     -------    ------
Net change in
 net interest
 income......  $3,666    $ 1,219    $ 4,885   $1,630     $(2,233)   $ (603)
               ======    =======    =======   ======     =======    ======
</TABLE>

ASSET QUALITY

     The following table sets forth information regarding non-performing assets
which consist of: non-performing loans and real estate owned ("REO"). In
addition to identifying non-performing loans, as discussed below, the Company
identifies loans which are characterized as "impaired" pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan and SFAS No. 118, Accounting by Creditors for Impairment of
a Loan -- Income Recognition and Disclosure. Accordingly, loans categorized as
"impaired" include non-performing loans as well as other identified loans. At
December 31, 1996, non-performing loans totaled $1.5 million, (all of which are
included in the balance of impaired loans) impaired loans totaled $4.4 million,
consisting of 40 loans, and REO totaled $2.7 million, consisting of ten
properties. It is the policy of the Company to cease accruing interest on loans
90 days or more past due and to charge-off all accrued interest. For the years
ended December 31, 1996, 1995, and 1994, the amount of additional interest
income that would have been recognized on non-accrual loans if such loans had
continued to perform in accordance with their contractual terms was $103,000,
$303,000, and $281,000, respectively. For the same periods, the difference
between the amount of interest income which would have been recognized on other
impaired loans if such loans were performing in accordance with their regular
terms and actual amounts recognized was $73,000, $77,000, and $294,000,
respectively.

<TABLE>
<CAPTION>
                                          AT DECEMBER 31,
                                      ------------------------
                                       1996     1995     1994
                                      ------   ------   ------
                                       (DOLLARS IN THOUSANDS)
<S>                                   <C>      <C>      <C>
NON-PERFORMING LOANS:
  Residential real estate:
    One- to four-family.............  $1,463   $1,195   $  848
    Multi-family....................      --      745      546
  Commercial real estate............      25    3,312    2,126
  Other Loans.......................      14       --       51
                                      ------   ------   ------
      Total.........................   1,502    5,252    3,571
Real estate owned, net(3)...........   2,668      971      387
                                      ------   ------   ------
      Total non-performing assets...   4,170    6,223    3,958
Restructured loans..................   2,489    2,941    4,834
                                      ------   ------   ------
Total risk elements.................  $6,659   $9,164   $8,792
                                      ======   ======   ======
Allowance for loan losses as a
  percent of loans(1)...............   0.64%    0.82%    0.74%
Allowance for loan losses as a
  percent of non-performing
  loans(2)..........................  293.02    81.40   103.61
Non-performing loans as a percent of
  loans(1)(2).......................    0.22     1.00     0.71
Non-performing assets as a percent
  of total assets(4)................    0.51     0.97     0.68
</TABLE>

---------------
(1) Loans includes loans, net and mortgage loans held for sale, excluding
    allowance for loan losses.

(2) Non-performing loans consist of all 90 days or more past due and other loans
    which have been identified by the Company as presenting uncertainty with
    respect to the collectability of interest or principal.

(3) REO balances are shown net of related valuation allowances.

(4) Non-performing assets consist of non-performing loans and real estate owned
    (REO).

                                       15
<PAGE>   8

     At December 31, 1996, loans which were characterized as impaired totaled
$4.4 million. All of the impaired loans have been measured using the fair value
of the collateral method. During the year ended December 31, 1996, the average
recorded value of impaired loans was $5.4 million, $321,000 of interest income
was recognized and $497,000 of interest income would have been recognized under
original terms. The composition of impaired loans by type is shown below:

<TABLE>
<CAPTION>
                                   DECEMBER 31,
                                  ---------------
                                   1996     1995
                                  ------   ------
                                  (IN THOUSANDS)
<S>                               <C>      <C>
Impaired loans:
  Residential real estate
     One- to four-family........  $1,763   $2,828
     Multi-family...............   2,271    1,367
  Commercial real estate........     246    4,062
  Other loans...................     112       99
                                  ------   ------
          Sub total.............   4,392    8,356
  Specific valuation
     allowance..................      --     (618)
                                  ------   ------
          Total impaired
            loans...............  $4,392   $7,738
                                  ======   ======
</TABLE>

     The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in its loan
portfolio and the national and regional economy. The allowance for loan losses
is maintained at an amount management considers adequate to cover estimated
losses in loans which are deemed probable and estimable based on information
currently known to management. Management's analysis of the adequacy of the
allowance is based upon consideration of a number of factors, including current
economic conditions, actual loss experience and industry trends. In addition
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to make additional provisions for estimated loan losses
based upon judgments different from those of management. Amounts provided for
the years 1996, 1995 and 1994 were $1.3 million, $3.6 million and $283,000,
respectively. During the year ended December 31, 1996, there were recoveries of
$343,000 credited to, and charge-offs of $1.5 million taken against this
allowance. As of December 31, 1996, the Company's allowance for loan losses was
 .64% of total loans compared to .82% as of December 31, 1995. The Company had
non-performing loans of $1.5 million and $5.3 million at December 31, 1996 and
December 31, 1995, respectively. The decrease in the non-performing loans
occurred principally due to the transfer of certain commercial real estate loans
to real estate owned. The Company will continue to monitor and modify its
allowance for loan losses as conditions dictate. While management believes the
Company's allowance for loan losses is sufficient to cover losses inherent in
its loan portfolio at this time, no assurances can be given that the Company's
level of allowance for loan losses will be sufficient to cover future loan
losses incurred by the Company or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of allowance for loan losses.

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

<TABLE>
<CAPTION>
                               AT OR FOR THE YEAR ENDED
                                     DECEMBER 31,
                      ------------------------------------------
                       1996     1995     1994     1993     1992
                      ------   ------   ------   ------   ------
                                    (IN THOUSANDS)
<S>                   <C>      <C>      <C>      <C>      <C>
Balance at begin-
  ning of period....  $4,275   $3,700   $4,450   $4,381   $5,000
Provision for loan
  losses............   1,294    3,614      283    3,918    5,487
Charge offs:
One-to-four-family..     387      550      711    2,114    2,330
  Multi-family......     263      483      251    1,114    1,288
  Commercial........     664    2,297      200      805    1,241
  Construction and
    land............      --       --       --        4    1,268
Other...............     198      194       56       17        3
                      ------   ------   ------   ------   ------
        Total.......   1,512    3,524    1,218    4,054    6,130
Recoveries..........     343      485      185      205       24
                      ------   ------   ------   ------   ------
Balance at end of
  period............  $4,400   $4,275   $3,700   $4,450   $4,381
                      ======   ======   ======   ======   ======
Ratio of net charge-
  offs during the
  period to average
  loans outstanding
  during the
  period............    0.19%    0.60%    0.23%    0.94%    1.54%
                      ======   ======   ======   ======   ======
</TABLE>

     The Company has developed an internal asset classification system which
classifies assets depending on risk of loss characteristics. The most severe
classification before a charge-off is required is "sub-standard." At December
31, 1996, 1995 and 1994, the Company classified (excluding REO) $3.8 million,
$8.3 million and $9.8 million of sub-standard assets, respectively. Included in
these amounts were $4.2 million, $6.2 million and $4.0 million in non-performing
assets, respectively. In the opinion of management, the performing sub-standard
loans evidence one or more weaknesses or potential weaknesses and, depending on
the regional economy and other factors, may become non-performing assets in
future periods.

                                       16
<PAGE>   9

COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995.

CHANGES IN FINANCIAL CONDITION

     Assets at December 31, 1996 totaled $820.6 million, an increase of $179.8
million, or 28.1%, compared to $640.8 million at December 31, 1995. This growth
was primarily due to increased originations of adjustable-rate one- to
four-family mortgage loans which caused loans, net, to increase by $167.2
million to a balance of $676.7 million at December 31, 1996, compared to a
balance of $509.5 million at December 31, 1995. Volatility in market interest
rates and a generally rising interest rate environment in 1996 caused customer
preference to shift to adjustable-rate loan products and the demand for
fixed-rate products declined. Deposits increased $9.7 million to $428.8 million
at December 31, 1996 compared to $419.1 million as of December 31, 1995, due
primarily to interest credited to accounts during the year. The Company funded
the increase in loans, net, primarily by borrowing short- and long-term funds
from the FHLB. Mortgage-backed securities increased by $7.6 million, or 12.9%,
from a balance of $59.0 million at December 31, 1995 to a balance of $66.6
million at December 31, 1996. Mortgage loans held for sale totaled $4.0 million
at December 31, 1996, compared to $8.9 million at December 31, 1995. FHLB
advances increased $176.6 million to a balance of $296.5 million at December 31,
1996, compared to $119.9 million at December 31, 1995. Total stockholders'
equity at December 31, 1996 totaled $86.4 million, or $14.75 book value per
share and 10.5% of total assets, compared to $90.7 million, or $14.78 book value
per share and 14.2% of total assets at December 31, 1995. The decrease in total
stockholders' equity is due to the combined effects of the contribution to the
Company's 1995 Stock-Based Incentive Plan Trust (the "SIP") to fund the SIP's
purchase of 4% of the Company's common stock (net of amortization), the
completion of a 5% stock repurchase program, the change in market valuation (net
of taxes), of the available-for-sale securities portfolio and dividends paid,
offset by net income.

RESULTS OF OPERATIONS

  General

     Net income for the year ended December 31, 1996 was $2.9 million, or $.48
per share, an increase of $1.8 million or 164%, from the $1.1 million (with
earnings per share not applicable) for the year ended December 31, 1995. The
increase was primarily attributable to higher net interest income, due to
increased balances of interest earning assets and a lower provision for loan
losses, which were partially offset by the one-time $2.7 million (approximately
$1.6 million after tax) special assessment for the recapitalization of the
Savings Association Insurance Fund (the "SAIF") as a result of federal
legislation enacted in late 1996. Excluding such non-recurring SAIF special
assessment, net income for the year would have been $4.5 million or $.73 per
share, a 309% increase over 1995's net income of $1.1 million, with earnings per
share not meaningful. The net interest margin in 1996 increased to 3.34% from
3.28% during 1995. The improvement in the net interest margin in 1996 was
primarily due to the impact of the Company's utilization of net conversion
proceeds for a full year in 1996 compared to approximately two months in 1995.

  Interest Income

     Total interest income for the year ended December 31, 1996 increased by
$10.2 million to $52.7 million compared to $42.5 million for the year ended
December 31, 1995. Interest on loans increased by $7.4 million, or 19.4%, to
$45.5 million, during 1996 compared to $38.1 million during 1995. The increase
in interest income in 1996 was attributable to increased average balances of
interest earning assets, primarily due to an increase in the average balance of
loans, from $503.9 million for 1995 to $603.9 million for 1996. The increased
average loan balances generated an additional $7.5 million of interest earned
which was partially offset by reduced earnings of $101,000 due to increased
origination of the Company's discounted adjustable-rate loans which resulted in
an overall decline in yields for the loan portfolio whereby the average loan
yield was reduced to 7.54% for 1996 compared to an average of 7.56% for 1995.
Interest income on mortgage-backed securities increased by $2.6 million for the
year ended December 31, 1996 due primarily to an increase in average balances
compared to the prior year. Average balances increased by $32.8 million from an
average of $39.5 million during 1995 to an average $72.3 million during 1996.
The majority of the mortgage-backed securities held in 1996 were adjustable GNMA
securities. The yields on mortgage-backed securities increased from an average
yield of 6.16% in 1995 to 6.91% in 1996, resulting in an increase in interest
earned on such securities in 1996 of $545,000, compared to 1995.

                                       17
<PAGE>   10

  Interest Expense

     Interest expense increased by $5.3 million, or 22.5%, for the year ended
December 31, 1996 to $28.9 million compared to $23.6 million for the year ended
December 31, 1995. The primary cause of the increase in interest expense for the
year ended December 31, 1996 was interest expense on borrowed funds consisting
primarily of FHLB advances and to a lesser extent, repurchase agreements which
were used primarily to fund adjustable-rate loans originated for portfolio
during 1996. Interest expense on deposit accounts increased by $575,000 for the
year ended December 31, 1996 due primarily to the effects of higher deposit
rates during the year, caused by a shift of regular savings deposits into higher
yielding certificates of deposit. Average deposit balances were $403.2 million
during the year ended December 31, 1996, compared to $403.9 million for the
prior year, a decrease of $695,000. For the year ended December 31, 1996,
interest expense on borrowed funds was $13.2 million compared to $8.4 million
the prior year, an increase of $4.8 million, or 57.1% While the average cost of
borrowed funds declined by 46 basis points, from an average of 6.32% for the
year ended December 31, 1995 to 5.86% for 1996, causing interest expense on FHLB
advances to decrease by $1.0 million, the average balances increased from an
average borrowed money balance of $133.3 million in 1995 to an average of $225.1
million in 1995. The higher average balances increased interest expense on
borrowed funds by $5.8 million in 1996 compared to 1995.

  Provision for Loan Losses

     During 1996, the provision for loan losses was reduced to $1.3 million from
the prior year's provision of $3.6 million. The lower provision was based on
management's evaluation of existing real estate market conditions, improvement
in the level of charge-offs and classified assets as well as a stabilization of
general economic conditions in the Company's market area. Total non-performing
loans decreased to $1.5 million, or .22% of loans at December 31, 1996 from $5.3
million, or 1.00% at December 31, 1995. Net charge-offs also decreased,
amounting to $1.2 million, or .19% of average loans outstanding during 1996
compared with 1995's total of $3.0 million or .60% of average loans outstanding.
The allowance for loan losses as a percentage of total loans was 0.64% at
December 31, 1996 compared to 0.82% at December 31, 1995. As a percentage of
total non-performing loans, the allowance for loan losses was 293.0% at December
31, 1996, compared to 81.4% a year earlier. See "Asset Quality" included
elsewhere herein.

  Non-Interest Income

     Total non-interest income increased to $3.6 million for the year ended
December 31, 1996 from $2.7 million for the year ended December 31, 1995. The
primary contributing factors were increased gains on the sale of loans and
higher transaction account service fees. The $668,000 gain on sale of loans
during the current year exceeded the $214,000 for the prior year due mostly to
the implementation of Statement of Financial Accounting Standards ("SFAS") No.
122 Accounting for Mortgage Servicing Rights, as of January 1, 1996. Deposit
service fees improved to $1.1 million for the year ended December 31, 1996,
compared to $668,000 for the prior year due to continued growth in transaction
accounts and service fees collected thereon during 1996.

  Non-Interest Expense

     Total non-interest expense for the year ended December 31, 1996 was $21.0
million, compared to $16.0 million for 1995. The increase of $5.0 million, or
31.3%, was primarily attributable to the SAIF special assessment of $2.7
million, increased compensation and benefits expense, occupancy and equipment
expense and other expenses. Compensation and benefits expense for the year ended
December 31, 1996 amounted to $9.8 million, compared to $8.4 million for the
prior year. The primary reason for the increase is the SIP expense, which
amounted to $1.1 million, (including $187,000 in market value appreciation).
Office occupancy and equipment expense increased from $2.2 million for the year
ended December 31, 1995 to $2.5 million for the year ended December 31, 1996,
due to higher costs incurred for the new data processing service and the costs
of new automation equipment placed in service during the current year. While the
Company's Federal Deposit Insurance Premiums were slightly lower this year, the
Company paid a non-recurring special assessment of $2.7 million. Other
non-interest expense increased to $3.4 million for the year ended December 31,
1996 from $2.6 million for the prior year due to increased costs of temporary
help and supplies (both due to high lending volumes), advertising and other
operating expenses.

                                       18
<PAGE>   11

  Income Taxes

     Income tax expense was $2.1 million for the year ended December 31, 1996
(resulting in an effective tax rate of 41.5%), compared to a tax expense of
$815,000 for the year ended December 31, 1995 (resulting in an effective tax
rate of 41.8%). The increase in income tax expense is primarily attributable to
an increase in pre-tax earnings.

COMPARISON OF FINANCIAL CONDITION AND
OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1995 AND 1994.

CHANGES IN FINANCIAL CONDITION

     Assets at December 31, 1995 totaled $640.8 million, an increase of $57.2
million or 9.8%, compared to $583.6 million at December 31, 1994. Most of the
growth in assets was in cash and cash equivalents, which increased from $8.3
million to $21.2 million, mortgage-backed securities available for sale, which
increased from zero to $23.9 million, and mortgage loans held for sale, which
increased from $316,000 to $8.9 million. Loans, net, increased by $10.4 million
or 2.1% from a balance of $499.1 million at December 31, 1994 to a balance of
$509.5 million at December 31, 1995. The relatively minor growth in loans, net,
was due to a market shift from adjustable rate loans towards fixed-rate products
in 1995, which the Bank generally sells in the secondary market. These increases
were funded by a portion of the $63.9 million net conversion proceeds.
Mortgage-backed securities held to maturity declined by $4.7 million to a
balance of $35.1 million at December 31, 1995, compared to a balance of $39.8
million at December 31, 1994 due to amortization and pre-payments.

     Deposit accounts increased from $413.2 million at December 31, 1994 to
$419.1 million at December 31, 1995, an increase of 1.4%. Certificate account
balances increased by $23.2 million from $173.0 million at December 31, 1994 to
$196.2 million at December 31, 1995, an increase of 13.4%. The growth in
certificate accounts was offset, somewhat by decreases in non-certificate
accounts which declined by $17.2 million during the same period. This shift was
caused in part by depositors seeking higher rates during a generally falling
interest rate environment. FHLB advances declined from $135.0 million at
December 31, 1994 to $119.9 million at December 31, 1995 due to the utilization
of net conversion proceeds used to reduce borrowings. Other borrowed money
increased by $7.0 million as the Company entered into a repurchase agreement to
fund some of the purchases of mortgage-backed securities.

     Total stockholders' equity at December 31, 1995 was $90.7 or 14.2% of
assets compared to $30.0 million or 5.1% of assets at December 31, 1994. The
increase is due to the addition of conversion proceeds of $63.9 million, less
the unearned portion of the Employee Stock Ownership Plan ("ESOP") shares,
amounting to $4.5 million, net income of $1.1 million and a $132,000 increase in
additional paid-in capital related to the appreciation in the fair value of
allocated ESOP shares.

     Non-performing assets increased to $6.2 million or .97% of total assets at
December 31, 1995, compared to $4.0 million or .68% of total assets at December
31, 1994. The allowance for loan losses was increased from $3.7 million at
December 31, 1994 to $4.3 million at December 31, 1995 partly in response to the
higher balance in non-performing assets at December 31, 1995, compared to the
previous year end. The allowance for loan losses amounted to .82% of loans at
December 31, 1995, compared to .74% of loans at December 31, 1994.

RESULTS OF OPERATIONS

  General

     Net income for the year ended December 31, 1995, amounted to $1.1 million,
compared to net income of $4.0 million for the year ended December 31, 1994. The
reduction in net income was primarily attributable to a $3.3 million increase in
the provision for loan losses. A majority of this provision was for
non-performing multi-family and commercial real estate loans and increased
charge-offs related to such loans during the current year. Net interest income
was also lower for the year ended December 31, 1995, compared to the year ended
December 31, 1994 as an increase in the cost of funds, although partially offset
by rising yields on assets, resulted in a decline in the net interest margin
from 3.82% to 3.28%. The net conversion proceeds, used to repay maturing FHLB
advances mitigated the reduction of the net interest margin. The net interest
spread, which is not impacted by the conversion proceeds, declined from 3.69%
for the year ended December 31, 1994 to 2.98% for the year ended December 31,
1995. Despite the reduction of the net interest margin, net interest income
remained relatively stable at $18.9 million for the year ended December 31,
1995, compared to $19.5 million for the year ended December 31, 1994.

                                       19
<PAGE>   12

INTEREST INCOME

     Total interest income for the year ended December 31, 1995 was $42.5
million. This is an increase of $6.0 million from the $36.5 million total
interest income for the year ended December 31, 1994. Most of the increase in
interest income was due to higher average balances of interest earning assets
which averaged $576.9 million during 1995, compared to average balances of
$510.4 million during 1994. Interest income from loans, net, increased $5.5
million or 16.9%, to $38.1 million for the year ended December 31, 1995. This
increase resulted from the combined effect of a $62.0 million increase in the
average balance of loans, net, and an improvement of 19 basis points in yield.
Although interest rates generally fell during 1995, the yield of loans, net,
improved as the discounted adjustable mortgages originated in 1994 were adjusted
to higher contractual rates as per the terms of the loans. Interest income on
mortgage-backed securities remained the same at $2.4 million despite a reduction
in the average balance of $2.8 million, from an average balance of $42.3 million
during the year ended December 31, 1994 to an average balance of $39.5 million
for the year ended December 31, 1995. The 42 basis point improvement in the
average yield during 1995 was sufficient to offset the reduction in average
balances caused by amortization and repayments during the year ended December
31, 1995. The Company also purchased $23.9 million of mortgage-backed securities
in late December 1995, however, because of the timing, such purchase did not
significantly increase the average balance of interest earning assets for the
year.

INTEREST EXPENSE

     Interest expense for the year ended December 31, 1995 amounted to $23.6
million, an increase of $6.6 million, or 38.8% from the prior year's total of
$17.0 million. The primary reason for this increase was due to higher average
balances of borrowed funds totaling $133.3 million during the year ended
December 31, 1995, compared to average borrowed funds of $77.6 million during
the year ended December 31, 1994. The Company increased its borrowed funds
balance in the latter part of 1994 to fund the growth of its adjustable rate
portfolio lending. Additionally, the average cost of borrowed funds increased
from 5.58% during 1994 to 6.32% during 1995. The borrowed funds balance did not
increase substantially until the latter part of 1994 when interest rates had
risen substantially. These higher cost borrowings were outstanding for a longer
period of time in 1995 and the borrowing rates on these borrowings did not
decline until the latter half of 1995. Because of the lag effect of maturing
advances, the average cost was higher in 1995 than 1994. Interest expense
increased by $3.1 million because of higher average borrowed funds balance and
$1.0 million because of higher average cost during the year ended December 31,
1995. Interest expense on deposits increased $2.4 million from $12.7 million for
the year ended December 31, 1994 to $15.1 million for the year ended December
31, 1995, reflecting the net of an increase in the average cost of deposits from
3.08% to 3.74%, as depositors shifted funds from lower yielding savings accounts
to higher yielding certificate accounts in the declining rate environment of
1995. This increase was offset somewhat by a decrease in the average balance of
total deposits of $8.5 million. Although the average cost of savings and NOW
accounts declined from 2.67% and 1.57% to 2.50% and 1.42%, respectively, during
the year ended December 31, 1995, these reductions were more than offset by
increased costs of money market deposit and certificate accounts which increased
from 2.42% and 4.18%, respectively, to 2.96% and 5.41%, respectively. The
Company has generally held rates paid on savings and NOW accounts stable, while
money market and certificate accounts are heavily influenced by market rates.
While interest rates were generally falling throughout 1995, the Company's
overall cost of funds of market sensitive accounts lag the current market.

                                       20
<PAGE>   13

  Provision for Loan Losses

     The Company's provision for loan losses amounted to $3.6 million for the
year ended December 31, 1995, compared to a provision of $283,000 for the year
ended December 31, 1994. The increase in the provision for loan losses was due
primarily to multi-family and commercial real estate loan charge-offs of $2.8
million related to eight loans arising from four lending relationships, due to
vacancies, environmental problems with a landfill located in close proximity to
the properties securing two of such loans, bankruptcies of borrowers and
repayment delinquencies. The events leading to such charge-offs associated with
such loans were generally attributable to adverse events occurring in 1995 which
resulted in the Company reevaluating such loans or obtaining updated appraisals
on the properties. The increase in the provision for loan losses was also caused
by management's assessment of the increase in non-accrual loans of $1.7 million
to $5.3 million at December 31, 1995 from a balance of $3.6 million at December
31, 1994. The increase in non-accrual loans was also primarily attributable to
increased delinquencies of one of the four lending relationships mentioned above
involving multi-family and commercial real estate loans. The allowance for loan
losses was also increased from $3.7 million or .74% of loans at December 31,
1994 to $4.3 million or .82% of loans at December 31, 1995. Although the balance
of the allowance for loan losses was increased during the year 1995, the ratio
of the allowance to non-performing loans declined from 103.6% at December 31,
1994 to 81.4% at December 31, 1995. The Company establishes provisions for loan
losses, which are charged to operations, in order to maintain the allowance for
loan losses at a level which is deemed to be appropriate based upon management's
assessment of the risk inherent in its loan portfolio in light of current
economic conditions, actual loss experience, industry trends and other factors
which may affect the real estate values in the Company's market area. While
management believes the current allowance for loan losses is adequate, actual
losses are dependent upon future events, and as such, future provisions for loan
losses may be necessary.

  Non-Interest Income

     Non-interest income increased to $2.7 million for the year ended December
31, 1995 compared to $1.6 million for the same period in 1994. The primary
reason for the improvement in non-interest income was the recognition of a gain
on the sale of loans of $214,000 during the year ended December 31, 1995,
whereas a loss of $748,000 was incurred during the comparable period in 1994
consisting of a $536,000 loss on sale of loans due to the rapid increase in
interest rates and its impact on the uncovered portion of the Company's mortgage
pipeline and a $212,000 mark to market downward adjustment on loans previously
contracted for a sale which was not completed. Deposit service fees increased by
$165,000 or 32.8% to $668,000 for the year ended December 31, 1995 from the
prior year's total of $503,000 primarily due to increased fee generation
provided by the new checking account program. Additionally, a gain of $32,000
was recorded on the sale of investment securities available for sale during the
year ended December 31, 1995 compared to a loss of $127,000 in the prior year
due to the sale of investment securities available for sale.

  Non-Interest Expense

     Total non-interest expense increased $1.5 million, or 10.3% from $14.5
million for the prior year ended December 31, 1994 to $16.0 million for the year
ended December 31, 1995. A primary contributing factor to this increase was an
additional compensation and benefits expense of $887,000 during the year ended
December 31, 1995 as the first year of the ESOP was implemented. The ESOP
expense consisted of the first full year's contribution to the ESOP of $755,000
to enable the ESOP to make principal payments on a loan from BF Funding
Corporation, a wholly-owned subsidiary of the Company. The ESOP expense also
included $132,000 comprised of the increased market value of the ESOP shares
compared to original cost on the shares allocated as a result of the loan
repayment. In accordance with AICPA Statement of Position 93-6, the $132,000 was
credited to additional paid-in capital. Excluding the ESOP expense, compensation
for the year ended December 31, 1995 would have decreased to $7.5 million,
compared to $7.6 million for the prior year. An increase in advertising expense
from $351,000 for the year ended December 31, 1994 to $736,000 in the current
year is another factor in the increase in non-interest expenses. The major
reason for the increase in advertising was due to increased expenses incurred to
promote a new line of checking account products. Other non-interest expense also
increased from $2.3 million for the year ended December 31, 1994 to $2.6 million
for the current year due to a variety of added costs associated with the growth
of new checking account deposits and costs of operating in a public environment.

  Income Taxes

     Income tax expense was $815,000 for the year ended December 31, 1995
(resulting in an effective tax rate of 41.8%), compared to $2.3 million for the
year ended December 31, 1994 (resulting in an

                                       21
<PAGE>   14

effective tax rate of 36.6%). The current year effective tax rate approximates
the combined federal and state statutory rates, less a reduction of 5.4% due to
a decrease in the valuation allowance, offset by a 2.8% increase due to a
non-deductible expense for the appreciation in the fair value of the allocated
ESOP shares. The effective tax rate for the year ended December 31, 1994 was
lower than expected due to the impact of a lower effective state tax rate.

  Impact of New Accounting Standards

     In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities ("SFAS 125"). SFAS 125
establishes, among other things, new criteria for determining whether a transfer
of financial assets in exchange for cash or other consideration should be
accounted for as a sale or as a pledge of collateral in a secured borrowing.
SFAS 125 also establishes new accounting requirements for pledged collateral.
SFAS 125 is effective for most transactions occurring after December 31, 1996
and must be applied prospectively. However, SFAS 127, Deferral of the Effective
Date of Certain Provisions of SFAS 125, requires the deferral of implementation
as it relates to repurchase agreements, dollar-rolls, securities lending and
similar transactions in the years beginning after December 31, 1997. The Company
has determined that the adoption of SFAS 125 will not have a material impact on
its consolidated financial statements.

                                       22
<PAGE>   15

                            BOSTONFED BANCORP, INC.

                                AND SUBSIDIARIES

                           Burlington, Massachusetts

                       Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

                  (With Independent Auditors' Report Thereon)

<PAGE>   16

Independent Auditors' Report

The Board of Directors
BostonFed Bancorp, Inc.:

We have  audited  the  accompanying  consolidated  balance  sheets of  BostonFed
Bancorp, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows for each of the years in the  three-year  period ended  December 31, 1996.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of BostonFed Bancorp,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December  31,  1996 in  conformity  with  generally  accepted  accounting
principles.

As  discussed  in note 1, the  Company  changed  its  method of  accounting  for
mortgage servicing rights effective January 1, 1996.


/s/ KPMG Peat Marwick LLP


Boston, Massachusetts
January 30, 1997

<PAGE>   17

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets

                             (Dollars in Thousands)

                           December 31, 1996 and 1995

<TABLE>
<CAPTION>

Assets                                                                         1996       1995
                                                                             --------    -------
<S>                                                                          <C>          <C>
Cash and due from banks (note 1)                                             $ 15,335     10,765
Daily federal funds sold                                                        2,930     10,000
Short-term investments (note 1)                                                    13        460
                                                                            ---------  ---------
     Total cash and cash equivalents                                           18,278     21,225

Investment securities available for sale (amortized cost of $1,085 at 1996
  and $1,022 at 1995) (note 4)                                                  1,085      1,022
Investment securities held to maturity (fair value of $19,045 at 1996 and
  $16,804 at 1995) (notes 5 and 14)                                            19,170     16,906
Mortgage-backed securities available for sale (amortized cost of $23,915
  at 1996 and $23,873 at 1995) (notes 4, 13 and 14)                            23,593     23,873
Mortgage-backed securities held to maturity (fair value of $43,033 at 1996
  and $35,647 at 1995) (notes 5 and 14)                                        43,019     35,116
Mortgage loans held for sale                                                    3,970      8,931
Loans, net of allowance for loan losses of $4,400 at 1996 and $4,275 at
  1995 (notes 6, 7 and 14)                                                    676,670    509,496
Accrued interest receivable (notes 8 and 13)                                    4,067      3,696
Stock in FHLB of Boston, at cost (note 14)                                     16,295      8,374
Premises and equipment, net (note 9)                                            4,979      5,246
Real estate held for sale or development (note 10)                                874        874
Real estate owned (note 11)                                                     2,668        971
Income tax receivable (note 15)                                                   449        272
Deferred income tax asset, net (note 15)                                        1,537      2,112
Prepaid expenses and other assets (note 6)                                      3,913      2,638
                                                                            ---------  ---------
     Total assets                                                           $ 820,567    640,752
                                                                            =========  =========

Liabilities and Stockholders' Equity

Liabilities:
   Deposit accounts (note 12)                                               $ 428,818      419,104
   Securities sold under agreements to repurchase (note 13)                     3,500        7,000
   Federal Home Loan Bank advances (note 14)                                  296,500      119,909
   Advance payments by borrowers for taxes and insurance                        2,100        1,531
   Accrued expenses and other liabilities                                       3,294        2,507
                                                                            ---------    ---------
     Total liabilities                                                        734,212      550,051
                                                                            ---------    ---------

Commitments and contingencies (notes 3, 4, 5, 7, 9, 16, 17, 18 and 19)

Stockholders' equity (notes 2, 3 and 16):
   Preferred stock, $.01 par value; 1,000,000 shares authorized;
     none issued                                                                 --           --
   Common stock, $0.01 par value; 17,000,000 shares authorized;
     6,589,617 issued at 1996 and 1995                                             66           66
   Additional paid-in capital                                                  64,461       63,987
   Retained earnings                                                           33,131       31,183
   Net unrealized loss on investments available for sale                         (322)        --
   Treasury stock, at cost (329,300 shares at 1996)                            (4,739)        --
   Unallocated ESOP shares                                                     (3,929)      (4,535)
   Unearned 1996 Stock-Based Incentive Plan                                    (2,313)        --
                                                                            ---------    ---------
        Total stockholders' equity                                             86,355       90,701
                                                                            ---------    ---------
                   Total liabilities and stockholders' equity               $ 820,567      640,752
                                                                            =========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.

<PAGE>   18

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                       Consolidated Statements of Income

                     (In Thousands, Except per Share Data)

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>

                                                                1996        1995       1994
                                                               ------      ------     ------
<S>                                                          <C>           <C>        <C>
Interest and dividend income:
   Loans (note 6)                                            $ 45,513      38,079     32,578
   Mortgage-backed securities                                   4,998       2,430      2,427
   Investment securities                                        2,001       1,652      1,465
   Federal funds sold                                             166         293         57
                                                               ------      ------     ------
          Total interest and dividend income                   52,678      42,454     36,527
                                                               ------      ------     ------
Interest expense:
   Deposit accounts (note 12)                                  15,698      15,123     12,687
   Borrowed funds (notes 13 and 14)                            13,193       8,429      4,335
                                                               ------      ------     ------
          Total interest expense                               28,891      23,552     17,022
                                                               ------      ------     ------
          Net interest and dividend income                     23,787      18,902     19,505
Provision for loan losses (note 7)                              1,294       3,614        283
                                                               ------      ------     ------
          Net interest and dividend income after provision
           for loan losses                                     22,493      15,288     19,222
                                                               ------      ------     ------

Non-interest income:
   Loan processing and servicing fees (note 6)                  1,330       1,318      1,330
   Deposit service fees                                         1,140         668        503
   Gain (loss) on sale of loans                                   668         214       (748)
   Gain (loss) on sale of investments (note 4)                    (11)         32       (127)
   Other                                                          440         440        682
                                                               ------      ------     ------
          Total non-interest income                             3,567       2,672      1,640
                                                               ------      ------     ------

Non-interest expense:
   Compensation and benefits (note 16)                          9,841       8,423      7,575
   Occupancy and equipment                                      2,479       2,231      2,174
   Deposit insurance premiums                                     916         947      1,109
   Advertising expense                                            588         736        351
   Data processing                                                600         615        523
   Real estate operations (notes 10 and 11)                       561         448        466
   SAIF special assessment (note 3)                             2,670        --         --
   Other                                                        3,385       2,609      2,333
                                                               ------      ------     ------
          Total non-interest expense                           21,040      16,009     14,531
                                                               ------      ------     ------

          Income before income taxes                            5,020       1,951      6,331

Income tax expense (note 15)                                    2,083         815      2,320
                                                               ------      ------     ------

          Net income                                         $  2,937       1,136      4,011
                                                               ======      ======     ======

Earnings per share (note 1)                                  $    .48          NM         NM
                                                               ======      ======     ======

Weighted average shares outstanding                             6,118          NM         NM
                                                               ======      ======     ======
</TABLE>

          See accompanying notes to consolidated financial statements.

<PAGE>   19

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           Consolidated Statements of Changes in Stockholders' Equity

                     (In Thousands, Except per Share Data)

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>

                                                        Shares of                Additional
                                          Preferred     common       Common       paid-in       Retained
                                            stock        stock        stock        capital      earnings
                                            -----        -----        -----        -------      --------
<S>                                         <C>           <C>         <C>          <C>           <C>
Balance at December 31, 1993                $   --          --        $  --           --         26,036

   Net income                                   --          --           --           --          4,011

   Change in net unrealized loss on
    investments available for sale,
    net of taxes                                --          --           --           --           --
                                              -----        -----        -----       ------       ------
Balance at December 31, 1994                    --          --           --           --         30,047

   Stock issued pursuant to initial
    common stock offering                       --         6,590           66       63,855         --

   Common stock acquired by ESOP                --          --           --           --           --

   Reduction in unallocated ESOP
    shares charged to expense                   --          --           --           --           --

   Appreciation in fair value of
    allocated ESOP shares charged
    to expense                                  --          --           --            132         --

   Net income                                   --          --           --           --          1,136
                                              -----        -----        -----       ------       ------
Balance at December 31, 1995                    --         6,590           66       63,987       31,183

<CAPTION>

                                                         Net unrealized
                                                         gain (loss) on                   Unearned
                                                          investments    Unallocated     Stock-Based       Total
                                               Treasury     available        ESOP          Incentive    stockholders'
                                                stock     for sale, net     shares       Plan ("SIP")      equity
                                                -----     -------------     ------       ------------      ------

<S>                                              <C>           <C>            <C>             <C>          <C>
Balance at December 31, 1993                      --             (19)         --               --          26,017

   Net income                                     --            --            --               --           4,011

   Change in net unrealized loss on
    investments available for sale,
    net of taxes                                  --              19          --               --              19
                                               ------         ------        -------          ------        ------
Balance at December 31, 1994                      --            --            --               --          30,047

   Stock issued pursuant to initial
    common stock offering                         --            --            --               --          63,921

   Common stock acquired by ESOP                  --            --          (5,290)            --          (5,290)

   Reduction in unallocated ESOP
    shares charged to expense                     --            --             755             --             755

   Appreciation in fair value of
    allocated ESOP shares charged
    to expense                                    --            --            --               --             132

   Net income                                     --            --            --               --           1,136
                                               ------         ------        -------          ------        ------
Balance at December 31, 1995                      --            --          (4,535)            --          90,701

</TABLE>

                                                                     (Continued)


<PAGE>   20

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

     Consolidated Statements of Changes in Stockholders' Equity (Continued)

                     (In Thousands, Except per Share Data)

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>

                                                       Shares of                 Additional
                                          Preferred     common       Common       paid-in       Retained
                                            stock        stock        stock        capital      earnings
                                            -----        -----        -----        -------      --------
<S>                                         <C>          <C>         <C>          <C>           <C>
Common stock repurchased
  (329,300 shares at an average
  price of $14.39 per share)                $  --        $ --          --            --          (4,739)

Cash dividends declared and paid
  (.15 per share)                              --          --          --            --            (989)

Reduction in unallocated ESOP
  shares charged to expense                    --          --          --            --            --

Appreciation in fair value of
  allocated ESOP shares charged
  to expense                                   --          --          --             287          --

Common stock acquired for SIP                  --          --          --            --            --

Earned portion of SIP shares
  charged to expense                           --          --          --            --            --

Appreciation in fair value of
  SIP shares charged to expense                --          --          --             187          --

Changes in net unrealized loss in
  investments available for sale,
  net                                          --          --          --            --            --

Net income                                     --          --          --            --           2,937
                                            -----         -----     -------        ------        ------
Balance at December 31, 1996                $  --         6,590     $    66        64,461        33,131
                                            =====         =====     =======        ======        ======

</TABLE>

<TABLE>
<CAPTION>
                                                         Net unrealized
                                                         gain (loss) on                   Unearned
                                                          investments    Unallocated     Stock-Based       Total
                                               Treasury     available        ESOP          Incentive    stockholders'
                                                stock     for sale, net     shares       Plan ("SIP")      equity
                                                -----     -------------     ------       ------------      ------
<S>                                              <C>           <C>            <C>            <C>           <C>
Common stock repurchased
  (329,300 shares at an average
  price of $14.39 per share)                      --           --             --             (4,739)

Cash dividends declared and paid
  (.15 per share)                                 --           --             --               --           (989)

Reduction in unallocated ESOP
  shares charged to expense                       --           --              606             --            606

Appreciation in fair value of
  allocated ESOP shares charged
  to expense                                      --           --             --               --            287

Common stock acquired for SIP                     --           --             --             (3,230)      (3,230)

Earned portion of SIP shares
  charged to expense                              --           --             --                917          917

Appreciation in fair value of
  SIP shares charged to expense                   --           --             --               --            187

Changes in net unrealized loss in
  investments available for sale,
  net                                             --           (322)          --               --           (322)

Net income                                        --           --             --               --          2,937
                                                ------         ----         ------           ------       ------
Balance at December 31, 1996                    (4,739)        (322)        (3,929)          (2,313)      86,355
                                                ======         ====         ======           ======       ======
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>   21

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                                 (In Thousands)

              For the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                                      1996         1995         1994
                                                                                    --------      -------     --------
<S>                                                                                <C>              <C>          <C>
Net cash flows from operating activities:
  Net income                                                                       $   2,937        1,136        4,011
    Adjustments to reconcile net income to net cash
      provided by operating activities:
        Depreciation, amortization and accretion, net                                  1,034        1,109        1,125
        Earned SIP shares                                                                917         --           --
        Appreciation in fair value of ESOP shares                                        287          132         --
        Appreciation in fair value of SIP shares                                         187         --           --
        Provision for loan losses                                                      1,294        3,614          283
        Provision for valuation allowance for real estate owned                          335          246          322
        Loans originated for sale                                                   (143,064)     (78,041)     (77,562)
        Proceeds from sale of loans                                                  148,693       69,640      102,349
        Write-downs (recovery) of real estate held for sale or development              --            (54)          55
        Net (gain) loss on sale of investment securities                                  11          (32)         127
        Gain on sale of real estate held for sale or development                        --           (113)        (201)
        Decrease (increase) in deferred income taxes                                     575           49          (39)
        Increase in income tax receivable                                               (177)        (272)        --
        Loss on sale of real estate acquired through foreclosure                          44         --            224
        Loss (gain) on sale of loans                                                    (668)        (214)         748
        Increase in accrued interest receivable                                         (371)        (694)        (498)
        Increase (decrease) in minority interest                                        --           (226)           1
        Decrease (increase) in prepaid expenses and other assets                      (1,275)         167         (708)
        Increase (decrease) in accrued expenses and other liabilities                    787         (935)         135
                                                                                    --------      -------     --------
            Net cash provided by (used in) operating activities                       11,546       (4,488)      30,372
                                                                                    --------      -------     --------

Cash flows from investing activities:
   Proceeds from sales of investment securities available for sale                      --          3,096        2,998
   Proceeds from sale of mortgage-backed securities available for sale                10,614         --           --
   Proceeds from maturities of investment securities available for sale                 --           --          1,000
   Proceeds from maturities of investment securities held to maturity                  1,745        3,279        6,383
   Purchase of investment securities available for sale                                  (63)      (4,088)        (105)
   Purchase of investment securities held to maturity                                 (9,992)      (8,710)     (10,129)
   Purchase of mortgage-backed securities available for sale                         (10,666)     (23,873)        --
   Purchase of mortgage-backed securities held to maturity                           (13,891)        --           --
   Principal repayments on investment securities held to maturity                      6,009        3,340         --
   Principal repayments on mortgage-backed securities held to maturity                 5,934        4,586        5,307
   Increase in portfolio loans, net                                                 (172,557)     (15,691)    (114,722)
   Purchase of FHLB stock                                                             (7,921)        (743)      (3,268)
   Purchases of premises and equipment                                                  (617)      (1,490)        (367)
   Proceeds from sale of real estate held for sale or development                       --            200          427
   Additional investment in real estate held for sale or development                    --             (4)         (82)
   Proceeds from sale of real estate owned                                             2,249          596        3,090
   Additional investments in real estate owned                                          (359)         (93)        (210)
                                                                                    --------      -------     --------
                  Net cash used in investing activities                             (189,515)     (39,595)    (109,678)
                                                                                    ========      =======     ========
</TABLE>

                                                                     (Continued)

<PAGE>   22

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

               Consolidated Statements of Cash Flows (continued)

                                 (In Thousands)
<TABLE>
<CAPTION>

                                                                                     1996         1995         1994
                                                                                  ---------     --------     --------
<S>                                                                               <C>              <C>        <C>
Cash flows from financing activities:
   Increase (decrease) in deposits accounts                                       $   9,714        5,940      (23,734)
   Proceeds from securities sold under agreement to repurchase                        2,973        7,000         --
   Repayments of securities sold under agreement to repurchase                       (6,473)        --           --
   Proceeds from Federal Home Loan Bank advances                                    670,304      461,029      483,763
   Repayments of Federal Home Loan Bank advances                                   (493,713)    (476,151)    (379,613)
   Increase (decrease) in advance payments by borrowers for taxes
     and insurance                                                                      569         (204)         251
   Net proceeds from common stock issued pursuant to initial
     public offering                                                                   --         63,921         --
   Cash dividends paid                                                                 (989)        --           --
   Common stock repurchased                                                          (4,739)        --           --
   Payments to acquire common stock for ESOP                                           --         (5,290)        --
   Reduction in unallocated ESOP shares                                                 606          755         --
   Purchase of common stock for SIP                                                  (3,230)        --           --
                                                                                  ---------     --------     --------
        Net cash provided by financing activities                                   175,022       57,000       80,667
                                                                                  ---------     --------     --------
        Net increase (decrease) in cash and cash equivalents                         (2,947)      12,917        1,361

Cash and cash equivalents at beginning of year                                       21,225        8,308        6,947
                                                                                  ---------     --------     --------
Cash and cash equivalents at end of year                                          $  18,278       21,225        8,308
                                                                                  =========     ========     ========
Supplemental disclosure of cash flow information: Payments during the year for:

   Interest                                                                       $  27,889       23,803       16,489
                                                                                  =========     ========     ========
   Taxes                                                                          $   1,664        1,293        2,141
                                                                                  =========     ========     ========
Supplemental schedule of noncash investing activities:
   Transfers of mortgage loans to real estate owned                               $   3,966        1,333          710
                                                                                  =========     ========     ========
</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>   23

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies (Dollars in Thousands)

   As more fully  described in note 2, Boston Federal  Savings Bank (the "Bank")
      converted  from a mutual  savings bank to a capital  stock savings bank on
      October 24, 1995. As part of the conversion,  BostonFed Bancorp, Inc. (the
      "Company") was formed,  acquired all of the Bank's  conversion  stock, and
      issued its common stock in a subscription offering.

   The Company provides a variety of loan and deposit  services to its customers
      through a network of eight locations.  The Company's  deposit gathering is
      concentrated in the  communities  surrounding its eight offices located in
      the  greater  Boston  metropolitan  area,   municipalities  of  Arlington,
      Bedford, Billerica, Boston, Burlington,  Lexington, Peabody and Wellesley.
      The Company is subject to competition  from other  financial  institutions
      including  commercial banks, other savings banks, credit unions,  mortgage
      banking  companies  and other  financial  service  providers.  The Bank is
      subject to the regulations of, and periodic  examination by, the Office of
      Thrift Supervision  ("OTS") and the Federal Deposit Insurance  Corporation
      ("FDIC").  The Bank's  deposits  are  insured by the  Savings  Association
      Insurance Fund of the FDIC.

   In preparing  these  financial  statements,  management  is  required to make
      estimates that affect the reported amounts of assets and liabilities as of
      the dates of the balance  sheets,  and income and expense for the periods.
      Actual results could differ from those estimates.  Material estimates that
      are particularly  susceptible to change relate to the valuation  allowance
      for deferred tax assets and the  determination  of the  allowance for loan
      losses and valuation of real estate owned.

   Principles of Consolidation

   The consolidated financial statements include the accounts of the Company and
      its  wholly-owned  subsidiaries:  Boston  Federal  Savings  Bank  and B.F.
      Funding Corporation ("B.F. Funding").

   Boston Federal Savings Bank includes its  wholly-owned  subsidiaries,  Leader
      Corporation and BFS Service Corporation,  including investments in various
      real estate  joint  ventures.  Leader Corp.  has an ownership  interest in
      three real estate development partnerships, two of which became dormant in
      1996 as operations have been completed.  Additionally, Leader Corp. leases
      office  space  from  the  Bank  which  it  sublets  to  Liberty  Financial
      Securities.  BFS Service Corp. is dormant and is not currently  conducting
      any business.

   B.F. Funding is a business corporation formed at the direction of the Company
      under the laws of the  Commonwealth of  Massachusetts  on August 25, 1995.
      B.F. Funding was established to lend funds to a Company sponsored employee
      stock ownership plan trust for the purchase of stock at the initial public
      offering. All significant intercompany accounts and transactions have been
      eliminated in consolidation.

   Certain amounts previously  reported have been reclassified to conform to the
      current year's presentation.

   Cash and Due from Banks

   The Bank is required to maintain  cash and reserve  balances  with the
      Federal Reserve  Bank.  Such reserve is calculated  based upon deposit
      levels and amounted to $3,394 at December 31, 1996.

                                                                     (Continued)
<PAGE>   24

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

   Short-Term Investments

   Short-term  investments  represent  certificates  of  deposit  with  original
      maturities of 90 days or less. These  investments are stated at cost which
      approximates market value.

   Investment and Mortgage-backed Securities

   Debt securities  that the Company has the positive intent and ability to hold
      to maturity are classified as  held-to-maturity  and reported at amortized
      cost; debt and equity  securities that are bought and held principally for
      the purpose of selling them in the near term are classified as trading and
      reported  at fair  value,  with  unrealized  gains and losses  included in
      earnings;  and  debt  and  equity  securities  not  classified  as  either
      held-to-maturity  or trading  are  classified  as  available-for-sale  and
      reported at fair value,  with  unrealized  gains and losses  excluded from
      earnings and reported as a separate component of stockholders' equity, net
      of related  income taxes.  The Company's  investment in mutual funds (Cash
      Management Funds) is classified as available for sale.

   Premiums and  discounts on  investment  and  mortgage-backed  securities  are
      amortized or accreted into income by use of the interest  method  adjusted
      for prepayments. If a decline in fair value below the amortized cost basis
      of an  investment or  mortgage-backed  security is judged to be other than
      temporary,  the cost basis of the investment is written down to fair value
      as a new cost  basis and the amount of the  write-down  is  included  as a
      charge against gain on sale of investment and mortgage-backed  securities.
      Gains and losses on the sale of investment and mortgage-backed  securities
      are recognized at the time of sale on a specific identification basis.

   Loans

   Loans  are  reported  at  the  principal  amount   outstanding,   reduced  by
      unamortized  discounts and net deferred loan origination  fees. Loans held
      for sale are  carried  at the lower of  aggregate  cost or  market  value,
      considering  loan  production  and sales  commitments  and deferred  fees.
      Generally,  all longer term (typically mortgage loans with terms in excess
      of ten years)  fixed-rate  residential  single-family  mortgage  loans are
      originated  for sale and  adjustable-rate  loans are  originated  both for
      portfolio and for sale.  Occasionally,  the Company  generates  fixed-rate
      loans which are designated for portfolio at the time of origination.

   Discounts and premiums on loans are  recognized  as income using the interest
      method  over the  remaining  contractual  term to  maturity  of the  loans
      adjusted for prepayments.

   Loan  origination  fees are  offset  with  related  direct  incremental  loan
      origination  costs and the  resulting net amount is deferred and amortized
      to interest income over the contractual  life of the associated loan using
      the interest  method.  Net deferred  amounts on loans sold are included in
      determining the gain or loss on the sale when the related loans are sold.

   The Company sells mortgage loans for cash proceeds approximately equal to the
      principal amount of loans sold, but with yields to investors which reflect
      current  market rates.  Gain or loss is recognized and premium or discount
      is recorded  at the time of sale in an amount  reflecting  the  difference
      between the  contractual  interest rates to the borrower on the loans sold
      and the yield to the investor,  adjusted for a normal  service fee (1/4 to
      3/8 of 1%), any  guarantee  fees and buyups and  buydowns.  The  resulting
      deferred  premium,  if any, is amortized to loan interest income using the
      interest method over the contractual term of the loans sold,  adjusted for
      estimated   prepayments.   Actual   prepayment   experience   is  reviewed
      periodically and the deferred premium is adjusted, if necessary.

                                                                     (Continued)


<PAGE>   25

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

   The Company adopted the  provisions of SFAS No. 122,  Accounting for Mortgage
      Servicing  Rights,  which  amends  SFAS No.  65,  Accounting  for  Certain
      Mortgage Banking  Activities,  on January 1, 1996. The Statement  requires
      that a mortgage banking enterprise recognize as separate assets, rights to
      service  mortgage  loans for  others,  regardless  of how those  servicing
      rights are acquired. As a result of adopting SFAS No. 122, the net gain on
      sale of loans increased $1,095 for the year ended December 31, 1996.

   Mortgage loan servicing rights are amortized to loan processing servicing fee
      income  using a method  which  approximates  the  level  yield  method  in
      proportion  to, and over the period of,  estimated net  servicing  income.
      Capitalized mortgage servicing rights are assessed for impairment based on
      the  fair  value  of  those  rights.  Prepayment  experience  on  mortgage
      servicing  rights is reviewed  periodically  and,  when actual  repayments
      exceed estimated prepayments,  the balance of the mortgage servicing asset
      is adjusted by a charge to earnings.  Any  impairment in the fair value of
      those  mortgage  servicing  assets is  recognized  by a charge to earnings
      through a valuation allowance.  The risk characteristics of the underlying
      loans used to measure  impairment  include loan type,  interest rate, loan
      origination date, and term to maturity.

   Accrual of interest on loans is discontinued when collectibility of principal
      or interest is uncertain or payments of principal or interest  have become
      contractually  past due 90 days or more.  Interest received on non-accrual
      loans is applied  against the principal  balance and all  amortization  of
      deferred fees is discontinued.  Accrual is generally not resumed until the
      loan is brought current,  the loan becomes well secured and in the process
      of collection and, in either case, when concern no longer exists as to the
      collectibility of principal or interest.

   Impaired loans are  commercial  real estate,  multi-family,  and  non-accrual
      mortgage and  consumer  and other loans for which it is probable  that the
      Company will not be able to collect all amounts due in accordance with the
      contractual  terms of the loan  agreement.  Impaired  loans,  except those
      loans  that are  accounted  for at fair  value or at lower of cost or fair
      value,  are accounted for at the present value of the expected future cash
      flows discounted at the loan's  effective  interest rate or as a practical
      expedient in the case of collateralized loans, the lower of the fair value
      of the  collateral or the recorded  amount of the loan.  These  Statements
      apply  to all  creditors  and  all  loans,  uncollateralized  as  well  as
      collateralized,  except large groups of smaller-balance  homogeneous loans
      that are collectively evaluated for impairment, loans that are measured at
      fair  value and  leases  and debt  securities.  Management  considers  the
      payment status, net worth and earnings potential of the borrower,  and the
      value and cash flow of the  collateral  as factors to  determine if a loan
      will be paid in accordance with its contractual terms. Management does not
      set any minimum  delay of payments as a factor in  reviewing  for impaired
      classification.  Impaired loans are charged off when  management  believes
      that the collectibility of the loan's principal is remote.  Classification
      of a loan as  in-substance  foreclosure  is made  only when a lender is in
      substantive possession of the collateral.

   Allowance for Loan Losses

   The allowance for loan losses is  established  through a  provision  for loan
      losses  charged  to  operations.  Loan  losses  are  charged  against  the
      allowance when management  determines that the  collectibility of the loan
      principal  is unlikely.  Recoveries  on loans  previously  charged off are
      credited to the allowance.

                                                                     (Continued)
<PAGE>   26

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

   Management believes the allowance is adequate to absorb probable loan losses.
      Factors  considered  in evaluating  the adequacy of the allowance  include
      trends in loan delinquencies and charge-offs,  current economic conditions
      and their effect on borrowers' ability to pay,  underwriting  standards by
      loan  type,  mix and  balance of the  portfolio,  and the  performance  of
      individual  loans in relation  to contract  terms.  In  addition,  various
      regulatory  agencies,  as an integral part of their  examination  process,
      periodically  review the Company's allowance for losses. Such agencies may
      require the Company to recognize additions to the allowance based on their
      judgments  about  information  available  to  them at the  time  of  their
      examination.

   While management  uses available  information  to recognize  losses on loans,
      future  additions to the  allowance  may be necessary  based on changes in
      economic  conditions.   Accordingly,  the  ultimate  collectibility  of  a
      substantial portion of the Company's loan portfolio is affected by changes
      in market conditions.

   Premises and Equipment

   Premises and equipment are recorded at cost,  less  accumulated  depreciation
      and amortization.  Depreciation is computed using the straight-line method
      over the  estimated  useful  lives of the related  assets (3 to 40 years).
      Amortization  of leasehold  improvements  is provided over the life of the
      related leases by use of the straight-line method. Rental income on leased
      facilities is included as a reduction of occupancy and equipment expense.

   Real Estate Held for Sale or Development

   Real estate held for sale or  development  is carried at the lower of cost or
      estimated  net  realizable  value.   Acquisition  and  development  costs,
      including  interest,  are capitalized.  The Company's  investments in real
      estate are usually  made on a joint  venture  basis.  For each project the
      Company maintains a controlling interest.

   Management  believes that the net carrying value of real estate held for sale
      or  development  adequately  reflects  the  lower  of its  cost  basis  or
      estimated  current  net  realizable   value.   Factors  similar  to  those
      considered in the  evaluation of the allowance for loan losses,  including
      regulatory  agency  requirements,  are considered in the evaluation of the
      net realizable value of real estate held for sale or development.

   Real Estate Owned

   Real estate owned is acquired  through  foreclosure or by accepting a deed in
      lieu of  foreclosure.  Real  estate  owned is recorded at the lower of the
      carrying value of the loan or the fair value,  less disposal costs, of the
      property  constructively or actually received,  thereby establishing a new
      cost basis.  Subsequent write-downs are recorded if the cost basis exceeds
      current net fair value. Related operating costs, net of rental income, are
      reflected in operations when incurred.

   Management believes that the net carrying value of real estate owned reflects
      the lower of its cost basis or estimated  current net fair value.  Factors
      similar to those  considered  in the  evaluation of the allowance for loan
      losses,  including regulatory agency  requirements,  are considered in the
      evaluation of the net fair value of real estate owned.

                                                                     (Continued)


<PAGE>   27

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

   Income Taxes

   Deferred tax  assets  and  liabilities  are  recognized  for the  future  tax
      consequences  attributable to differences between the accounting basis and
      the tax basis of the Bank's  assets and  liabilities.  Deferred tax assets
      and  liabilities are measured using enacted tax rates expected to apply to
      taxable  income  in the years in which  those  temporary  differences  are
      expected  to be  realized or  settled.  The Bank's  deferred  tax asset is
      reviewed  periodically  and  adjustments  to such asset are  recognized as
      deferred  income tax expense or benefit  based on  management's  judgments
      relating to the realizability of such asset.

   Pension

   Pension cost is recognized over the employees' approximate service period.

   Employee Benefits

   In October 1995, the Financial Accounting Standards Board issued Statement of
      Financial   Accounting  Standards  No.  123,  Accounting  for  Stock-Based
      Compensation ("SFAS 123"). The Statement  encourages  companies to adopt a
      new accounting  method based on the estimated fair value of employee stock
      options and other stock awards under which  compensation  cost is measured
      at the grant date based on the value of the award and is  recognized  over
      the service  period.  The Company  continues to follow APB Opinion No. 25,
      Accounting for Stock Issued to Employees. See footnote 16 for the expanded
      disclosures  required  by SFAS 123  regarding  pro  forma net  income  and
      earnings per share.

   Earnings Per Share

   Earnings per share is computed by dividing net income by the weighted average
      number of shares of common stock outstanding  during the year,  calculated
      using the treasury stock method,  adjusted for the weighted average number
      of unallocated  shares held by the Employee Stock  Ownership Plan ("ESOP")
      and the 1996  Stock-Based  Incentive  Plan ("SIP").  Stock options did not
      have a material dilutive effect.

   Earnings per share is not  presented  for the period of October 24, 1995 (the
      date of conversion  to a stock savings bank) through  December 31, 1995 as
      the earnings per share  calculation  for the sixty-nine day period was not
      meaningful.  Earnings per share is not  presented for the periods prior to
      the conversion to stock form, as the Bank was a mutual savings bank and no
      stock was outstanding.

   Recent Accounting Developments

   In June 1996, the Financial  Accounting  Standards Board issued  Statement of
      Financial  Accounting  Standards  No. 125,  Accounting  for  Transfers and
      Servicing of Financial  Assets and  Extinguishment  of Liabilities  ("SFAS
      125").  SFAS  125  establishes,  among  other  things,  new  criteria  for
      determining whether a transfer of financial assets in exchange for cash or
      other  consideration  should be accounted  for as a sale or as a pledge of
      collateral  in  a  secured  borrowing.   SFAS  125  also  establishes  new
      accounting requirements for pledged collateral.  SFAS 125 is effective for
      most  transactions  occurring  after December 31, 1996 and must be applied
      prospectively.  However,  SFAS  127,  Deferral  of the  Effective  Date of
      Certain Provisions of SFAS 125, requires the deferral of implementation as
      it relates to repurchase agreements, dollar-rolls,  securities lending and
      similar  transactions  in the years beginning after December 31, 1997. The
      Company  has  determined  that  the  adoption  of SFAS 125 will not have a
      material impact on its consolidated financial statements.

                                                                     (Continued)
<PAGE>   28

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(2)  Conversion  to Stock Form of Ownership  (Dollars in  Thousands,  Except per
     Share Data)

   The Company is a business  corporation  formed at the  direction  of the Bank
      under the laws of Delaware on July 11, 1995. On October 24, 1995,  (i) the
      Bank  converted  from a  federally  chartered  mutual  savings  bank  to a
      federally  chartered  stock savings bank,  (ii) the Bank issued all of its
      outstanding capital stock to the Company and (iii) the Company consummated
      its initial public offering of common stock, par value $.01 per share (the
      "Common Stock"), by selling 6,589,617 shares of Common Stock at a price of
      $10.00 per share to the Bank's  Employee Stock Ownership Plan ("ESOP") and
      to certain of the Bank's  eligible  account holders who had subscribed for
      such shares (collectively,  the "Conversion").  The Conversion resulted in
      net  proceeds  of $63.9  million,  after  expenses  of $2.0  million.  Net
      proceeds of $31 million  were  invested in the Bank to increase the Bank's
      tangible capital to 10% of the Bank's total adjusted assets.

   Prior to the  initial  public  offering  and as a  part  of the  subscription
      offering,  in order to grant  priority  to eligible  depositors,  the Bank
      established a  liquidation  account at the time of conversion in an amount
      equal to the  retained  earnings  of the Bank as of the date of its latest
      balance sheet date, June 30, 1995,  contained in the final Prospectus used
      in connection  with the  Conversion.  In the unlikely  event of a complete
      liquidation of the Bank (and only in such an event),  eligible  depositors
      who continue to maintain accounts at the Bank shall be entitled to receive
      a  distribution  from the  liquidation  account.  The total  amount of the
      liquidation  account is decreased  if the balances of eligible  depositors
      decrease  on the  annual  determination  dates.  The  liquidation  account
      approximated $13.4 million (unaudited) at December 31, 1996.

   The Company may not declare or pay dividends on its stock if such declaration
      and payment would violate statutory or regulatory requirements.

   In addition to the 17,000,000  authorized shares of common stock, the Company
      authorized  1,000,000  shares of preferred stock with a par value of $0.01
      per share (the OPreferred  StockO).  The Board of Directors is authorized,
      subject to any  limitations  by law,  to provide  for the  issuance of the
      shares of preferred  stock in series,  to establish  from time to time the
      number of  shares  to be  included  in each  such  series,  and to fix the
      designation,  powers,  preferences,  and rights of the shares of each such
      series and any qualifications,  limitations or restrictions thereof. As of
      December 31, 1996 there were no shares of preferred stock issued.

(3) Stockholders' Equity (Dollars in Thousands)

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

                                                                     (Continued)
<PAGE>   29

BOSTONFED BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

   Quantitative  measures  established by regulation to ensure capital  adequacy
      require the Bank to maintain  minimum amounts and ratios (set forth in the
      table below) of  risk-weighted,  core and tangible  capital (as  defined).
      Management  represents,  as of December 31, 1996,  that the Bank meets all
      capital adequacy requirements to which it is subject.

   As of April 22, 1996, the most recent  notification  from the OTS categorized
      the Bank as "well capitalized"  under the regulatory  framework for prompt
      corrective  action. To be categorized as "well  capitalized" the Bank must
      maintain minimum  risk-weighted  capital, core capital and tangible ratios
      as  set  forth  in the  table.  As of  December  31,  1996,  the  Bank  is
      categorized  as "well  capitalized"  based on its ratios of  risk-weighted
      core and tangible capital.

   The Bank's actual capital  amounts and ratios are presented in the table.  No
      deduction was taken from capital for interest-rate risk.

<TABLE>
<CAPTION>
                                                                                    To Be Well
                                                               For Capital       Capitalized Under
                                                                 Adequacy        Prompt Corrective
                                              Actual             Purposes        Action Provisions
                                         ----------------    ----------------    -----------------
                                         Amount     Ratio    Amount     Ratio    Amount      Ratio
                                         ------     -----    ------     -----    ------      -----
<S>                                     <C>         <C>      <C>         <C>     <C>          <C>
   As of December 31, 1996:
      Risk-weighted capital             $ 58,310    13.2%    $35,301     8.0%    $44,060      10.0%
      Core capital                        53,910     6.8      23,868     3.0      39,780       5.0
      Tangible capital                    53,910     6.8      11,934     1.5      39,780       5.0

   As of December 31, 1995:
      Risk-weighted capital             $ 65,809    19.5%    $26,959     8.0%    $33,632      10.0%
      Core capital                        62,086    10.2      18,206     3.0      30,343       5.0
      Tangible capital                    62,086    10.2       9,103     1.5      30,343       5.0
</TABLE>

   During  1996,  the  Company's  Board  of  Directors  approved  a  program  to
      repurchase up to 329,481 or  approximately  5% of its  outstanding  common
      shares. The Company plans to hold the repurchased shares as treasury stock
      to be used for general  company  purposes.  During the year ended December
      31, 1996,  329,300 shares were  repurchased  under this program at a total
      cost of $4.7 million.

   The Company's deposits are insured by the Savings  Association Insurance Fund
      ("SAIF") of the FDIC. On September 30, 1996, the President signed into law
      the  Deposit  Insurance  Funds  Act  of  1996  (the  "Act").  Among  other
      provisions,  the Act empowers the Board of Directors of the FDIC to impose
      a special assessment on "SAIF-assessable deposits" as of March 31, 1995 of
      depository institutions to recapitalize the SAIF. The Company was assessed
      a rate of 65.7 cents per $100 of  SAIF-assessable  deposits.  The  Company
      recorded a charge to SAIF  special  assessment  expense of $2.7 million on
      September 30, 1996.

(Continued)


<PAGE>   30

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(4) Investment  and  Mortgage-Backed  Securities  Available for Sale (Dollars in
    Thousands)

   The amortized cost  and  fair  values  of  investment   and   mortgage-backed
      securities available for sale are shown below by contractual maturity:

<TABLE>
<CAPTION>
                                                       December 31, 1996
                                  -----------------------------------------------------------
                                    Weighted    Amortized   Unrealized   Unrealized    Fair
                                  average rate     cost        gains       losses      value
                                  ------------  ---------   ----------   ----------   -------
<S>                                   <C>        <C>            <C>          <C>        <C>
   Investment securities:
     Cash management funds            6.0%       $ 1,085        --           --         1,085

   Mortgage-backed securities:
     Maturing after 5 years but
       within 10 years                7.0%       $10,036        --           (153)      9,883
     Maturing after 10 years          6.1%        13,879        --           (169)     13,710

          Total mortgage-backed
            securities                           $23,915        --           (322)     23,593
                                                 =======      =====        =====      =======

<CAPTION>
                                                       December 31, 1995
                                  -----------------------------------------------------------
                                    Weighted    Amortized   Unrealized   Unrealized    Fair
                                  average rate     cost        gains       losses      value
                                  ------------  ---------   ----------   ----------   -------
<S>                                   <C>        <C>            <C>          <C>        <C>
   Investment securities:
     Cash management funds            6.3%       $ 1,022        --           --         1,022

   Mortgage-backed securities:
     Maturing after 5 years but
       within 10 years                7.0%       $11,268        --           --        11,268
     Maturing after 10 years          6.8%        12,605        --           --        12,605

           Total mortgage-backed
             securities                          $23,873        --           --        23,873
                                                 =======      =====        =====      =======
</TABLE>

   Maturities  of  mortgage-backed  securities  are  shown at final  contractual
      maturity but are expected to have shorter lives because borrowers have the
      right to prepay obligations without prepayment penalties.

   At December 31, 1996,  mortgage-backed  securities  with book value of $5,597
      and fair value of $5,512 were pledged as collateral  for  securities  sold
      under  agreement to  repurchase.  At December  31,  1995,  mortgage-backed
      securities  with a book  value and fair  value of $7,407  were  pledged as
      collateral for securities sold under agreement to repurchase.

                                                                     (Continued)
<PAGE>   31

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

   The composition by issuer of  mortgage-backed  securities  available for sale
      follows:

                                              December 31,
                            -------------------------------------------------
                                    1996                        1995
                            ---------------------      ----------------------
                           Amortized        Fair       Amortized       Fair
                              cost          value         cost         value
                            -------       -------       -------       -------
   FHLMC                    $10,036         9,883        11,268        11,268
   GNMA                      13,879        13,710        12,605        12,605
                            -------       -------       -------       -------
                            $23,915        23,593        23,873        23,873
                            =======       =======       =======       =======

   Proceeds from the sale of investment  securities  available for sale amounted
      to $3,096 in 1995 and  $2,998 in 1994.  There were not such sales in 1996.
      Realized gains and losses on investment securities available for sale were
      $37 and $5,  respectively,  in 1995. There were $127 in realized losses on
      investment securities available for sale for the year ended 1994. Proceeds
      from the sale of mortgage-backed securities available for sale amounted to
      $10,614 in 1996.  Realized gains and losses on mortgage-backed  securities
      available for sale were $8 and $19,  respectively,  in 1996. There were no
      sales of mortgage-backed securities available for sale in 1995 and 1994.

(5)  Investment  and  Mortgage-Backed  Securities  Held to Maturity  (Dollars in
     Thousands)

   The amortized cost  and  fair  values  of  investment   and   mortgage-backed
      securities held to maturity are shown below by contractual maturity:

<TABLE>
<CAPTION>
                                                                      December 31, 1996
                                                -----------------------------------------------------------
                                                  Weighted    Amortized   Unrealized   Unrealized    Fair
                                                average rate     cost        gains       losses      value
                                                ------------  ---------   ----------   ----------   -------
<S>                                                <C>        <C>            <C>          <C>        <C>
   Investment securities:
     U.S. government, federal
       agency and other obligations:
         Maturing within one year                   5.6%        $  2,004        --            (3)      2,001
         Maturing after 1 year but
          within 5 years                            5.9%          15,916          43        (167)     15,792
         Maturing after 5 years but
          within 10 years                           7.0%           1,000           2        --         1,002
                                                                --------         ---        ----      ------
                                                                  18,920          45        (170)     18,795
                                                                --------         ---        ----      ------
         Certificates of deposit:
           Maturing after 1 year but
            within 5 years                          5.1%             250        --          --           250
                                                                --------         ---        ----      ------
         Total investment securities                            $ 19,170          45        (170)     19,045
                                                                ========         ===        ====      ======
   Mortgage-backed securities:
         Maturing after 1 year but
           within 5 years                           6.5%        $     51        --            (2)         49
         Maturing after 5 years but
           within 10 years                          7.7%           5,485          86         (51)      5,520
         Maturing after 10 years                    7.1%          37,483         113        (132)     37,464
                                                                --------         ---        ----      ------
         Total mortgage-backed securities                       $ 43,019         199        (185)     43,033
                                                                ========         ===        ====      ======

</TABLE>

                                                                     (Continued)

<PAGE>   32

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                     December 31, 1995
                                                -----------------------------------------------------------
                                                  Weighted    Amortized   Unrealized   Unrealized    Fair
                                                average rate     cost        gains       losses      value
                                                ------------  ---------   ----------   ----------   -------
<S>                                                <C>        <C>            <C>          <C>        <C>

   Investment securities:
     U.S. government, federal
       agency and other obligations:
          Maturing within one year                  5.2%       $  1,500           1          (6)      1,495
          Maturing after 1 year but
            within 5 years                          5.2%         13,911          58        (132)     13,837
          Maturing after 5 years but
            within 10 years                         5.5%          1,000        --           (23)        977
                                                                 16,411          59        (161)     16,309
     Certificates of deposit:
       Maturing after 1 year but
         within 5 years                             5.7%            495        --          --           495

     Total investment securities                               $ 16,906          59        (161)     16,804

   Mortgage-backed securities:
       Maturing after 5 years but
         within 10 years                            7.4%       $  4,964         117        --         5,081
       Maturing after 10 years                      6.5%         30,152         414        --        30,566

     Total mortgage-backed securities                          $ 35,116         531        --        35,647

</TABLE>

   Maturities  of  mortgage-backed  securities  are  shown at final  contractual
      maturity but are expected to have shorter lives because borrowers have the
      right to prepay obligations without prepayment penalties.

   A  U.S.  Agency note with  amortized  cost of $500 at  December  31, 1996 and
      1995,  and fair  value of $491 and $490 at  December  31,  1996 and  1995,
      respectively,  was  pledged  to  secure  certain  of the  Bank's  recourse
      liabilities relating to loans sold as described in note 6.

   A  U.S. Agency note with an amortized cost of $1,000 and $500 at December 31,
      1996 and 1995, respectively, and a fair value of $991 and $481 at December
      31,  1996 and 1995,  respectively  was pledged to provide  collateral  for
      customer and the Bank's employee tax withholdings  that are to be remitted
      to the federal government in excess of the $100 of withholdings insured by
      the FDIC.

   Included  in U.S.  government,  federal  agency  and  other  obligations  are
      investments  with  callable  features  that can be  called  prior to final
      maturity with an amortized  cost of $10,996 and a fair value of $10,925 at
      December 31, 1996.

                                                                     (Continued)
<PAGE>   33

BOSTONFED BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

   The composition  by  issuer of  mortgage-backed  securities  held to maturity
      follows:

                                                        December 31,
                                          -------------------------------------
                                                  1996                1995
                                          ------------------   ----------------
                                          Amortized    Fair    Amortized   Fair
                                             cost      value     cost     value
                                             ----      -----     ----     -----
   FHLMC                                   $ 1,356     1,330     1,824     1,830
   FNMA                                      1,147     1,129     1,512     1,531
   GNMA                                     26,611    26,696    31,780    32,286
   Privately issued collateralized
     mortgage obligation                    13,905    13,878      --        --

                                           $43,019    43,033    35,116    35,647

(6) Loans (Dollars in Thousands)

   The Company's  lending  activities  are  conducted   principally  in  eastern
      Massachusetts.  The Bank grants single-family and multifamily  residential
      loans,  commercial  real estate loans,  commercial  loans and a variety of
      consumer loans. In addition, the Company grants loans for the construction
      of  residential  homes,  multifamily  properties,  commercial  real estate
      properties  and  for  land  development.  Approximately  99% of the  loans
      granted by the Company are secured by real estate collateral.  The ability
      and willingness of the single-family residential and consumer borrowers to
      honor their  repayment  commitments  is generally  dependent,  among other
      things,  on the level of overall  economic  activity within the borrowers'
      geographic  areas and real estate values.  The ability and  willingness of
      commercial  real estate,  commercial  and  construction  loan borrowers to
      honor their repayment  commitments is generally  affected by the health of
      the real estate economic sector in the borrowers' geographic areas and the
      general economy.

                                                                     (Continued)
<PAGE>   34

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

   The Company's loan portfolio was comprised of the following at December 31:

                                                         1996             1995
                                                         ----             ----
Mortgage loans:
  Residential 1-4 family                             $ 603,822          438,102
  Multi-family                                          21,381           27,986
  Construction and land                                 12,532            3,435
  Commercial real estate                                28,136           26,412
                                                     ---------          -------
                                                       665,871          495,935
                                                     ---------          -------
Consumer and other loans:
  Home equity and improvement                           17,417           14,914
  Secured by deposits                                      979            1,092
  Consumer                                               1,730            1,673
  Business                                                 724              664
                                                     ---------          -------
                                                        20,850           18,343
                                                     ---------          -------
        Total loans                                    686,721          514,278

Less:
  Allowance for loan losses (note 7)                    (4,400)          (4,275)
  Construction loans in process                         (6,936)            (805)
  Net unearned discount on loans
   purchased                                              (163)            (262)
  Deferred loan origination costs                        1,448              560
                                                     ---------          -------
        Loans, net                                   $ 676,670          509,496
                                                     =========          =======

   Included in 1-4 family  residential  mortgage  loans at December 31, 1996 and
      1995,  respectively,  were  $464,883  and  $287,153  of loans at  variable
      interest rates. Most other loans are also of a variable rate nature.

   The Company services  mortgage loans for investors  which are not included in
      the  accompanying   consolidated  balance  sheets  totaling  approximately
      $540,356  and  $491,794 at December  31, 1996 and 1995,  respectively.  Of
      these loans  serviced  for others,  $1,010 and $1,028 at December 31, 1996
      and 1995,  respectively,  had been sold with  recourse by the Company.  In
      addition,  at December  31, 1996 and 1995,  respectively,  the Company had
      retained  the  secondary  layer of recourse  risk on $9,861 and $10,788 of
      serviced  loans,  with such risk  limited to $267 and $267 after the first
      layer (25% of each such loss,  not to exceed  $2,200)  is  exhausted.  The
      losses incurred on loans subject to recourse  amounted to $53 and $137 for
      the years ended  December 31, 1995 and 1994,  respectively.  There were no
      such losses on loans subject to recourse in 1996.

                                                                     (Continued)
<PAGE>   35

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

   Proceeds from the sales of mortgage loans were $148,693 for 1996, $69,640 for
      1995 and $102,349 for 1994.

   At December 31, 1996 and 1995,  the Company had  capitalized  excess  service
      fees from loans sold of $384 and $495,  respectively,  included in prepaid
      expenses and other assets.

   A  summary  of the  activity  of the  mortgage  servicing  rights,  which  is
      included as a component of other  assets,  for the year ended  December 31
      follows:

     Balance at December 31, 1995                                       $  --
     Capitalized mortgage servicing rights                                1,095
     Amortization                                                          (107)
                                                                        -------
     Balance at December 31, 1996                                       $   988
                                                                        =======

   The Company has determined that the fair value of mortgage  servicing  rights
      at December 31, 1996 exceeds their carrying amount. Therefore, a valuation
      allowance for the mortgage servicing rights was not established.

   The regulations established  by FIRREA  implemented  a "loan to one  borrower
      limit"  equal  to  15%  of  capital  and  general  valuation  reserves  or
      approximately  $10,000  for the  Company.  The  Company  did not  have any
      borrower  relationships  which  exceeded the limit as of December 31, 1996
      and 1995.

   In the ordinary course of business,  the Company makes loans to its directors
      and officers and their related  interests at substantially  the same terms
      prevailing at the time of  origination  for comparable  transactions  with
      borrowers. The following is a summary of related party loan activity:

                                                           1996            1995
                                                           ----            ----
     Balance, beginning of year                           $ 951             988

     Originations                                           --              --
     Payments                                               (86)            (37)
     Net changes in equity lines                            (19)
                                                          -----             ---
     Balance, end of year                                 $ 846             951
                                                          =====             ===

   At December 31, 1996 and 1995,  total  impaired loans were $4,392 and $8,356,
      respectively.  In the opinion of management,  no impaired loans required a
      specific valuation allowance at December 31, 1996 and $618,000 of impaired
      loans required a specific valuation  allowance of $618,000 at December 31,
      1995.  All impaired  loans have been measured  using the fair value of the
      collateral method. The average recorded value of impaired loans was $5,450
      during 1996 and $8,683  during 1995.  The Company  follows the same policy
      for  recognition  of  income  on  impaired  loans as it does for all other
      loans.

                                                                     (Continued)
<PAGE>   36

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

   The following table summarizes information regarding the reduction of
      interest income on impaired loans at December 31:

                                                                1996        1995
                                                                ----        ----
     Income in accordance with original terms                   $497         943
     Income recognized                                           321         563
                                                                 ---         ---
     Foregone interest income during year                       $176         380
                                                                ====         ===

   All of the Company's  non-accrual  loans are considered to be impaired loans.
      Non-accrual  loans at  December  31, 1996 and 1995 were $1,502 and $5,252,
      respectively. The foregone interest on non-accrual loans was $103 in 1996,
      $303 in 1995 and $281 in 1994.

   At December 31, 1996 and 1995,  there were no commitments to lend  additional
      funds to those borrowers whose loans were classified as impaired.

(7) Allowance for Loan Losses (In Thousands)

   The following is a summary of the activity in the  allowance  for loan losses
      for the years ended December 31:

                                               1996          1995          1994
                                               ----          ----          ----
   Balance, beginning of year               $ 4,275         3,700         4,450

   Provision charged to income                1,294         3,614           283
   Recoveries                                   343           485           185
   Charge-offs                               (1,512)       (3,524)       (1,218)
                                            -------        ------        ------
   Balance, end of year                     $ 4,400         4,275         3,700
                                            =======        ======        ======

(8) Accrued Interest Receivable (In Thousands)

   Accrued  interest  receivable as of December 31 is presented in the following
      table:

                                                               1996         1995
                                                               ----         ----
   Investment and mortgage-backed securities                 $   13          569
   Loans                                                      4,054        3,127
                                                              -----        -----
                                                             $4,067        3,696
                                                             ======        =====

                                                                     (Continued)
<PAGE>   37

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(9)  Premises and Equipment (In Thousands)

     A summary of the cost,  accumulated  depreciation and amortization of land,
       buildings and equipment is as follows at December 31:

                                                              1996         1995
                                                              ----         ----
        Land                                               $   519          519
        Buildings                                            3,114        3,086
        Furniture, fixtures and equipment                    4,841        4,280
        Leasehold improvements                               1,296        1,251
                                                           -------        -----
                                                             9,770        9,136
        Less accumulated depreciation and amortization      (4,791)      (3,890)
                                                           -------        -----
                                                           $ 4,979        5,246
                                                           =======        =====

     The  Company  presently  leases  office  space  at three  locations  and is
       committed to minimum annual rentals plus lease  escalations.  Such leases
       expire at various dates with options to renew. Minimum future rentals are
       as follows at December 31:

        Year ended December 31,
          1997                                                           $1,022
          1998                                                              889
                                                                         ------
                                                                         $1,911
                                                                         ======

     Rent expense was $1,095 in 1996, $1,059 in 1995 and $1,009 in 1994.

     The Company leases, as lessor, office space at two of its branch locations.
       The leases expire at various dates with options to renew.  Minimum future
       rental income is as follows at December 31:

        Year ended December 31,
           1997                                                            $125
           1998                                                             117
           1999                                                             101
           2000                                                              61
           2001                                                              15
                                                                           ----
                                                                           $419
                                                                           ====

(10) Real Estate Held for Sale or Development (In Thousands)

     The  Company's  investment  in real  estate  held for  sale or  development
       consists of the following:

        Type of Property                                      1996         1995
        ----------------                                      ----         ----
        Land                                               $ 2,459        2,459
        Write-downs to net realizable value                 (1,585)      (1,585)
                                                            ------       ------
                Net investment in real estate              $   874          874
                                                            ======       ======

                                                                     (Continued)
<PAGE>   38

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     Sales in the Company's joint venture interests resulted in the following:

                                                          1995             1994
                                                          ----             ----
      Gross sales                                        $ 200              427
      Cost of sales                                        (87)            (226)
                                                         -----              ---
      Operating gain (loss)                                113              201
      Recoveries (write-downs)                              54              (55)
                                                         -----              ---
      Net gain                                           $ 167              146
                                                         =====              ===

     There were no sales in the Company's  joint venture  interests for the year
       ended December 31, 1996.

     Operating  expenses on real estate held for sale or development were $51 in
       1996, $309 in 1995 and $148 in 1994.

(11) Real Estate Owned (In Thousands)

     The table below  presents the  composition of real estate owned by property
       type at December 31:

                                                            1996           1995
                                                            ----           ----
        Single-family homes                              $    84            166
        Condominiums                                        --               31
        Multi-family                                         167           --
        Apartment buildings                                  720           --
        Land subdivisions                                     86             87
        Commercial property                                2,047            930
                                                         -------            ---
                                                           3,104          1,214

        Valuation allowance to net fair value               (436)          (243)
                                                         -------            ---
                                                         $ 2,668            971
                                                         =======            ===

     At December 31, 1996, all real estate owned  apartment buildings  represent
       property  classified as substantively  repossessed.  Commercial  property
       includes $411 in property  classified  as  substantively  repossessed  at
       December 31, 1996 and 1995.

                                                                     (Continued)

<PAGE>   39

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     The following is a summary of the activity in the  valuation  allowance for
       real estate owned:

                                                 1996         1995         1994
                                                 ----         ----         ----
        Balance, beginning of year             $  243          168        1,372

        Provision charged to income               335          246          322
        Charge-offs                              (142)        (171)      (1,526)
                                               ------          ---        -----
        Balance, end of period                 $  436          243          168
                                               ======          ===        =====

     The table below summarizes the operating results of real estate owned:

                                                   1996        1995        1994
                                                   ----        ----        ----
        Income from holding real estate           $ 163           3         147
        Expenses of holding real estate            (294)        (63)        (65)
        Losses from disposition of properties       (44)        --         (224)
        Additions to the valuation allowance       (335)       (246)       (322)
                                                  -----        ----        ----
                Net loss                          $(510)       (306)       (464)
                                                  =====        ====        ====

(12) Deposit Accounts (Dollars in Thousands)

     A summary of deposit balances by type is as follows at December 31:

<TABLE>
<CAPTION>

                                                            1996                             1995
                                                  -----------------------          -----------------------
                                                                 Weighted                        Weighted
                                                                 average                          average
                                                    Amount         rate              Amount         rate
                                                    ------         ----              ------         ----
<S>                                               <C>              <C>             <C>               <C>
NOW                                               $ 78,517         1.21%           $ 71,374          1.45%
Regular and statement savings                       88,100         2.49              91,492          2.50
Money market                                        45,788         3.01              47,897          3.00
Demand deposits and official checks                 16,289          --               12,167           --
                                                  --------                         --------
         Total noncertificate accounts             228,694         1.98             222,930          2.13
                                                  --------                         --------
Certificate accounts:
   3 to 6 months                                    29,257         5.03              19,468          5.00
   1 to 3 year                                     115,946         5.57             121,190          5.75
   Greater than 3 years                              7,061         5.44               6,917          5.38
   IRA/Keogh                                        47,860         5.77              48,599          6.00
                                                  --------                         --------
         Total certificate accounts                200,124         5.53             196,174          5.72
                                                  --------                         --------
                                                  $428,818         3.64%           $419,104          3.81%
                                                  ========         ====            ========          ====
Contractual maturity of certificate accounts:
   Within one year                                $135,026                         $129,819
   One to two years                                 37,949                           42,487
   Two to three years                               16,546                           12,140
   Over three years                                 10,603                           11,728
                                                  --------                         --------
                                                  $200,124                         $196,174
                                                  ========                         ========

</TABLE>

                                                                     (Continued)
<PAGE>   40

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     Aggregate amount of  certificate  accounts of $100 or more were $15,256 and
       $15,062 at December 31, 1996 and 1995,  respectively.  Deposit amounts in
       excess of $100 are not federally insured.

     Interest expense on deposits consisted of the following for the years ended
       December 31:

                                                  1996         1995         1994
                                                  ----         ----         ----
        NOW                                    $   890          931        1,017
        Regular and statement savings            2,219        2,485        3,185
        Money market                             1,395        1,472        1,442
        Certificate accounts                    11,194       10,235        7,043
                                               -------       ------       ------
                                               $15,698       15,123       12,687
                                               =======       ======       ======

(13) Securities Sold Under Agreement to Repurchase (Dollars in Thousands)

                                                1996                  1995
                                           -------------         -------------
                                           Amount   Rate         Amount   Rate
                                           ------   ----         ------   ----
      Securities sold under agreements
        to repurchase, due on demand      $ 3,500   5.45%        $7,000   5.43%
                                          =======   ====         ======   ====

     Securities  sold under  agreements  to  repurchase  are  collateralized  by
       mortgage-backed  securities  with a book value of $3,566 and a fair value
       of $3,578 at December  31, 1996.  At December  31, 1995,  mortgage-backed
       securities  with a book  value and fair value of $7,407  were  pledged as
       collateral against securities sold under agreements to repurchase. During
       the year ended  December 31, 1994,  there were no  securities  sold under
       agreements  to  repurchase.  The  securities  had $26 and $64 of  accrued
       interest receivable at December 31, 1996 and 1995, respectively.

     Securities sold under agreement to repurchase  averaged $7,496 during 1996,
       and $96 during 1995. Maximum amounts  outstanding at any month end during
       1996 and 1995 were $9,973 during 1996 and $7,000 during 1995. The average
       costs of repurchase agreements was 5.86% in 1996 and 5.43% in 1995.

     The $3,500 represents one commitment with a scheduled  maturity of December
       26, 1997. The securities collateralizing the agreements are not under the
       Company's control.

     Interest expense was $439 in 1996 and $5 in 1995.

                                                                     (Continued)
<PAGE>   41

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(14) Federal Home Loan Bank ("FHLB") of Boston Advances (Dollars in Thousands)

     FHLB of Boston advances by year of maturity at December 31 were:

                                    1996                     1995
                            -------------------      --------------------
                                       Weighted                  Weighted
                                        average                   average
                            Amount       rate         Amount       rate
                            ------       ----         ------       ----
     1996                 $   --           --%      $ 97,909       6.03%
     1997                  165,000       5.81         10,000       5.50
     1998                   58,000       5.79         10,000       5.73
     1999                   56,000       6.05          2,000       5.63
     2000                   13,500       6.26           --          --
     2001                    3,000       6.43           --          --
     2002                    1,000       6.55           --
                          --------                  --------
       Total              $296,500       5.88%      $119,909       5.95%
                          ========       ====       ========       ====

     The  advances  are  secured by FHLB of Boston  stock and a blanket  lien on
       certain qualified  collateral,  defined  principally as 90% of the market
       value of U.S.  Government and federal agency  obligations  and 75% of the
       carrying  value of first  mortgage  loans on  owner-occupied  residential
       property. Applying these ratios, the Company's overall borrowing capacity
       was  approximately  $430,095  and $318,661 at December 31, 1996 and 1995,
       respectively.  Additionally,  as a member of FHLB of Boston,  the Company
       has a line of credit of approximately $12,184 at December 31, 1996.

     As a member of the FHLB of Boston,  the  Company is  required  to maintain
       a minimum  investment in the capital stock of the Federal Home Loan Bank
       of Boston,  at cost, in an amount not less than 1% of its  outstanding
       home loans or 1/20 of its  outstanding  notes payable to the Federal Home
       Loan Bank of Boston,  whichever is greater,  as  calculated  at December
       31 of each year. The investment exceeds the required level by $1,470 and
       $2,378 at December 31, 1996 and 1995,  respectively.  Any excess may be
       redeemed by the Company or called by FHLB of Boston at par.

     Interest expense was $12,754 in 1996, $8,424 in 1995 and $4,335 in 1994.

                                                                     (Continued)
<PAGE>   42

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(15) Income Taxes (Dollars in Thousands)

     An analysis of the  current  and  deferred  federal  and state  income  tax
       expense (benefit) follows:

                                                        1996     1995      1994
                                                        ----     ----      ----
     Current income tax expense:
        Federal income tax                            $1,142      607     1,724
        State income tax                                 366      159       635
                                                      ------      ---     -----
                Total current expense                  1,508      766     2,359
                                                      ------      ---     -----
     Deferred income tax expense (benefit):
        Federal deferred income tax                      442       82       207
        State income tax                                 127       72        54
        Change in valuation allowance                      6     (105)     (300)
                                                      ------      ---     -----
                Total deferred expense (benefit)         575       49       (39)
                                                      ------      ---     -----
                Total income tax expense              $2,083      815     2,320
                                                      ======      ===     =====

     The temporary  differences (the difference between the financial  statement
       carrying  amounts of existing assets and liabilities and their respective
       tax bases) that give rise to  significant  portions of the  deferred  tax
       asset and liability are as follows at December 31:

                                                                1996       1995
                                                                ----       ----
     Deferred tax assets:
       Allowance for loan losses                             $ 1,796      1,751
       Deferred compensation                                      91         84
       Real estate owned                                         687        615
       State net operating loss carryforwards                    135        131
       Depreciation                                               87         67
       Unrealized loss on securities available for sale          110       --
       Other                                                      52         81
                                                             -------      -----
          Gross deferred assets                                2,958      2,729
       Valuation allowance                                      (403)      (287
                                                             -------      -----
          Net deferred tax assets before deferred
              tax liabilities                                  2,555      2,442
                                                             -------      -----
     Deferred liabilities:
       Premium on loans sold                                     438         53
       Deferred loan fees                                        576        195
       Other                                                       4         82
                                                             -------      -----
          Gross deferred liabilities                           1,018        330
                                                             -------      -----
          Net deferred tax asset                             $ 1,537      2,112
                                                             =======      =====

                                                                     (Continued)
<PAGE>   43

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     The valuation  allowance  of $403 at December 31, 1996 is  attributable  to
       unrealized  state losses and state net operating loss  carryforwards  and
       unrealized losses on securities  available for sale.  Management believes
       that existing net deductible temporary differences which give rise to the
       net deferred tax asset will reverse  during  periods in which the Company
       generates net taxable income.  For the year ending December 31, 1996, the
       Company generated  approximately $3,500 of taxable income. Factors beyond
       management's  control,  such as the general state of the economy and real
       estate  values,  can  affect  future  levels  of  taxable  income  and no
       assurance can be given that  sufficient  taxable income will be generated
       to  fully  absorb  gross  deductible  temporary  differences.  Management
       believes it is more likely than not that the net  deferred tax asset will
       be realized.

     Of the change in the  valuation  allowance of $116, approximately  $110 was
       attributable  to the unrealized  losses on securities  available for sale
       and consequently is not recorded in the statement of income.

     In August 1996, the  provisions repealing the current thrift bad debt rules
       were passed by Congress as part of "The Small Business Job Protection Act
       of 1996".  The new rules  eliminate  the 8% of taxable  income method for
       deducting  additions  to the  tax  bad  debt  reserves  for  all  thrifts
       beginning  after  December  31,  1995.  These rules also require that all
       thrift institutions recapture all or a portion of their bad debt reserves
       added since the base year (last taxable year beginning  before January 1,
       1988). The Company has previously recorded a deferred tax liability equal
       to the bad debt  recapture and as such, the new rules will have no effect
       on net income or income tax expense.

     The  unrecaptured  base year  reserves  will not be subject to recapture as
       long as the institution continues to carry on the business of banking. In
       addition,  the balance of the pre-1988 bad debt  reserves  continue to be
       subject to provision of present law that require recapture in the case of
       certain excess distributions to shareholders.  The tax effect of pre-1988
       bad debt  reserves  subject to  recapture  in the case of certain  excess
       distributions is approximately $5.5 million.

     A reconciliation  between the amount of total tax expense and  expected tax
       expense, computed by applying the federal statutory rate to income before
       taxes, follows:

                                                        1996     1995      1994
                                                        ----     ----      ----
     Computed expected expense at statutory rate      $1,707      663     2,153
     Items affecting federal income tax rate:
        State income tax, net of federal income tax
           benefit and before valuation allowance        325      152       455
        Change in valuation allowance                      6     (105)     (300
        Allocated ESOP share appreciation                 98       45      --
        Other                                            (53)      60        12
                                                      ------      ---     -----
     Effective income tax expense                     $2,083      815     2,320
                                                      ======      ===     =====

     Effective income tax rate                          41.5%    41.8%     36.7%
                                                      ======      ===     =====

                                                                     (Continued)
<PAGE>   44

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(16) Employee Benefits (Dollars in Thousands, Except for Per Share Data)

     Employee Stock Ownership Plan

     Effective  January 1, 1995, the Company adopted an Employee Stock Ownership
       Plan ("ESOP").  The Plan is designed to provide  retirement  benefits for
       eligible employees of the Bank. Because the Plan invests primarily in the
       stock of the Company, it will also give eligible employees an opportunity
       to acquire an ownership  interest in the Company.  Employees are eligible
       to participate in the Plan after reaching age twenty-one,  completing one
       year of service and working at least one  thousand  hours of  consecutive
       service during the previous year. Contributions are allocated to eligible
       participants on the basis of compensation.

     During October 1995,  the Company  issued a total of 529,000  shares to the
       ESOP at a total purchase price of $5,290.  The purchase was made from the
       proceeds of a $5,290 loan from B.F. Funding  Corporation,  a wholly-owned
       subsidiary of the Company,  bearing interest at the prime rate. Repayment
       of the loan is secured by contributions the Bank is obliged to make under
       a contribution  agreement with the ESOP. The Bank made  contributions  to
       the ESOP  totaling  $606 in 1996 and $755 in 1995 to  enable  the ESOP to
       make principal  payments on the loan. The amount  contributed was charged
       to compensation and benefits expense. The Company recognized $287 in 1996
       and $132 in 1995 in  compensation  and benefit expense and an increase in
       additional  paid-in capital related to the appreciation in the fair value
       of allocated  ESOP shares.  The balance of the loan will be repaid over a
       period of approximately six years, principally with funds from the Bank's
       future contributions to ESOP, subject to IRS limitations.

     Shares used as collateral to secure the loan are released and available for
       allocation to eligible  employees as the principal balance of the loan is
       repaid.  Employees  vest in  their  ESOP  account  at a rate  of  33-1/3%
       annually  commencing after the completion of one year of credited service
       or  immediately  if  service  was  terminated  due to death,  retirement,
       disability,  or change in  control.  Dividends  on  released  shares  are
       credited to the participants' ESOP accounts or paid out proportionally or
       applied towards payment of the loan.  Dividends on unreleased shares will
       generally be applied towards payment of the loan.

     At December  31,  1996 and 1995,  shares  held in  suspense  to be
       released annually  as the loan is paid  down  amounted  to  392,929  and
       453,429, respectively.  The fair value of  unallocated  ESOP shares was
       $5,796 and $5,328 at December  31, 1996 and 1995,  respectively.
       Dividends  on ESOP shares are charged to retained  earnings and ESOP
       shares  committed-to-be released are considered outstanding in
       determining earnings per share.

     1996 Stock-Based Incentive Plan

     On April 30, 1996, the Company's  stockholders approved the 1996
       Stock-Based Incentive Plan ("SIP"). The objective of the SIP is to enable
       the Company to provide  officers and  directors  with a  proprietary
       interest in the Company as an  incentive  to  encourage  such  persons to
       remain with the Company. The SIP acquired 263,584 shares in the open
       market at an average price  of  $12.255  per  share.  This  acquisition
       represents  deferred compensation  which is initially recorded as a
       reduction in stockholders' equity and charged to  compensation  expense
       over the vesting  period of each annual stock award.

                                                                     (Continued)

<PAGE>   45

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     Awards are  granted  in the form of common  stock  held by the SIP.  During
       1996, 242,500 shares were awarded on April 30, 1996 and 8,584 shares were
       awarded on October  15,  1996.  Awards  outstanding  vest in five  annual
       installments  commencing  on the date of the award.  As of  December  31,
       1996, 12,500 shares remain unallocated under the SIP.

     Compensation  expense  in the  amount of the fair value of the stock at the
       date of the grant, will be recognized over the applicable  service period
       for the portion of each award that vests equally over a five-year period.
       In  addition,  compensation  expense has been  recognized  related to the
       appreciation  in the  fair  value of the SIP  shares  with an  offset  to
       additional  paid-in capital.  The Company  recognized $917 related to the
       earned shares and $187 related to the  appreciation  in the fair value of
       the shares in  compensation  and  benefit  expense  and as an increase in
       additional paid-in capital.

     A recipient  will be entitled to all voting and other  stockholder  rights.
       The  unallocated  SIP shares,  with the  exception of the  unawarded  SIP
       shares,  are considered  outstanding  in the  calculation of earnings per
       share.

     Stock Option Plan

     The Company has adopted a stock option plan for officers, key employees and
       directors.  Pursuant  to the  terms of the  plan,  the  number  of shares
       reserved  for  issuance is 658,961.  All options  have been issued at not
       less than  fair  market  value at the date of the grant and  expire in 10
       years from the date of the grant. All stock options vest and become fully
       exercisable after 5 years from the date of grant.

     During  1996,  the  Company  granted  employees  and  directors  options to
       purchase  604,500 shares of common stock at between $12.44 and $14.82 per
       share.

     A summary of option activity follows:

                                                 Number of    Weighted Average
                                                   Shares      Exercise Price
                                                   ------      --------------
     Balance at December 31, 1995                    --           $  --
     Granted                                      604,500           12.51
                                                  -------           -----
     Balance at December 31, 1996                 604,500         $ 12.51
                                                  =======         =======

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

                                                                1996
                                                                ----
       Net income as reported                                $ 2,937
       Pro forma net income                                    2,533
       Earnings per share as reported                            .48
       Pro forma earnings per share                              .41

                                                                     (Continued)
<PAGE>   46

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     The per share weighted  average fair value of stock options  granted during
       1996 was $5.22  determined  using the Flexible  Binomial  option  pricing
       model with the following weighted average assumptions:

                                                               1996
                                                               ----
     Expected  dividend  yield                                 1.63%
     Risk-free  interest  rate                                 6.47%
     Expected volatility                                      32.75%
     Expected life (years)                                     7.8

     Pension Plan

     All eligible  officers  and  employees  are  included in a  noncontributory
       defined  benefit  pension  plan  provided by the Bank as a  participating
       employer with  Pentegra,  formerly  known as the  Financial  Institutions
       Retirement  Fund.  Salaried  employees are eligible to participate in the
       plan after  reaching age  twenty-one  and completing one year of service.
       Pentegra does not segregate the assets or  liabilities  by  participating
       employer and, accordingly, disclosure of accumulated vested and nonvested
       benefits and net assets available for benefits required by SFAS No. 87 is
       not possible.  Contributions are based on individual employer experience.
       According to Pentegra's Administrators,  as of June 30, 1996, the date of
       the latest actuarial valuation, the market value of Pentegra's net assets
       exceeded the actuarial present value of vested benefits in the aggregate.
       There was no pension expense recorded for 1996, 1995 and 1994, except for
       an administration fee of approximately $5 per year.

     Profit Sharing Plan

     The Company must attain a minimum profitability  requirement of at least 50
       basis points (before income tax,  profit  sharing,  and 401k expenses) of
       net average  assets to generate any profit sharing  payouts.  The expense
       relative  to this plan was $438 for the year  ended  December  31,  1994.
       There was no expense  relative to this plan for the years ended  December
       31, 1996 and 1995. The plan was dissolved effective December 31, 1995.

     Deferred Thrift Incentive Plan

     On January 1, 1994, the Company  implemented an employee tax deferred
       thrift incentive  plan (the "401K plan") under which employee
       contributions  to the plan are matched by the Company up to 50% of the
       participant's  first 4%  contributed.  All  employees  who meet
       specified  age and  length of service  requirements  are eligible to
       participate in the 401K plan. The amounts matched by the Company are
       included in compensation  and employee benefits expense.  The amounts
       matched was $88 for 1996 and $97 for 1995. Additionally,  the Company
       accrued a  supplemental  distribution  of $45 (deducted  from the profit
       sharing pool to eligible  participants)  which was paid to  eligible
       participants  in January  1996.  There was no such supplemental
       distribution to be paid in 1997.

                                                                     (Continued)
<PAGE>   47

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     Executive Officer Employment Agreements

     The Company and Bank entered into employment  agreements with its President
       and  Chief  Executive  Officer,   Executive  Vice  President,  and  Chief
       Financial Officer.  The employment  agreements  generally provide for the
       continued payment of specified  compensation and benefits for three years
       and provide  payments for the remaining  term of the agreement  after the
       officers are terminated, unless the termination is for OcauseO as defined
       in the employment agreements. The agreements also provide for payments to
       the officer upon  voluntary  or  involuntary  termination  of the officer
       following a change in control, as defined in the agreements. In addition,
       the Bank entered  into change in control  agreements  with certain  other
       executives which provide for the payment, under certain circumstances, to
       the officer upon the officer's  termination after a change of control, as
       defined in their change of control agreements.

     Employee Severance Compensation Plan

     The Company  established an Employee Severance  Compensation Plan. The Plan
       provides eligible employees with severance pay benefits in the event of a
       change  in  control  of the Bank or  Company.  Generally,  employees  are
       eligible to  participate  in the Plan if they have completed at least one
       year of service with the Company and are not eligible to receive benefits
       under the executive officer employment agreements.  The Plan provides for
       the  payment,  under  certain  circumstances,  of lump-sum  amounts  upon
       termination following a change of control, as defined in the Plan.

     The  Company  does not  provide  any  postretirement  benefits  other  than
       pensions.

(17) Litigation

     Various legal proceedings are pending against the Company which have arisen
       in the normal  course of  business.  In the  opinion of  management,  the
       ultimate  disposition of these matters is not expected to have a material
       adverse effect on the consolidated financial position, the annual results
       of operations, or liquidity of the Company.

(18) Financial Instruments with Off-balance-sheet Risk (In Thousands)

     In the normal  course  of  business,  the  Company  is party  to  financial
       instruments  with   off-balance-sheet   risk,  including  commitments  to
       originate or purchase loans,  unadvanced  amounts of construction  loans,
       unused credit lines, standby letters of credit and forward commitments to
       sell loans and  recourse  agreements  on assets sold.  These  instruments
       involve, to varying degrees, elements of credit and interest rate risk in
       excess of the amount recognized in the consolidated  balance sheets.  The
       contract or notional amounts of those  instruments  reflect the extent of
       involvement  the Company  has in these  particular  classes of  financial
       instruments.  The  Company's  exposure  to  credit  loss in the  event of
       nonperformance  by the other  party  with  respect  to loan  commitments,
       unused credit lines and standby  letters of credit is  represented by the
       contractual amount of those instruments. The Company uses the same credit
       policies in making commitments and conditional obligations as it does for
       on-balance-sheet  instruments.  For forward commitments,  the contract or
       notional amounts exceed the Company's exposure to credit loss.

                                                                     (Continued)
<PAGE>   48

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     Commitments to originate  loans and unused  credit lines are  agreements to
       lend  to  a  customer,   provided  the  customer   meets  all  conditions
       established in the contract.  Commitments have fixed expiration dates and
       may  require  payment  of a fee.  The  total  commitment  amounts  do not
       necessarily   represent  total  future  cash   requirements   since  many
       commitments  are not expected to be drawn upon.  The amount of collateral
       obtained,  if  necessary  for the  extension  of credit,  is based on the
       credit evaluation of the borrower.

     Standby letters of credit are conditional commitments issued by the Company
       to guarantee the  performance by a customer to a third party.  The credit
       risk  involved in issuing  letters of credit is  essentially  the same as
       that involved in extending loans to customers.

     Forward  commitments  to sell loans are contracts  which the Company enters
       into  for the  purpose  of  reducing  the  market  risk  associated  with
       originating loans for sale. In order to fulfill a forward commitment, the
       Company typically  exchanges through FNMA or FHLMC its current production
       of loans for  mortgage-backed  securities  which are then  delivered to a
       securities  firm at a future  date at prices or yields  specified  by the
       contracts.  Risks may arise from the possible inability of the Company to
       originate  loans to fulfill the contracts,  in which case the Company may
       purchase securities in the open market to deliver against the contracts.

     In addition to construction loans in process, the Company had the following
       outstanding commitments at December 31:

                                                              1996         1995
                                                              ----         ----
        Commitments to originate mortgage loans:
           Fixed                                            $ 7,540        6,620
           Variable                                          23,116       10,813
        Unused lines of credit:
           Home equity                                       30,080       29,756
           Commercial loans                                     209          631
        Standby letters of credit                                34           77
        Commitments to sell loans or swap loans for
           mortgage-backed securities                         8,723        3,754
        Loans sold with recourse (note 6)                     1,010        1,028

(19) Fair Values of Financial Instruments (In Thousands)

     Fair value  estimates  are  based  on  existing  on- and  off-balance-sheet
       financial  instruments  without  attempting  to  estimate  the  value  of
       anticipated  future business and the value of assets and liabilities that
       are not considered  financial  instruments.  Other significant assets and
       liabilities  that are not  considered  financial  assets  or  liabilities
       include real estate  acquired by  foreclosure,  the  deferred  income tax
       asset,  office  properties  and  equipment,  and core  deposit  and other
       intangibles.   In  addition,   the  tax  ramifications   related  to  the
       realization  of the  unrealized  gains and losses can have a  significant
       effect on fair value estimates and have not been considered in any of the
       estimates. Accordingly, the aggregate fair value amounts presented do not
       represent the underlying value of the Company.

                                                                     (Continued)
<PAGE>   49

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     Fair value  estimates  are  made at a  specific  point  in  time,  based on
       relevant  market   information   and  information   about  the  financial
       instrument.  These  estimates do not reflect any premium or discount that
       could  result from  offering  for sale at one time the  Company's  entire
       holdings of a particular financial  instrument.  Because no market exists
       for some of the Company's financial instruments, fair value estimates are
       based on judgments regarding future expected loss experience, cash flows,
       current  economic  conditions,  risk  characteristics  and other factors.
       These  estimates are subjective in nature and involve  uncertainties  and
       matters of significant  judgment and therefore  cannot be determined with
       precision.  Changes in  assumptions  and  changes  in the loan,  debt and
       interest rate markets could significantly affect the estimates.

     The  following  methods  and  assumptions  were  used  by  the  Company  in
       estimating fair values of its financial instruments:

     Cash and Cash Equivalents

     The fair  values  of cash and cash  equivalents  approximate  the  carrying
       amounts as reported in the balance sheet.

     Investment and Mortgage-backed Securities

     Fair values for investment  securities and  mortgage-backed  securities are
       based on quoted market prices,  where available.  If quoted market prices
       are not  available,  fair  values  are based on quoted  market  prices of
       comparable instruments.

     Mortgage Loans Held for Sale

     Fair values for  mortgage  loans  held for sale are based on quoted  market
       prices.  Commitments to originate  loans and forward  commitments to sell
       loans  have been  considered  in the  determination  of the fair value of
       mortgage loans held for sale.

     Loans

     The fair  values  of  loans  are  estimated  using  discounted  cash  flows
       analyses,  using  interest rates  currently  being offered for loans with
       similar terms to borrowers of similar  credit  quality.  The  incremental
       credit  risk  for   nonperforming   loans  has  been  considered  in  the
       determination of the fair value of loans.

     Accrued Interest Receivable

     The fair value of accrued  interest  receivable  approximates  the carrying
       amount as reported in the balance sheet because of its short-term nature.

     Stock in FHLB of Boston

     The fair  value  of  Federal  Home  Loan  Bank  of  Boston  ("FHLB")  stock
       approximates  its carrying  amount as reported in the balance  sheet.  If
       redeemed,  the Company  will  receive an amount equal to the par value of
       the stock.

     Deposit Accounts and Advance  Payments by Borrowers for Taxes and Insurance

     The fair  values of demand  deposits  (e.g.,  NOW,  regular  and  statement
       savings and money market  accounts and advance  payments by borrowers for
       taxes and insurance)  are, by definition,  equal to the amount payable on
       demand at the reporting date (i.e., their carrying amounts).  Fair values
       for fixed-rate  certificates  of deposit are estimated using a discounted
       cash flow technique that applies  interest rates  currently being offered
       on  certificates  with  similar  remaining  maturities  to a schedule  of
       aggregated expected monthly maturities on such time deposits.

                                                                     (Continued)
<PAGE>   50

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     Federal Home Loan Bank Advances

     Fair values for FHLB  advances are estimated  using a discounted  cash flow
       technique that applies interest rates currently being offered on advances
       to a schedule of aggregated expected monthly maturities of FHLB advances.

     Securities Sold Under Agreements to Repurchase

     Fair values of securities sold under agreements to repurchase are estimated
       using a  discounted  cash flow  technique  that  applies  interest  rates
       currently being offered on securities sold under agreements to repurchase
       to a schedule of expected  maturities of securities sold under agreements
       to repurchase.

     Off-balance-sheet Instruments

     The Company's  commitments for unused lines and outstanding standby letters
       of credit and  unadvanced  portions of loans and loans sold with recourse
       are considered in estimating the fair value of loans.

     The carrying amounts and fair values of the Company's financial instruments
       at December 31 are as follows:

<TABLE>
<CAPTION>

                                                                         1996                           1995
                                                               ----------------------          ---------------------
                                                               Carrying          Fair          Carrying       Fair
                                                                amount          value           amount        value
                                                                ------          -----           ------        -----
<S>                                                            <C>              <C>             <C>           <C>
Financial assets:
   Cash and cash equivalents                                   $ 18,278         18,278          21,225        21,225
   Investment securities available for sale                       1,085          1,085           1,022         1,022
   Investment securities held to maturity                        19,170         19,045          16,906        16,804
   Mortgage-backed securities available for sale                 23,593         23,593          23,873        23,873
   Mortgage-backed securities held to maturity                   43,019         43,033          35,116        35,647
   Loans, net and mortgage loans held for sale                  680,640        678,602         518,427       520,101
   Accrued interest receivable                                    4,067          4,067           3,696         3,696
   Stock in FHLB of Boston                                       16,295         16,295           8,374         8,374

Financial liabilities:
   Deposit accounts                                            $428,818        429,060         419,104       419,750
   Securities sold under agreements to repurchase                 3,500          3,487           7,000         6,940
   FHLB advances                                                296,500        297,873         119,909       120,021
   Advance payments by borrowers for taxes and
     insurance                                                    2,100          2,100           1,531         1,531

</TABLE>

(20) Subsequent Events - Acquisition

     In September  1996,  the Company  signed a  definite  agreement  to acquire
       Broadway Capital  Corporation and its subsidiary  Broadway National Bank.
       The  acquisition is expected to be completed in February  1997.  Broadway
       Capital Corporation is a Massachusetts  corporation that was organized in
       1982 primarily to become the holding  company of Broadway  National Bank.
       Broadway   National  Bank  is  a   national-chartered   bank,  which  was
       incorporated  in 1910 and is  headquartered  in  Chelsea,  Massachusetts.
       Broadway  National Bank  operates its business  from two banking  offices
       located in Chelsea and Revere,  Massachusetts.  Broadway National Bank is
       engaged  principally  in the  business of  attracting  deposits  from the
       general public and investing  those deposits in residential  real estate,
       consumer and small business loans.

                                                                     (Continued)
<PAGE>   51

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1996 and 1995

     Total assets of Broadway Capital Corporation were approximately $128,012 at
       December 31, 1996. Under the terms of the agreement,  holders of Broadway
       Capital Corporation common stock will receive $369.31 in cash for each of
       their shares of common  stock,  which  equates to an  aggregate  purchase
       price of approximately $22 million. The transaction will be accounted for
       using the purchase method of accounting.

(21) Parent Company Only Financial Statements (Dollars In Thousands)

     The following are the condensed financial statements for BostonFed Bancorp,
       Inc. (the "Parent Company") only:

Balance Sheet

Assets                                                      1996        1995
------                                                      ----        ----
Cash and interest bearing deposit in
  subsidiary bank                                         $ 10,854       1,672
Daily federal funds sold                                      --        10,000
Short-term investments                                          13          13
                                                          --------      ------
       Total cash and cash equivalents                      10,867      11,685
                                                          --------      ------
Mortgage-backed securities available for sale
  (amortized cost of $23,915 at 1996 and
  $23,873 at 1995)                                          23,593      23,873
Investment in subsidiaries, at equity                       55,143      62,136
Accrued interest receivable                                    125         139
Other assets                                                   200        --
                                                          --------      ------
      Total assets                                        $ 89,928      97,833
                                                          ========      ======
Liabilities and Stockholders' Equity
Securities sold under agreement to repurchase             $  3,500       7,000
Accrued income taxes                                            45          93
Accrued expenses and other liabilities                          28          39
                                                          --------      ------
      Total liabilities                                      3,573       7,132
                                                          --------      ------
Preferred stock, $.01 par value, 1,000,000
  shares authorized; none issued                              --          --
Common stock, $0.01 par value; 17,000,000 shares
  authorized; 6,589,617 issued at 1996 and 1995                 66          66
Additional paid-in capital                                  64,461      63,987
Retained earnings                                           33,131      31,183
Net unrealized loss on investment securities
  available for sale                                          (322)       --
Treasury stock, at cost (329,300 shares at 1996)            (4,739)       --
Unallocated ESOP shares                                     (3,929)     (4,535)
Unearned 1996 SIP                                           (2,313)       --
                                                          --------      ------
       Total stockholders' equity                           86,355      90,701
                                                          --------      ------
       Total liabilities and stockholders' equity         $ 89,928      97,833
                                                          ========      ======

                                                                     (Continued)
<PAGE>   52

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                     Years ended December 31, 1996 and 1995

Statement of Income                                             1996      1995
-------------------                                             ----      ----
Interest income                                             $  2,164       316
Interest expense                                                 439         5
                                                             -------   -------
    Net interest income                                        1,725       311

Non-interest expense                                             307        10
                                                             -------   -------
    Income before income taxes                                 1,418       271

Income tax expense                                               536        93
                                                             -------   -------
    Income before equity in net income of subsidiaries           882       178

Equity in net income of subsidiaries                           2,055       958
                                                             -------   -------
    Net income                                              $  2,937     1,136
                                                            ========   =======

Statement of Cash Flows

Net cash flows from operating activities:
    Net income                                              $  2,937     1,136
    Adjustments to reconcile net income to net cash
      provided by operating activities:
        Equity in undistributed earnings of subsidiaries      (2,055)     (908)
        Amortization and accretion, net                           (1)     --
        Appreciation in fair value of ESOP shares                287       132
        Reduction in unearned SIP                                917      --
        Appreciation in fair value of SIP shares                 187      --
        Loss on sale of investment securities                     11      --
        Increase (decrease) in accrued interest
         receivable                                               14      (139)
        Increase in other assets                                (200)     --
        Increase (decrease) in accrued income taxes              (48)       93
        Increase (decrease) in accrued expenses and
         other liabilities                                       (11)       39
                                                             -------   -------
          Net cash provided by operating activities            2,038       353
                                                             -------   -------
Cash flow from investing activities:
   Proceeds from sale of mortgage-backed
     securities for sale                                      10,614      --
   Purchase of mortgage-backed securities
     available for sale                                      (10,666)  (23,873)
   Change in investment in subsidiaries                        9,048   (31,181)
                                                             -------   -------
          Net cash used in (provided by)
             investing activities                              8,996   (55,054)
                                                             -------   -------

                                                                     (Continued)
<PAGE>   53

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                     Years ended December 31, 1996 and 1995

Statement of Cash Flows
                                                             1996        1995
                                                             ----        ----
Cash flow from financing activities:
   Proceeds from securities sold under
     agreement to repurchase                             $  2,973       7,000
   Repayments of securities sold under
     agreement to repurchase                               (6,473)       --
   Net proceeds from common stock issued
     pursuant to initial public offering                     --        63,921

   Payments to acquire common stock for ESOP                 --         5,290
   Reduction in unearned ESOP shares                          606         755
   Common stock repurchases                                (4,739)       --
   Purchase of common stock by SIP                         (3,230)       --
   Cash dividends paid                                       (989)       --
                                                         --------      ------
         Net cash provided (used) from
           financing activities                           (11,852)     66,386
                                                         --------      ------
         Net increase (decrease) in cash
           and cash equivalents                              (818)     11,685

Cash and cash equivalents at beginning of year             11,685        --
                                                         --------      ------
Cash and cash equivalents at end of year                 $ 10,867      11,685
                                                         ========      ======
Supplemental cash flow information:
   Cash paid during the year for:
         Interest                                        $    442        --
         Income taxes                                         584        --

                                                                     (Continued)
<PAGE>   54

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(22) Quarterly Results of Operations (unaudited)

     Summaries of  consolidated  operating  results on a quarterly basis for the
       year ended December 31 follows:

                                                    1996 Quarters
                                      ----------------------------------------
                                     (In Thousands, Except Per Share Amounts)
                                      First      Second     Third       Fourth
                                      -----      ------     -----       ------
Interest and dividend income        $ 11,385   $ 12,627   $ 14,083    $ 14,583
Interest expense                       5,867      6,754      7,937       8,333
                                    --------   --------   --------    --------
Net interest income                    5,518      5,873      6,146       6,250
                                    --------   --------   --------    --------
Provision for loan losses                438        298        390         168
Non-interest income                      969        856        839         903
SAIF special assessment                 --         --        2,670        --
Non-interest expense                   4,316      4,533      4,680       4,841
                                    --------   --------   --------    --------
Income (loss) before income taxes      1,733      1,898       (755)      2,144
Income tax expense (benefit)             710        774       (334)        933
                                    --------   --------   --------    --------
Net income (loss)                   $  1,023   $  1,124   $   (421)   $  1,211
                                    ========   ========   ========    ========
Earnings (loss) per share           $   0.17   $   0.18   $  (0.07)   $   0.20
                                    ========   ========   ========    ========