##### 



SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY The selected consolidated financial and other data of the Company set forth
below are derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report. At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands)Selected Financial Condition Data:Total assets
    
    $
    1,694,978
    
    
    $
    1,525,612
    
    
    $
    1,470,866
    
    
    $
    1,327,782
    
    
    $
    1,253,653Investment securities available for sale1
    
    
    102,647
    
    
    
    112,888
    
    
    
    63,258
    
    
    
    63,421
    
    
    
    53,203Investment securities held to maturity1
    
    
    2,025
    
    
    
    2,524
    
    
    
    554
    
    
    
    2,304
    
    
    
    2,304Mortgage-backed securities available
for sale1
    
    
    83,752
    
    
    
    114,515
    
    
    
    94,922
    
    
    
    15,372
    
    
    
    15,540Mortgage-backed securities held to
maturity1
    
    
    145,674
    
    
    
    25,429
    
    
    
    40,822
    
    
    
    55,283
    
    
    
    13,941Loans held for sale
    
    
    12,751
    
    
    
    31,614
    
    
    
    24,612
    
    
    
    12,816
    
    
    
    16,174Loans, net
    
    
    1,198,019
    
    
    
    1,071,356
    
    
    
    1,055,798
    
    
    
    1,036,435
    
    
    
    1,032,594Allowance for loan losses
    
    
    13,874
    
    
    
    12,656
    
    
    
    12,328
    
    
    
    11,381
    
    
    
    10,654Deposit accounts
    
    
    1,188,548
    
    
    
    960,278
    
    
    
    884,516
    
    
    
    849,647
    
    
    
    770,049FHLB advances and other borrowed
funds
    
    
    398,653
    
    
    
    458,560
    
    
    
    481,000
    
    
    
    376,334
    
    
    
    387,555Stockholders equity
    
    
    94,649
    
    
    
    92,973
    
    
    
    93,388
    
    
    
    89,913
    
    
    
    85,704
 For The Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands)Selected Operating Data:Interest income
    
    $
    75,650
    
    
    $
    85,603
    
    
    $
    94,896
    
    
    $
    91,834
    
    
    $
    80,736Interest expense
    
    
    39,743
    
    
    
    48,089
    
    
    
    57,562
    
    
    
    55,626
    
    
    
    47,208Net interest income
    
    
    35,907
    
    
    
    37,514
    
    
    
    37,334
    
    
    
    36,208
    
    
    
    33,528Provision for loan losses
    
    
    3,350
    
    
    
    1,350
    
    
    
    820
    
    
    
    1,000
    
    
    
    1,626Net interest income after provision
for loan losses
    
    
    32,557
    
    
    
    36,164
    
    
    
    36,514
    
    
    
    35,208
    
    
    
    31,902Total non-interest income
    
    
    15,334
    
    
    
    14,891
    
    
    
    16,599
    
    
    
    14,354
    
    
    
    6,911Total non-interest expense
    
    
    40,177
    
    
    
    47,280
    
    
    
    38,248
    
    
    
    34,508
    
    
    
    25,300Income before income taxes
    
    
    7,714
    
    
    
    3,775
    
    
    
    14,865
    
    
    
    15,054
    
    
    
    13,513Income tax expense
    
    
    4,415
    
    
    
    1,387
    
    
    
    5,209
    
    
    
    5,344
    
    
    
    4,945Net income
    
    $
    3,299
    
    
    $
    2,388
    
    
    $
    9,656
    
    
    $
    9,710
    
    
    $
    8,568
 - 3 -




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##### 



SELECTED FINANCIAL RATIOS AND OTHER DATA At Or For The Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Performance Ratios:2Return on average assets
    
    
    0.21
    %
    
    
    0.16
    %
    
    
    0.69
    %
    
    
    0.75
    %
    
    
    0.72
    %Return on average stockholders
equity
    
    
    3.51
    
    
    
    2.44
    
    
    
    10.32
    
    
    
    10.72
    
    
    
    10.00Dividend payout ratio
    
    
    85.33
    
    
    
    116.67
    
    
    
    26.61
    
    
    
    24.64
    
    
    
    25.84Average stockholders equity to
average assets
    
    
    6.00
    
    
    
    6.54
    
    
    
    6.65
    
    
    
    6.99
    
    
    
    7.21Stockholders equity to total assets
at end of period
    
    
    5.58
    
    
    
    6.09
    
    
    
    6.35
    
    
    
    6.77
    
    
    
    6.84Average interest rate spread3
    
    
    2.27
    
    
    
    2.44
    
    
    
    2.56
    
    
    
    2.75
    
    
    
    2.59Net interest margin4
    
    
    2.47
    
    
    
    2.71
    
    
    
    2.86
    
    
    
    3.02
    
    
    
    2.97Average interest-earning assets to
average interest-bearing
liabilities
    
    
    106.9
    
    
    
    107.6
    
    
    
    106.9
    
    
    
    106.0
    
    
    
    109.0Asset Quality Ratios:2Non-performing loans as a
percent of loans5,6
    
    
    0.38
    
    
    
    0.49
    
    
    
    0.11
    
    
    
    0.09
    
    
    
    0.07Non-performing assets as a
percent of total assets6
    
    
    0.38
    
    
    
    0.43
    
    
    
    0.08
    
    
    
    0.08
    
    
    
    0.09Allowance for loan losses as
a percent of loans5
    
    
    1.13
    
    
    
    1.13
    
    
    
    1.13
    
    
    
    1.07
    
    
    
    1.01Allowance for loan losses as
a percent of
non-performing loans6
    
    
    295.95
    
    
    
    230.23
    
    
    
    1,064.59
    
    
    
    1,190.48
    
    
    
    1,428.15Number of full-service
banking facilities
    
    
    17
    
    
    
    11
    
    
    
    11
    
    
    
    11
    
    
    
    10Number of shares outstanding
at end of period
(in thousands)
    
    
    4,492
    
    
    
    4,425
    
    
    
    4,451
    
    
    
    4,648
    
    
    
    4,973Per Share Data:Basic earnings per
common share
    
    $
    0.75
    
    
    $
    0.54
    
    
    $
    2.18
    
    
    $
    2.07
    
    
    $
    1.78Diluted earnings per
common share
    
    
    0.71
    
    
    
    0.51
    
    
    
    2.05
    
    
    
    2.01
    
    
    
    1.71Dividends per common share
    
    
    0.64
    
    
    
    0.63
    
    
    
    0.58
    
    
    
    0.51
    
    
    
    0.46Book value per common
share at end of period
    
    
    21.07
    
    
    
    21.17
    
    
    
    21.39
    
    
    
    19.82
    
    
    
    17.88Market value per common share
at end of period
    
    
    34.90
    
    
    
    26.70
    
    
    
    24.10
    
    
    
    20.88
    
    
    
    15.88
  1
    
    The balance does not include FHLB-Boston stock.2
    
    Asset Quality and Capital Ratios are end of period.3
    
    The average interest rate spread represents the difference
between the weighted average yield on average interest-earning assets and the
weighed average cost of average interest-bearing liabilities.4
    
    The net interest margin represents net interest income as a percent of average interest-earning assets.5
    
    Loans includes loans, net, and loans held for sale, excluding the allowance for loan losses.6
    
    Non-performing assets consist of non-performing loans, real estate owned (REO), and other repossessed assets.
Non-performing loans consist of all loans 90 days or more past due and other loans which have been identified by the Company as presenting
uncertainty with respect to the collectibility of interest or principal. It is
the Companys policy to cease accruing interest on all such loans. - 4 -




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##### 



Managements Discussion and Analysis
of

Financial Condition and Results of
Operations


Forward-Looking Statements:

The following discussion may contain certain
forward-looking statements, which are based on current
management expectations. Generally, verbs in the future tense
and the words believe, expect,
anticipate, intends,
opinion, potential, and similar
expressions identify forward-looking statements. Examples of
this forward-looking information can be found in, but are not
limited to, the expected effects of accounting pronouncements
applicable to the Companys operations, the allowance for
losses discussion, litigation, subsequent events and any
quantitative and qualitative disclosure about market risk. The
actual results of BostonFed Bancorp, Inc. (the
Company) could differ materially from those
management expectations. Factors that could cause future results
to vary from current management expectations include, but are
not limited to, general economic conditions, legislative and
regulatory changes, monetary and fiscal policies of the federal
government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest
rates, deposit flows, the cost of funds, demand for loan
products, demand for financial services, competition, changes in
the quality or composition of the Companys loan and
investment portfolios, changes in accounting principles,
policies or guidelines, and other economic, competitive,
governmental and technological factors and the effects of war or
terrorist activities affecting the Companys operations,
markets, products, services, prices and litigation. These risks
and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be
placed on such statements. Further information concerning the
Company and its business, including additional factors that
could materially affect the Companys financial results, is
included in the Companys filings with the Securities and
Exchange Commission.

Except as may be required by applicable law and
regulation, the Company does not undertake, and specifically
disclaims any obligation, to publicly release the result of any
revisions, which may be made to any forward-looking statements,
to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or
unanticipated events.

General

The Company, headquartered in Burlington,
Massachusetts, was organized in 1995 under Delaware law as the
holding company for Boston Federal Savings Bank (BFS
or the Bank) in connection with the conversion of
BFS from a mutual to a stock form of ownership. The Company
later acquired Broadway National Bank (BNB), a
nationally-chartered commercial bank, as its wholly-owned
subsidiary, which was merged into BFS on December 31, 2003,
collectively, BFS. In December 1999, the Company acquired
Diversified Ventures, Inc., d/b/a Forward Financial Company
(Forward Financial) and Ellsmere Insurance Agency,
Inc. (Ellsmere). Forward Financial and Ellsmere
operate as subsidiaries of BFS. On October 24, 2003, the
Company acquired the seven (7) Boston area branch offices of
Encore Bank (the acquisition of branches). The
Lexington office was merged into the Companys existing
Lexington office.

The Companys business has been conducted
primarily through its wholly-owned subsidiary, BFS. It operates
its administrative/bank branch office located in Burlington,
Massachusetts and its sixteen other bank branch offices located
in Arlington, Bedford, Belmont, Billerica, Boston, Chelsea,
Lexington, Needham, Newton, Peabody, Revere, Sudbury, and two
offices each in Wellesley and Woburn. These offices are all
located in the greater Boston metropolitan area. The Banks
subsidiary, Forward Financial, maintains its headquarters in
Westborough, Massachusetts, effective October 1, 2003, and
currently operates in 20 states. Through its subsidiary
Bank, the Company attracts retail deposits from the general
public and invests those deposits and other borrowed funds in
loans, mortgage-backed securities, U.S. Government and federal
agency securities and other securities. The Company originates
mortgage loans for its investment portfolio and for sale and
generally retains the servicing rights of loans it sells.
Additionally, the Company originates chattel mortgage loans,
substantially all of which are sold in the secondary market,
servicing released. 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 loans, and
to a lesser extent, interest and dividends on its investment and
mortgage-backed securities, gains on sale of loans, fees and
loan servicing income. The Companys primary sources of
funds are deposits, principal and interest payments on loans,
investments, mortgage-backed securities, Federal Home Loan Bank
of Boston (FHLB) advances and proceeds from the sale
of loans.

5



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##### 



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,
investment activities, gains or losses on sale of loans,
amortization of originated mortgage servicing rights, loan
servicing fees and other fees. The Companys non-interest
expense principally consists of compensation and benefits,
occupancy and equipment expense, advertising, data processing
expense 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.

The Company is a savings and loan holding company
subject to the regulations of the Office of Thrift Supervision
(the OTS).



| |                  
| | -----------------
| | Executive Summary

BostonFed is a $1.7 billion,
community-oriented, savings and loan holding company offering a
variety of financial services through its principal subsidiary
BFS. Both the Company and the Bank are headquartered in
Burlington, Massachusetts and are regulated by the OTS. The
Company attracts retail deposits from the general public through
its seventeen branch offices in fifteen cities/towns in the
Boston metropolitan area. The Company originates residential and
commercial real estate mortgage loans for portfolio and for
sale, business and consumer loans, primarily in its lending area
of Eastern Massachusetts. Through Forward Financial Company, a
subsidiary of the Bank, the Company also originates loans,
generally for sale, on manufactured housing, recreational
vehicles and boats, currently in 20 states.

Earnings for the year ended December 31,
2003 were $3.3 million, compared to earnings of
$2.4 million for the year ended December 31, 2002.
These earnings levels are lower than historical average (since
the Company became a publicly traded stock corporation on
October 24, 1995) due to several issues, which have
negatively impacted earnings. During the year ended
December 31, 2003:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company experienced margin contraction of
    24 basis points, which on top of the previous years 15
    basis point reduction, caused net interest income to decline by
    $1.6 million, despite growth in average interest earnings
    assets of approximately $72 million.                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Asset quality problems resulted in an
    incremental $2.0 million loan loss provision, due primarily
    to a $1.6 million charge-off of a portion of large
    commercial real estate/business loan relationship. Although
    non-performing assets of $6.5 million, or .38% of assets,
    were essentially the same as the prior year and approximate
    industry averages, the Companys classified assets of
    $58.1 million at December 31, 2003, were higher than
    the prior year-end level of $46.6 million. The Company
    increased its loan loss allowance to $13.9 million at
    December 31, 2003, from a balance of $12.7 million at
    December 31, 2002.
|
| | The Company continued to experience rapid
    prepayment of loans serviced for others and accordingly,
    recorded a negative loan processing and servicing income of
    $1.9 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Gain on sale of loans was $2.2 million
    lower as the Company retained more of its loan production for
    portfolio to offset rapid prepayment of loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | The Company incurred a $1.9 million
    incremental state tax expense due to a settlement with the
    Massachusetts Department of Revenue (Mass. DOR)
    involving current and retroactive income taxes associated with
    the Companys real estate investment trusts
    (REITs).                                                                                                                                                                                                                                                                                                                                                                                         

Diluted earnings per share were $0.71 per
share, compared to diluted earnings per share of $0.51 for the
year ended December 31, 2002.

During the year ended December 31,
2002:



| |                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company recorded a $7.0 million
    goodwill impairment to reduce the carrying value of goodwill
    associated with the 1999 acquisition of Forward Financial
    Company, due to recessionary conditions in the manufacturing
    housing market.                                                                       
|
| | The Company experienced rapid prepayments of
    its portfolio loans and loans serviced for others. A substantial
    valuation allowance and large write-offs were required on its
    originated mortgage servicing rights (OMSRs). This
    resulted in a $4.0 million negative loan processing and
    servicing income.
|
| | The Company settled two lawsuits during the
    year at a total cost of approximately
    $1.3 million.                                                                                                                                                                                                                       

6



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##### 



Although gain on sale of loans were a record
$12.7 million, the above negative factors contributed to
lower diluted earnings per share of $0.51, compared to $2.05
diluted earnings per share for 2001.

Critical Accounting Policies

A summary of the Companys significant
accounting policies is included in footnote 1 of the
Companys financial statements, which form a part of this
annual report. Various elements of accounting policies, by their
nature, are inherently subject to estimation techniques,
valuation assumptions and other subjective assessments. The
Companys policies with respect to the methodologies used
to determine the allowance for loan losses, the valuation of
originated mortgage servicing rights (OMSRs) and
asset impairment judgments, including the value of goodwill and
other intangibles, are the Companys most critical
accounting policies. They are important to the presentation of
the financial condition and results of operations because they
involve a higher degree of complexity and require management to
make difficult and subjective judgments, which often require
assumptions or estimates about highly uncertain matters. The use
of different judgments, assumptions and estimates could result
in material differences in results of operation or financial
condition.

The following is a description of the critical
accounting policies and an explanation of the methods and
assumptions underlying their application. These critical
policies and their application are reviewed on a quarterly basis
with the Audit and Compliance Committee of the Board of
Directors.

Allowance for Loan
Losses:The Companys allowance
for loan losses (or the allowance) is established
and maintained through a provision for loan losses based on the
Companys evaluation of the risks inherent in the loan
portfolio. The Company evaluates the adequacy of its allowance
on a quarterly basis. The allowance is comprised of both
specific valuation allowances and general valuation allowances.

Specific valuation allowances are established in
connection with individual loan reviews and the asset
classification process including the procedures for impairment
testing under GAAP. Such evaluation, which includes a review of
loans on which full collectibility is not reasonably assured,
considers the estimated fair value of the underlying collateral,
if any, current and anticipated economic and regulatory
conditions, current and historical loss experience of similar
loans and other factors that determine risk exposure to arrive
at an adequate allowance. Pursuant to the Companys policy,
loan losses must be charged-off in the period the loans, or
portions thereof, are deemed uncollectable. The determination of
the loans on which full collectibility is not reasonably
assured, the estimates of the fair value of the underlying
collateral and the assessments of economic and other conditions
are subject to assumptions and judgments by management. Specific
valuation allowance could differ materially as a result of
changes in these assumptions and judgments.

General valuation allowances represent loss
allowances that have been established to recognize the inherent
risks associated with the Companys lending activities, but
which, unlike specific allowances, have not been allocated to
particular problem assets. The determination of the adequacy of
the valuation allowance is a multi-dimensional process, which
takes into consideration a variety of factors. The Company
segments the loan portfolio into like categories by composition,
risk ratings and classification and performs a variety of
analyses against each category. These include, but are not
limited to, historical loss experience, risk ratings assigned to
individual loans, delinquency levels and trends. In addition,
the Company evaluates and considers the impact that existing and
projected economic and market conditions may have on the
portfolio, as well as known and inherent risks in the portfolio.
Finally, the Company evaluates and considers the allowance
ratios and coverage percentages of both peer group and
regulatory agency data. After evaluating these variables, the
Company determines appropriate allowance coverage percentages
for each of the portfolio segments and the appropriate level of
the allowance.

These evaluations are inherently subjective
because, even though they are based on objective data, it is
managements interpretation of that data that determines
the amount of the appropriate allowance. Therefore, from time to
time, management reviews the actual performance and charge-off
history of the portfolio and compares that to previously
determined allowance coverage percentages. In this manner,
management evaluates the impact the previously mentioned
variables may have had on the portfolio to determine which
changes, if any, should be made to the assumptions and analyses.
Recent analysis has indicated that projections of estimated
losses inherent in the portfolio have approximated actual
charge-off experience during the current economic environment.

As indicated above, actual results could differ
from estimates as a result of changes in economic or market
conditions and other factors. Changes in estimates could result
in a material change in the

7



---



##### 



allowance. While the Company believes that the
allowance has been established and maintained at levels adequate
to reflect the risks inherent in the loan portfolio, future
increases may be necessary if economic or market conditions and
other factors differ substantially from the conditions that
existed at the time of the initial determinations.


Valuation of OMSRs:OMSRs are carried at cost, and impairment, if any, is recognized
through a charge to the loan servicing income and/or the OMSR
valuation allowance. Impairment exists if the carrying value of
OMSRs exceeds the estimated fair value. The Company stratifies
OMSRs by underlying loan type, primarily fixed and adjustable,
and further stratifies fixed rate loans by interest rates.
Impairment allowances are established when necessary and then
adjusted in subsequent periods to reflect changes in the
measurement of impairment. The estimated fair value of each OMSR
stratum is determined through analyses of future cash flows,
incorporating numerous assumptions including servicing income,
servicing costs, market discount rates, prepayment speeds and
other market driven data.

The fair value of OMSRs is highly sensitive to
changes in assumptions. Changes in prepayment speed assumptions
have the most significant impact on the fair value of OMSRs.
Generally, as interest rates decline, prepayments accelerate due
to increased refinance activity, which results in a decrease in
the fair value of OMSRs. As interest rates rise, prepayments
slow down, which results in an increase in the fair value of
OMSRs. All assumptions are reviewed for reasonableness on a
quarterly basis and adjusted as necessary to reflect current and
anticipated market conditions. Thus, any measurement of the fair
value of OMSRs is limited by the conditions existing and the
assumptions utilized as of a particular point in time, and those
assumptions may not be appropriate if they are applied at a
different point in time.

Valuation of Goodwill and Other Intangible
Assets:GAAP requires the
identification of goodwill and other identifiable intangible
assets, such as core deposit intangibles (CDI)
acquired in a business combination. Identifiable intangible
assets are amortized to expense over their estimated useful
lives and are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset
may not be recoverable. Since January 2002, goodwill is no
longer amortized, rather on a periodic basis, at least annually,
goodwill must be evaluated for impairment. Accordingly, the
Company periodically assesses the carrying value of goodwill
associated with various acquisitions to determine whether there
is any impairment. Impairment assessments involve estimates for
discount rates, projected future cash flows and time period
calculations, all of which are susceptible to change based on
changes in economic conditions and other factors. Any changes in
the estimates that the Company uses to determine the carrying
value of goodwill and other identifiable intangible assets or
that otherwise adversely affects the value or estimated lives
may adversely affect the Companys results of operations.
At December 31, 2003 and 2002, total goodwill and other
intangibles was $17.5 million and $10.8 million,
respectively.

Other Risk Factors

In addition to all of the information in this
Report, the following risk factors should be considered. Many of
these risk factors are discussed in greater detail throughout
this annual report.

Competition:The
Company operates in a highly competitive market. The Company
competes on the basis of providing higher levels of service
rather than the best price in the markets in which it conducts
its business. Loans and savings accounts and other services are
generally priced at mid-market. From time to time, the
Companys competitors seek to compete aggressively on the
basis of pricing factors and the Company may lose market share
to the extent it is unwilling to approximate its
competitors aggressive pricing. To the extent that the
Company seeks to minimize market share erosion through pricing
alternatives, it may experience lower interest margins.

Interest rates:Interest rates have a significant impact on the Companys
operations. The Company attempts to minimize the impact through
various means and monitoring through the use of modeling
techniques. The repricing characteristics of its loans do not
necessarily match those of its deposit or borrowed money
liabilities. Changes in interest rates can also affect the
number of loans the Company originates, as well as the value of
its loans and other interest-earning assets and its ability to
realize gains on the sale of those assets. Prevailing interest
rates also affect the extent to which borrowers prepay loans
owned by the Company. When interest rates increase, borrowers
are less likely to prepay their loans, and when interest rates
decrease, borrowers are more likely to prepay loans. The Company
may then be forced to invest the funds generated by those
prepayments at less favorable interest rates. Similarly,
increases in interest rates and/or prepayments on
mortgage-backed securities can cause the value of those
securities to fall. In addition, an increase in interest rates
could lower the ability of the Companys borrowers who

8



---



##### 



currently have adjustable-rate loans, to maintain
their loans in a current status as their payments increase upon
repricing. Such an event could cause an increase in
non-performing loans and loan losses.


Increases in interest rates might cause
depositors to shift funds from accounts that have comparatively
lower cost (such as regular savings accounts) to accounts with a
higher cost (such as certificates of deposit). If the cost of
deposits increased at a rate greater than the yield on
interest-earning assets increases, the Companys
interest-rate spread would decline.

Market risk also arises as the Company originates
and accumulates fixed rate mortgage loans prior to their sale or
securitization. As applications are approved, a commitment is
made to lend at a specified interest rate. Should rates rise,
either prior to closing or after closing but prior to sale or
securitization, the price at which the loan will be sold or
securitized will decline. Hedging strategies are implemented to
mitigate this risk.

Credit risk:The
Company assumes credit risk in the loan and investment
securities portfolios and in the recourse it has or may provide
in conjunction with loan sales and securitization. The majority
of its loan portfolio consists of adjustable-rate loans secured
by one- to four-family residences and to a lesser extent,
commercial real estate loans, construction loans, equity lines
of credit, and business loans. Management believes that the
allowance for loan losses is adequate. However, such
determination is susceptible to the effect of future
unanticipated changes in general economic and market conditions
and other factors that may affect the financial circumstances of
borrowers and/or residential/commercial real estate values or
business loan environment within the Companys lending
areas.

Risks to gain on sale of loans and originated
mortgage servicing rights:A
substantial portion of the Companys non-interest income is
generated by gain on sale of loans. The Company currently sells
the vast majority of longer-term fixed-rate loans and a portion
of the adjustable-rate loans it originates, into the secondary
market. The Company generally retains the servicing rights on
mortgage loans sold. Gain on sale of loans and OMSRs can be
severely impacted by fluctuations in interest rates and other
economic conditions. When interest rates fall, gain on sale of
loans generally increase, but the value of OMSRs may be
impaired. When interest rates increase, the opposite may occur.

Additionally, the Company sells loans originated
on manufactured housing, recreational vehicles and boats to
various client lenders. The volume of gain on sale of
manufactured housing loans is dependent on consumer demand, the
Companys ability to originate, underwriting standards of
the client lenders and their desire to add to their portfolio.
The vast majority of manufactured housing loans are sold
servicing released and without recourse. Soon after the time the
Company acquired its manufactured housing loan origination
company, Forward Financial, the manufactured housing industry
became mired in a severe recession and has experienced a glut of
repossessions. The Companys gain on sale of manufactured
housing loans in 2003 was substantially less than the gain
earned in the prior years. The Company cannot estimate the
duration of the current manufactured housing recession or if
prior lending volumes will be achieved when the recession ends.

Regulation:The
Companys operations are subject to extensive regulation by
several federal, state and local authorities and are subject to
various laws and judicial and administrative decisions imposing
requirements and restrictions on its operations. Policies
adopted by these entities can significantly affect the
Companys business operations. In addition, certain of
these authorities periodically conduct examinations of the
Company and may impose various requirements or sanctions.

Legislation:Proposals to change the laws governing financial institutions
are frequently raised in federal, state and local legislatures
and if passed could lead to new regulatory requirements. The
implementation of regulations required under the Sarbanes-Oxley
Act and other changes in applicable laws or policies could
materially affect the Companys businesses, and the
likelihood of any major changes in the future and their effects
are impossible to determine. Moreover, it is impossible to
predict the ultimate form any proposed legislation or regulation
might take or how it might affect the Company. Similarly,
changes in applicable accounting principles, policies or
guidelines could impact the manner in which the Company reports
the results of its operations.

Stockholder
dividends:The Company is a holding
company and substantially all of its operations are conducted
through its subsidiary Bank. Therefore, the Companys
ability to pay dividends is dependent upon the earnings of its
subsidiary Bank and its ability to pay dividends or make other
payments to the Company. Certain laws and regulatory
requirements limit the ability of the Companys subsidiary
to pay dividends or make other payments to it.

9



---



##### 



Business continuity:The Company has business continuity and disaster recovery plans
in place. However, events, including terrorist or military
actions and resulting political and social turmoil, could arise
that would cause unforeseen damage to the Companys
physical facilities or could cause delays or disruptions to
operational functions, including information processing and
financial market settlement functions. Should these events
affect the Company, its customers, vendors or counter-parties
with which it conducts business, the Companys results of
operations could be negatively affected.

Results of Operations



| |         
| | --------
| | Overview

Net income for the year ended December 31,
2003, was $3.3 million, or $0.75 basic earnings per share
and $0.71 diluted earnings per share, compared to
$2.4 million, or $0.54 basic earnings per share and $0.51
diluted earnings per share for the year ended December 31,
2002. Net income for 2003 was approximately $900,000 higher than
2002 despite being negatively impacted by net interest income
contraction (due to margin compression), an incremental loan
loss provision of $2.0 million, continued write-downs of
OMSRs due to rapid serviced loan prepayments, lower gain on sale
of loans and the settlement with the Mass. DOR for
$1.9 million for additional state taxes and interest
applicable to the real estate investment trusts
(REIT).

Net income for 2002 was negatively impacted by
the Companys $7.0 million goodwill impairment related
to the acquisition of Forward Financial, $5.1 million in
OMSR impairment resulting from rapid prepayments of loans
serviced for others, margin compression and $1.3 million
for the settlement of two lawsuits.

Net income for the year ended December 31,
2001, was $9.7 million, or $2.18 basic earnings per share
and $2.05 diluted earnings per share.

The return on average stockholders equity
was 3.51% during the year ended December 31, 2003, 2.44%
during the year ended December 31, 2002, and 10.32% during
the year ended December 31, 2001. Return on average assets
was 0.21% for the year ended December 31, 2003, compared to
0.16% for the year ended December 31, 2002, and 0.69% for
the year ended December 31, 2001.

Earnings were impacted in the current year by a
continued decline in net interest margin, which was 2.47% for
the year ended December 31, 2003, compared to 2.71% for the
year ended December 31, 2002, and 2.86% for the year ended
December 31, 2001. Federal Reserve induced decreases in
short-term interest rates throughout 2001, 2002 and 2003 caused
yields to decline rapidly on adjustable-rate loan products and
investments and accelerated refinancings of higher yielding
loans. While interest rates paid on deposits and borrowings were
also lowered during the three years, management was unable to
reduce interest rates on core deposits in lock- step with
overall market interest rates due to the generally low interest
rates already being paid on core deposits.

The Company incurred an incremental loan loss
provision of $2.0 million in the year ended
December 31, 2003, as it recorded a $3.4 million
provision for loan losses, compared to $1.4 million for the
prior year. The additional loss provision was necessary in part
due to a charge-off of $1.6 million, which required
replenishment of the allowance. A large commercial real estate/
business loan borrower of the Company lost a substantial portion
of its business to international competition, causing the
borrower to close a large portion of its manufacturing
facilities. An appraisal of the borrowers real estate
showed a substantial reduction in the value of the collateral
due to the vacated space and very low potential rental rates.

The historically low interest rates during 2003,
2002 and 2001 provided the Company with an opportunity to
increase volumes of loans sold in the secondary market. Gain on
the sale of loans was $10.5 million during the year ended
December 31, 2003, $12.7 million for the year ended
December 31, 2002, and $10.6 million for the year
ended December 31, 2001. However, the rapid prepayment of
loans serviced required substantial write-downs of the OMSRs,
which resulted in negative loan processing and servicing fees of
($1.9) million in 2003, ($4.0) million in 2002 and
($275,000) in 2001.



| |                
| | ---------------
| | Interest Income

Total interest income for the year ended
December 31, 2003, decreased by $9.9 million to
$75.7 million from $85.6 million for the year ended
December 31, 2002, primarily due to a decline in interest
earned on loans, net. Although average balances were higher in
2003, the reduction in yields on

10



---



##### 



new and refinanced loans, precipitated by
historically low mortgage interest rates, more than offset
interest earned on higher average balances.


Total interest income for the year ended
December 31, 2002, decreased by $9.3 million to
$85.6 million compared to $94.9 million for the year
ended December 31, 2001. As in the current year, the major
factor in the decline in interest earned on loans, net, in 2002
was lower yields.

Interest income on loans, net, was
$64.8 million for the year ended December 31, 2003,
compared to $73.4 million for the prior year. Reinvestment
and repricing at lower interest rates reduced the average yield
on loans, net, from 6.62% for the year ended December 31,
2002, to an average yield of 5.70% for the current year. The
increase in average balances was not sufficient to offset the
decline in yields. Average loan balances increased by
$26.7 million to an average balance of $1.136 billion
for the year ended December 31, 2003, from an average
balance of $1.110 billion for the year ended
December 31, 2002. The increased average loans, net,
balances generated an additional $1.8 million of interest
earned while lower yields reduced interest earned on loans, net,
by $10.4 million.

Interest income on loans, net was
$73.4 million for the year ended December 31, 2002,
compared to $81.9 million for the prior year. For the same
reasons as in the current year, low interest rates reduced the
average yield on loans, net, from 7.54% for the year ended
December 31, 2001, to an average yield of 6.62% for the
year ended December 31, 2002. Average loan balances
increased from $1.086 billion for 2001 to
$1.110 billion for 2002, but the earnings thereon was not
sufficient to offset the impact of lower yields on the
portfolio. The increased average loans, net, balances generated
an additional $1.8 million of interest earned while lower
yields reduced interest earned on loans, net, by
$10.3 million. The Company slowed the decline in yields by
continuing to increase volume of construction and land and
commercial real estate.

Interest income on mortgage-backed securities
declined by $1.4 million for the year ended
December 31, 2003, due to a 139 basis point decline in
average yield, partially offset by an increase in average
balances. Average mortgage-backed securities balances increased
by $13.8 million from an average of $141.8 million
during 2002 to an average of $155.6 million during 2003.
The major reason for the increase in the average balance was due
to the purchase of collateralized mortgage obligations
(CMOs). The average yield on mortgage-backed
securities declined from 5.57% for the year ended
December 31, 2002, to an average yield of 4.18% in the
current year. The effect of the decline in the average yield was
a reduction in interest earned of approximately
$2.2 million. Higher average balances generated an increase
in interest earned on mortgage-backed securities of $767,000.

Interest income on mortgage-backed securities
increased by $539,000 for the year ended December 31, 2002,
due to an increase in average balances compared to the prior
year. Average mortgage-backed securities balances increased by
$25.2 million from an average of $116.6 million during
2001 to an average of $141.8 million during 2002. The major
reason for the increase in the average balance was due to the
purchase of CMOs. The yields on mortgage-backed securities
declined by 75 basis points from an average yield of 6.32% in
2001 to 5.57% in 2002. Higher average balances generated an
increase in interest earned on mortgage-backed securities of
$1.6 million, while lower yields reduced interest earned on
such securities by $1.1 million in 2002 when compared to
the prior year.

Interest income on investment securities and FHLB
overnight and federal funds sold for the year ended
December 31, 2003 was only slightly higher, by $76,000,
despite a $31.9 million increase in average balances, which
were $164.5 million during the year ended December 31,
2003. Average balances of investment securities were higher this
year primarily due to the cash infusion from the acquisition of
branches. The interest income on investment securities was
suppressed by a 58 basis point decline in the average yield,
which declined to 2.65% for the year ended December 31,
2003, from 3.23% for the prior year. The Companys
investment securities are generally short term and accordingly
have been affected by reductions in market interest rates as
management reinvested cash flows from maturing securities.

Interest income on investment securities and FHLB
overnight and federal funds sold decreased by $1.3 million
to $4.3 million for the year ended December 31, 2002,
compared to $5.6 million for the year ended
December 31, 2001. The primary reason for the decrease is
due to a lower average yield of 3.23% for the year ended
December 31, 2002, compared to an average yield of 5.52%
for the year ended December 31, 2001. Investment securities
balances averaged $132.6 million during the year ended
December 31, 2002, compared to average balances of
$101.7 million for the year ended December 31, 2001.

11



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##### 





| |                 
| | ----------------
| | Interest Expense

Interest expense declined by $8.4 million,
or 17.4%, for the year ended December 31, 2003, to
$39.7 million compared to $48.1 million for the year
ended December 31, 2002. The decline in interest expense
was primarily due to reductions in interest rates paid on all
types of savings accounts and FHLB advances.

Interest expense for the year ended
December 31, 2002, was $48.1 million compared to
$57.6 million for the year ended December 31, 2001.
The $9.5 million decline in interest expense was also
primarily due to reductions in interest rates paid on savings
accounts and FHLB advances.

Interest expense on interest-bearing deposit
accounts declined by $2.9 million for the year ended
December 31, 2003, compared to the prior year due to the
effects of lower cost of funds, partially offset by interest
expense on higher average balances. Average interest-bearing
deposit balances were $899.2 million for the year ended
December 31, 2003, compared to average interest-bearing
deposit balances of $811.0 million for the prior year. The
increased interest-bearing average balances for the year ended
December 31, 2003, was primarily attributable to growth in
average core deposit balances (money market, savings and NOW
accounts), which increased by a combined $61.0 million in
average balances. Certificates of deposit increased by an
average balance of $27.1 million during the year ended
December 31, 2003. The overall average cost of
interest-bearing deposit accounts declined from 2.75% for the
year ended December 31, 2002, to an average cost of 2.17%
for the current year due to the lower interest rate environment
continuing throughout 2003.

Interest expense on interest-bearing deposit
accounts declined by $7.8 million for the year ended
December 31, 2002, compared to the prior year due to the
effects of lower cost of funds, partially offset by interest
expense on higher average balances. Average interest-bearing
deposit balances were $811.0 million for the year ended
December 31, 2002, compared to average interest-bearing
deposit balances of $767.5 million for the prior year. The
increased average balances for the year ended December 31,
2002, were primarily attributable to growth of
$25.9 million in the average balance of savings accounts
and growth of $12.7 million in NOW account average
balances. The overall average cost of interest-bearing deposit
accounts declined from 3.92% for the year ended
December 31, 2001, to an average cost of 2.75% for the year
ended December 31, 2002, also due to the lower interest
rate environment.

Borrowed funds consisted of FHLB advances and
corporation obligated mandatory redeemable capital securities
(trust preferred securities), which were used
generally to fund loan portfolio growth. Average balances of
borrowed funds were $463.7 million during the year ended
December 31, 2003, a decrease of $12.2 million from
the prior year average balance of $475.9 million. The
average cost of borrowed funds declined by 104 basis points,
from 5.41% for the year ended December 31, 2002 to an
average of 4.37% for the current year. Although the average cost
of borrowed funds declined by a larger amount than the average
cost of deposits, the 4.37% cost of borrowings remains higher
than the average cost of deposits because the Company has
utilized longer-term advances as part of its management of
interest rate risk and borrowings include high cost trust
preferreds, whereas core deposits reduce the cost of savings.

Average balances of borrowed funds were
$475.9 million during the year ended December 31,
2002, an increase of $24.0 million from the prior year
average balance of $451.9 million. The average cost of
borrowed funds declined by 67 basis points, from 6.08% for the
year ended December 31, 2001 to an average of 5.41% for the
year ended December 31, 2002 as market interest continued
to decline during the year.

The Companys cost of interest bearing
liabilities has declined slower than overall market rates as the
high percentage of core deposits already bear low interest rates
and such rates and market conditions preclude further
substantial declines in the interest rate paid on these
accounts. Interest rates on certificates of deposit and advances
from the FHLB can change to market rates only as they mature.

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 depends
primarily upon the volume of interest-earning assets and
interest-bearing liabilities and the corresponding interest
rates earned or paid. Net interest income can be significantly
impacted by changes in interest rates and market yield curves.
See Market Risk and Management of Interest Rate Risk
for further discussion of the potential impact of changes in
interest rates on results of operations.

12



---



##### 



The following table sets forth certain
information relating to the Company for the years ended
December 31, 2003, 2002 and 2001. 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. The average
balance data is derived from daily balances. The yields and
costs include fees, premiums and discounts, which are considered
adjustments to yields.

13



---



##### 



|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |      |      |  
|--------------------------------------------------------------------- | ------------------------------------ | ------------------------------------------ | ------- | --------- | --------- | ------------------------------- | ---- | -------- | ---- | ---------- | ------- | --------- | --------- | -------- | ------ | ---------- | ------ | ------- | ---- | -------- | ---- | ---------- | ------- | --------- | --------- | - | ------ | ------ | ------ |  | ---- | ---- | ---- | - | ------ | --------- | --------- | - | ------ | ------ | ------ |  | ---- | ---- | ---- | -
|                                                                      |                                      |                                            |         |           |           |                                
|                                                                      |                                      |                                            |         |           |           | For the Year Ended December 31,
|                                                                      |                                      |                                            |         |           |           |                                
|                                                                      |                                      |                                            |         |           |           |                                 |      |         
|                                                                      |                                      | At December 31, 2003                       |         | 2003      |           | 2002                            |      | 2001    
|                                                                      |                                      |                                            |         |           |           |                                 |      |         
|                                                                      |                                      |                                            |         | Yield/    |           | Average                         |      |          |      | Average    |         | Average   |           |          |        | Average    |        | Average |      |          |      | Average   
|                                                                      |                                      | Balance                                    |         | Cost      |           | Balance                         |      | Interest |      | Yield/Cost |         | Balance   |           | Interest |        | Yield/Cost |        | Balance |      | Interest |      | Yield/Cost
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |           
|                                                                      |                                      |                                           
|                                                                      |                                      | (Dollars in thousands)                    
|Assets:                                                               |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|Interest-earning assets:                                              |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|                                                                      | Investment securities(1)             |                                            | $       | 134,682   |           |                                 |      | 2.77     | %    |            | $       | 164,500   |           |          | $      | 4,357      |        |         |      | 2.65     | %    |            | $       | 132,569   |           |   | $      | 4,281  |        |  |      | 3.23 | %    |   | $      | 101,675   |           |   | $      | 5,617  |        |  |      | 5.52 | %   
|                                                                      | Loan, net and loans held for sale(2) |                                            |         | 1,210,770 |           |                                 |      | 5.52     | %    |            |         | 1,136,475 |           |          |        | 64,788     |        |         |      | 5.70     | %    |            |         | 1,109,799 |           |   |        | 73,418 |        |  |      | 6.62 | %    |   |        | 1,085,798 |           |   |        | 81,914 |        |  |      | 7.54 | %   
|                                                                      | Mortgage-backed securities(3)        |                                            |         | 229,426   |           |                                 |      | 4.65     | %    |            |         | 155,563   |           |          |        | 6,505      |        |         |      | 4.18     | %    |            |         | 141,796   |           |   |        | 7,904  |        |  |      | 5.57 | %    |   |        | 116,557   |           |   |        | 7,365  |        |  |      | 6.32 | %   
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|                                                                      |                                      | Total interest- earning assets             |         |           | 1,574,878 |                                 |      |          | 5.16 | %          |         |           | 1,456,538 |          |        |            | 75,650 |         |      |          | 5.19 | %          |         |           | 1,384,164 |   |        |        | 85,603 |  |      |      | 6.18 | % |        |           | 1,304,030 |   |        |        | 94,896 |  |      |      | 7.28 | %
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|                                                                      | Non-interest- earning assets         |                                            |         | 120,100   |           |                                 |      |          |      |            |         | 107,719   |           |          |        |            |        |         |      |          |      |            |         | 110,316   |           |   |        |        |        |  |      |      |      |   |        | 103,625   |           |   |        |        |        |  |      |      |     
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|                                                                      |                                      | Total assets                               |         | $         | 1,694,678 |                                 |      |          |      |            |         | $         | 1,564,257 |          |        |            |        |         |      |          |      |            |         | $         | 1,494,480 |   |        |        |        |  |      |      |      |   |        | $         | 1,407,655 |   |        |        |        |  |      |      |      |  
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|Liabilities and Stockholders
    Equity:                             |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|Interest-bearing liabilities:                                         |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|                                                                      | Money market deposit accounts        |                                            | $       | 138,986   |           |                                 |      | 1.54     | %    |            | $       | 80,136    |           |          |        | 1,017      |        |         |      | 1.27     | %    |            | $       | 60,530    |           |   |        | 946    |        |  |      | 1.56 | %    |   | $      | 54,965    |           |   |        | 1,380  |        |  |      | 2.51 | %   
|                                                                      | Savings accounts                     |                                            |         | 227,491   |           |                                 |      | 0.92     | %    |            |         | 220,751   |           |          |        | 2,250      |        |         |      | 1.02     | %    |            |         | 200,552   |           |   |        | 2,838  |        |  |      | 1.42 | %    |   |        | 174,651   |           |   |        | 4,104  |        |  |      | 2.35 | %   
|                                                                      | NOW accounts                         |                                            |         | 211,469   |           |                                 |      | 0.62     | %    |            |         | 161,697   |           |          |        | 470        |        |         |      | 0.29     | %    |            |         | 140,470   |           |   |        | 447    |        |  |      | 0.32 | %    |   |        | 127,779   |           |   |        | 735    |        |  |      | 0.58 | %   
|                                                                      | Certificate accounts                 |                                            |         | 521,114   |           |                                 |      | 3.33     | %    |            |         | 436,603   |           |          |        | 15,739     |        |         |      | 3.60     | %    |            |         | 409,493   |           |   |        | 18,110 |        |  |      | 4.42 | %    |   |        | 410,119   |           |   |        | 23,884 |        |  |      | 5.82 | %   
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|                                                                      |                                      | Total                                      |         |           | 1,099,060 |                                 |      |          | 2.08 | %          |         |           | 899,187   |          |        |            | 19,476 |         |      |          | 2.17 | %          |         |           | 811,045   |   |        |        | 22,341 |  |      |      | 2.75 | % |        |           | 767,514   |   |        |        | 30,103 |  |      |      | 3.92 | %
|                                                                      | Borrowed funds(4)                    |                                            |         | 398,653   |           |                                 |      | 4.42     | %    |            |         | 463,670   |           |          |        | 20,267     |        |         |      | 4.37     | %    |            |         | 475,931   |           |   |        | 25,748 |        |  |      | 5.41 | %    |   |        | 451,867   |           |   |        | 27,459 |        |  |      | 6.08 | %   
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|                                                                      |                                      | Total interest- bearing liabilities        |         |           | 1,497,713 |                                 |      |          | 2.71 | %          |         |           | 1,362,857 |          |        |            | 39,743 |         |      |          | 2.92 | %          |         |           | 1,286,976 |   |        |        | 48,089 |  |      |      | 3.74 | % |        |           | 1,219,381 |   |        |        | 57,562 |  |      |      | 4.72 | %
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|Non-interest-bearing liabilities                                      |                                      |                                            | 102,616 |           |           |                                 |      |          |      |            | 107,524 |           |           |          |        |            |        |         |      |          |      |            | 109,811 |           |           |   |        |        |        |  |      |      |      |   | 94,686 |           |           |   |        |        |        |  |      |     
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|                                                                      |                                      | Total liabilities                          |         |           | 1,600,329 |                                 |      |          |      |            |         |           | 1,470,381 |          |        |            |        |         |      |          |      |            |         |           | 1,396,787 |   |        |        |        |  |      |      |      |   |        |           | 1,314,067 |   |        |        |        |  |      |      |      |  
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|Stockholders equity                                                  |                                      |                                            | 94,649  |           |           |                                 |      |          |      |            | 93,876  |           |           |          |        |            |        |         |      |          |      |            | 97,693  |           |           |   |        |        |        |  |      |      |      |   | 93,588 |           |           |   |        |        |        |  |      |     
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|                                                                      |                                      | Total liabilities and stockholders equity |         | $         | 1,694,978 |                                 |      |          |      |            |         | $         | 1,564,257 |          |        |            |        |         |      |          |      |            |         | $         | 1,494,480 |   |        |        |        |  |      |      |      |   |        | $         | 1,407,655 |   |        |        |        |  |      |      |      |  
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|Net interest income                                                   |                                      |                                            |         |           |           |                                 | NA   |          |      |            |         |           |           | $        | 35,907 |            |        |         |      |          |      |            |         |           |           | $ | 37,514 |        |        |  |      |      |      |   |        |           |           | $ | 37,334 |        |        |  |      |     
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|Net interest rate spread(5)                                           |                                      |                                            |         |           |           |                                 | 2.45 | %        |      |            |         |           |           |          |        |            |        |         | 2.27 | %        |      |            |         |           |           |   |        |        |        |  | 2.44 | %    |      |   |        |           |           |   |        |        |        |  | 2.56 | %   
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|Net interest margin(6)                                                |                                      |                                            |         |           |           |                                 | NA   |          |      |            |         |           |           |          |        |            |        |         | 2.47 | %        |      |            |         |           |           |   |        |        |        |  | 2.71 | %    |      |   |        |           |           |   |        |        |        |  | 2.86 | %   
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     
|Ratio of interest- earning assets to
    interest-bearing liabilities |                                      |                                            | 105.15  | %         |           |                                 |      |          |      |            | 106.87  | %         |           |          |        |            |        |         |      |          |      |            | 107.55  | %         |           |   |        |        |        |  |      |      |      |   | 106.94 | %         |           |   |        |        |        |  |      |     
|                                                                      |                                      |                                            |         |           |           |                                 |      |          |      |            |         |           |           |          |        |            |        |         |      |          |      |            |         |           |           |   |        |        |        |  |      |      |      |   |        |           |           |   |        |        |        |  |      |     



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 4.34%,
    5.39%, and 6.07% for the years ended December 31, 2003,
    2002 and 2001, 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.                                                                                                                                                                                                                                                                                                   

14



---



##### 



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 current 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.

|                                  |                                     |                                    |       |                              |       |                     |        |         |         |      |        |        |        |   |       |       |       |   |        |         |         |   |        |        |        |  
|--------------------------------- | ----------------------------------- | ---------------------------------- | ----- | ---------------------------- | ----- | ------------------- | ------ | ------- | ------- | ---- | ------ | ------ | ------ | - | ----- | ----- | ----- | - | ------ | ------- | ------- | - | ------ | ------ | ------ | -
|                                  |                                     |                                    |       |                             
|                                  |                                     | Year Ended December 31, 2003       |       | Year Ended December 31, 2002
|                                  |                                     | Compared to                        |       | Compared to                 
|                                  |                                     | Year Ended December 31, 2002       |       | Year Ended December 31, 2001
|                                  |                                     |                                    |       |                             
|                                  |                                     |                                    |       |                              |       |                     |        |        
|                                  |                                     | Increase (Decrease)                |       |                              |       | Increase (Decrease) |        |        
|                                  |                                     | Due to                             |       |                              |       | Due to              |        |        
|                                  |                                     |                                    |       |                              |       |                     |        |        
|                                  |                                     | Volume                             |       | Rate                         |       | Net                 |        | Volume  |         | Rate |        | Net   
|                                  |                                     |                                    |       |                              |       |                     |        |         |         |      |        |       
|                                  |                                     |                                   
|                                  |                                     | (In thousands)                    
|Interest-earning assets:          |                                     |                                    |       |                              |       |                     |        |         |         |      |        |        |        |   |       |       |       |   |        |         |         |   |        |       
|                                  | Investment securities               |                                    | $     | 1,031                        |       |                     | $      | (955    | )       |      | $      | 76     |        |   | $     | 1,705 |       |   | $      | (3,041  | )       |   | $      | (1,336 | )     
|                                  | Loans, net, and loans held for sale |                                    |       | 1,766                        |       |                     |        | (10,396 | )       |      |        | (8,630 | )      |   |       | 1,810 |       |   |        | (10,306 | )       |   |        | (8,496 | )     
|                                  | Mortgage-backed securities          |                                    |       | 767                          |       |                     |        | (2,166  | )       |      |        | (1,399 | )      |   |       | 1,595 |       |   |        | (1,056  | )       |   |        | 539    |       
|                                  |                                     |                                    |       |                              |       |                     |        |         |         |      |        |        |        |   |       |       |       |   |        |         |         |   |        |       
|                                  |                                     | Total interest-earning assets      |       |                              | 3,564 |                     |        |         | (13,517 | )    |        |        | (9,953 | ) |       |       | 5,110 |   |        |         | (14,403 | ) |        |        | (9,293 | )
|                                  |                                     |                                    |       |                              |       |                     |        |         |         |      |        |        |        |   |       |       |       |   |        |         |         |   |        |       
|Interest-bearing liabilities:     |                                     |                                    |       |                              |       |                     |        |         |         |      |        |        |        |   |       |       |       |   |        |         |         |   |        |       
|                                  | Money market deposit accounts       |                                    |       | 306                          |       |                     |        | (235    | )       |      |        | 71     |        |   |       | 140   |       |   |        | (574    | )       |   |        | (434   | )     
|                                  | Savings accounts                    |                                    |       | 287                          |       |                     |        | (875    | )       |      |        | (588   | )      |   |       | 609   |       |   |        | (1,875  | )       |   |        | (1,266 | )     
|                                  | NOW accounts                        |                                    |       | 68                           |       |                     |        | (45     | )       |      |        | 23     |        |   |       | 74    |       |   |        | (362    | )       |   |        | (288   | )     
|                                  | Certificate accounts                |                                    |       | 1,198                        |       |                     |        | (3,569  | )       |      |        | (2,371 | )      |   |       | (36   | )     |   |        | (5,738  | )       |   |        | (5,774 | )     
|                                  |                                     |                                    |       |                              |       |                     |        |         |         |      |        |        |        |   |       |       |       |   |        |         |         |   |        |       
|                                  |                                     | Total                              |       |                              | 1,859 |                     |        |         | (4,724  | )    |        |        | (2,865 | ) |       |       | 787   |   |        |         | (8,549  | ) |        |        | (7,762 | )
|Borrowed funds                    |                                     |                                    | (663  | )                            |       |                     | (4,818 | )       |         |      | (5,481 | )      |        |   | 1,458 |       |       |   | (3,169 | )       |         |   | (1,711 | )     
|                                  |                                     |                                    |       |                              |       |                     |        |         |         |      |        |        |        |   |       |       |       |   |        |         |         |   |        |       
|                                  |                                     | Total interest-bearing liabilities |       |                              | 1,196 |                     |        |         | (9,542  | )    |        |        | (8,346 | ) |       |       | 2,245 |   |        |         | (11,718 | ) |        |        | (9,473 | )
|                                  |                                     |                                    |       |                              |       |                     |        |         |         |      |        |        |        |   |       |       |       |   |        |         |         |   |        |       
|Net change in net interest income |                                     | $                                  | 2,368 |                              |       | $                   | (3,975 | )       |         | $    | (1,607 | )      |        | $ | 2,865 |       |       | $ | (2,685 | )       |         | $ | 180    |       
|                                  |                                     |                                    |       |                              |       |                     |        |         |         |      |        |        |        |   |       |       |       |   |        |         |         |   |        |       



| |                          
| | -------------------------
| | Provision for Loan Losses

The provision for loan losses was
$3.4 million for the year ended December 31, 2003, an
increase of $2.0 million compared to $1.4 million for
the year ended December 31, 2002. The increase in the
provision was necessitated primarily due to a charge-off of
$1.6 million, which required replenishment of the allowance
for loan losses. A large commercial real estate/business loan
borrower of the Company lost a substantial portion of its
business to international competition, causing the borrower to
close a large portion of its manufacturing facilities. An
appraisal of the borrowers real estate showed a
substantial reduction in the value due to the vacated space and
very low potential rental rates. Additional provisions were
recorded due to an increased level of classified loans.

For the year ended December 31, 2002, the
provision for loan losses amounted to $1.4 million,
compared to $820,000 for the year ended December 31, 2001.
The increased provision in 2002 was based on managements
evaluation of the growth and change in composition of the
Companys loan portfolio, existing real estate market
conditions, the level of charge-offs and classified assets.

Total non-performing loans were
$4.7 million, $5.5 million and $1.2 million at
December 31, 2003, 2002 and 2001, respectively. Total
classified assets were $58.1 million, $46.6 million
and $10.1 million at December 31, 2003, 2002 and 2001,
respectively. Although non-performing loans are lower at the
current year end, total classified assets have increased as
several of these borrowers continue making payments, but the
properties or businesses are experiencing some form of stress,
which require classifications needing a higher level of
management attention. Examples of these conditions are delays in
construction, slower than expected sales of residential and
condominium units, lower business demands in certain industries
and deterioration in the occupancy levels and rental rates of
office buildings in the Companys lending area.

The Company recorded charge-offs of
$2.3 million and recoveries of $130,000 during the year
ended December 31, 2003, charge-offs of $1.4 million
and recoveries of $359,000 during the year ended

15



---



##### 



December 31, 2002 and charge-offs of
$234,000 and recoveries of $361,000 during 2001. The allowance
for loan losses as a percentage of total loans was 1.13% at
December 31, 2003, 2002 and 2001. As a percentage of total
non-performing loans, the allowance for loan losses was 296%,
230% and 1,065% at December 31, 2003, 2002 and 2001,
respectively. See also Asset Quality included
elsewhere in this Annual Report for a further discussion.




| |                    
| | -------------------
| | Non-Interest Income

Total non-interest income increased to
$15.3 million for the year ended December 31, 2003,
compared to $14.9 million for the year ended
December 31, 2002. Loan processing and servicing fees were
a negative $1.9 million in the current year, compared to a
negative $4.0 million for the year ended December 31, 2002,
due to a decline in amortization and impairment charges to the
OMSRs in the current year. Amortization and impairment charges
were $4.8 million for the year ended December 31,
2003, compared to $7.0 million for the year ended
December 31, 2002. Rapid serviced loan prepayments in the
declining interest rate environment throughout 2002 and most of
2003 required substantial permanent impairment write-offs and
the maintenance of valuation allowances due to accelerated
pre-payment speed estimates of OMSRs. In the second half of
2003, the Company was able to reverse a substantial portion of
the valuation allowance of the OMSR due to reduced prepayment
speed assumptions caused by rising mortgage interest rates at
year-end. A return to falling market interest rates, which
affect loan prepayments and prepayment speeds, could result in
future additional impairment charges.

For the year ended December 31, 2002, total
non-interest income declined to $14.9 million, compared to
$16.6 million for the year ended December 31, 2001,
due primarily to lower loan processing and servicing fees
resulting from the OMSR impairment charges. Loan processing and
servicing fees were a negative $4.0 million for the year
ended December 31, 2002 compared to a negative $275,000 for
the year ended December 31, 2001. The decline was due to
adjustments (in excess of normal amortization) for the
impairment of OMSRs, which were necessary due to increasing
levels of loan prepayments and utilization of faster prepayment
speed assumption which reduce the value of OMSRs in the
declining interest rate environment throughout most of 2002.

For the year ended December 31, 2003, gain
on sale of loans was $10.5 million, a decrease of
$2.2 million compared to the year ended December 31,
2002. Although total mortgage originations of $1.3 billion
during the year ended December 31, 2003, were higher than
the $1.2 billion for the prior year, fewer mortgage loans
were sold and a greater amount of the current year production
was placed in portfolio in order to replace the high levels of
loan prepayments. Included in the above gain on sale of loans
were gains on sale of manufactured housing loans, which amounted
to $3.5 million for the year ended December 31, 2003,
compared to $4.0 million for the year ended
December 31, 2002. Gain on sale of loans increased by
$2.1 million, to $12.7 million for the year ended
December 31, 2002, compared to the year ended
December 31, 2001. The increased gain on sale of loans
resulted from a continuation of high volumes of one- to
four-family mortgage loan sales, made possible by the volume of
lending activity, especially fixed-rate one- to four-family
mortgages, in the current low interest rate environment. During
the year ended December 31, 2002, gains on sale of
manufactured housing loans declined by $1.2 million, from
$5.2 million for the year ended December 31, 2001, to
$4.0 million for the year ended December 31, 2002.

The lower gain on sales of manufactured housing
loans in the past three years is primarily due to recessionary
conditions in the industry and various factors, which adversely
impacted the manufactured housing and recreational vehicle loan
market. If such market conditions persist, it may continue to
adversely affect the Companys manufactured housing loan
sale activity and lead to further impairment of goodwill
attributable to such operations.

Deposit service fees continue to improve,
increasing to $3.6 million for the year ended
December 31, 2003, compared to $3.0 million in the
year ended December 31, 2002 and $2.5 million in the year
ended December 31, 2001. The increases are primarily due to
increases in fees and higher levels of deposit account services
activity.



| |                     
| | --------------------
| | Non-Interest Expense

Total non-interest expense for the year ended
December 31, 2003, was $40.2 million, compared to
$47.3 million for the prior year. The prior year was higher
primarily due to a $7.0 million goodwill impairment charge.
The goodwill impairment charge resulted primarily from a
valuation assessment of the Companys Forward Financial
operations. Such assessment considered the reduced volume of
loan sales, the

16



---



##### 



recession in the manufactured housing industry
and other factors. Effective January 1, 2002, GAAP requires
that goodwill no longer be amortized, but instead requires
periodic impairment testing as conditions warrant, (but at least
annually) to determine if impairment has occurred. If the level
of manufactured housing loan sales remain at current levels and
the manufactured housing industry recession continues for a
longer period than expected, further goodwill impairment charges
may become necessary.


Total non-interest expense for the year ended
December 31, 2002, increased by $9.1 million compared
to the $38.2 million non-interest expense for the year
ended December 31, 2001. In addition to the goodwill
impairment charge, non-interest expenses for 2002 also included
the cost of settling two lawsuits for a combined cost of
$1.3 million.

Compensation and benefits increased to
$24.3 million, or 1.5% for the year ended December 31,
2003. The increase includes compensation and benefits for the
staff hired as part of the acquisition of branches and increased
defined benefit pension fund expenses. The defined benefit
pension plan (the plan) expense for the current year
was $1.4 million, compared to $530,000 for the year ended
December 31, 2002. Prior to July 1, 2002, the
plans sponsor had been in an over-funded status and had
not required contributions from the Company for over a decade.
These increases were partially offset by a decline in the
Employee Stock Ownership Plan (ESOP) expense, which
was approximately $1.0 million for the year ended
December 31, 2003, compared to approximately
$1.5 million for the prior year. The final ESOP
distribution of unallocated shares was made on December 31,
2003.

The compensation and benefits expense of
$23.9 million for the year ended December 31, 2002,
was $2.2 million higher than the $21.7 million for the
year ended December 31, 2001 due to normal year-over-year
employee expense increases, higher than usual expenses incurred
for loan originations support and the Companys accrual of
the $530,000 for the pension plan during the second half of 2002.

Advertising expense for the year ended
December 31, 2003 was $1.5 million, compared to
$1.1 million for the prior year. The increase was due to
the implementation of a more focused branding program requiring
additional advertising expense.

For the year ended December 31, 2002, other
non-interest expense was $6.9 million compared to
$7.5 million for the year ended December 31, 2001.
This decrease was primarily due to the year 2001 containing
higher outside professional fees (particularly legal fees
incurred in defending the Company against the two lawsuits
settled in 2002) and a variety of other increased expenses.



| |             
| | ------------
| | Income Taxes

Income tax expense for the year ended
December 31,2003 was $4.4 million, for an effective
tax rate of 57.2%, due primarily to the REIT settlement for the
current and retroactive income taxes with the Mass. DOR.
Excluding the effects of the REIT settlement, the effective tax
rate for the year ended December 31, 2003, was 41.7%.
Income tax expense for the year ended December 31, 2002, was
$1.4 million for an effective tax rate of 36.8% compared to
$5.2 million for an effective tax rate of 35.0% for the year
ended December 31, 2001. Although the effective rate for
the year ended December 31, 2002 was lower than the current
year, due to the REIT tax benefit, it was higher than the year
ended December 31, 2001 due primarily to higher
non-deductible ESOP expenses, resulting from the higher market
value of the Companys stock.

Financial Condition



| |                                             
| | --------------------------------------------
| | Overview of Financial Condition
    (Assets)

The Companys total assets at
December 31, 2003, were $1.7 billion, compared to
$1.5 billion at December 31, 2002, an increase of
$169.4 million or 11.1%. Asset growth was primarily
attributable to a $126.7 million increase in loans, net, as
the Company retained a greater portion of its loan production
for portfolio purposes. Additionally, mortgage-backed securities
held to maturity increased by $120.2 million as a portion
of the Companys loan origination was securitized to reduce
risk-weight capital requirements. Total assets at
December 31, 2001, were $1.5 billion.

Cash and Cash Equivalents, and
Investments

Total cash and cash equivalents decreased by
$40.6 million, from a balance of $74.7 million at
December 31, 2002, to $34.0 million at
December 31, 2003. The decrease was primarily due to a
$24.6 million decrease in FHLB overnight and federal funds
sold. Additionally, cash and due from banks

17



---



##### 



was $16.1 million lower at December 31,
2003, compared to the balance at December 31. 2002, due to
lower cash reserve requirements at the Federal Reserve Bank at
the current year-end. Total cash and cash equivalents were
$96.0 million at December 31, 2001 due to heavy cash
infusion from large sales of loans during the latter part of
December 2001.


The following table sets forth certain
information regarding the carrying amount and fair values of the
Companys short-term investments and investment securities
at the dates indicated:

|                                                        |                     |                                                                                    |         |       |         |          |         |       |         |          |         |       |         |  |         |  |         |  |         |  |        |  |         |  |        | 
|------------------------------------------------------- | ------------------- | ---------------------------------------------------------------------------------- | ------- | ----- | ------- | -------- | ------- | ----- | ------- | -------- | ------- | ----- | ------- |  | ------- |  | ------- |  | ------- |  | ------ |  | ------- |  | ------ | 
|                                                        |                     |                                                                                   
|                                                        |                     | At December 31,                                                                   
|                                                        |                     |                                                                                   
|                                                        |                     |                                                                                    |         |       |         |         
|                                                        |                     | 2003                                                                               |         | 2002  |         | 2001    
|                                                        |                     |                                                                                    |         |       |         |         
|                                                        |                     | Carrying                                                                           |         | Fair  |         | Carrying |         | Fair  |         | Carrying |         | Fair 
|                                                        |                     | Amount                                                                             |         | Value |         | Amount   |         | Value |         | Amount   |         | Value
|                                                        |                     |                                                                                    |         |       |         |          |         |       |         |          |         |      
|                                                        |                     |                                                                                   
|                                                        |                     | (In thousands)                                                                    
|Daily federal funds sold and short-term
    investments |                     | $                                                                                  | 1,527   |       |         |          | 1,527   |       |         |          | 26,077  |       |         |  | 26,077  |  |         |  | 48,158  |  |        |  | 48,158  | 
|Investment securities:                                  |                     |                                                                                    |         |       |         |          |         |       |         |          |         |       |         |  |         |  |         |  |         |  |        |  |         | 
|                                                        | Held to maturity:   |                                                                                    |         |       |         |          |         |       |         |          |         |       |         |  |         |  |         |  |         |  |        |  |         |  |       
|                                                        |                     | U.S. Government obligations, federal agency
    obligations, and other obligations |         |       | 2,025   |          |         |       | 2,138   |          |         |       | 2,524   |  |         |  | 2,576   |  |         |  | 554    |  |         |  | 598    | 
|                                                        |                     |                                                                                    |         |       |         |          |         |       |         |          |         |       |         |  |         |  |         |  |         |  |        |  |         | 
|Total held to maturity                                  |                     |                                                                                    | 2,025   |       |         |          | 2,138   |       |         |          | 2,524   |       |         |  | 2,576   |  |         |  | 554     |  |        |  | 598     | 
|                                                        |                     |                                                                                    |         |       |         |          |         |       |         |          |         |       |         |  |         |  |         |  |         |  |        |  |         | 
|                                                        | Available for sale: |                                                                                    |         |       |         |          |         |       |         |          |         |       |         |  |         |  |         |  |         |  |        |  |         |  |       
|                                                        |                     | U.S. Government obligations, federal agency
    obligations, and other obligations |         |       | 27,361  |          |         |       | 27,361  |          |         |       | 35,206  |  |         |  | 35,206  |  |         |  | 25,050 |  |         |  | 25,050 | 
|                                                        |                     | Mortgage-related mutual funds                                                      |         |       | 69,767  |          |         |       | 69,767  |          |         |       | 61,499  |  |         |  | 61,499  |  |         |  | 21,149 |  |         |  | 21,149 | 
|                                                        |                     | Other mutual funds(1)                                                              |         |       | 2,092   |          |         |       | 2,092   |          |         |       | 13,824  |  |         |  | 13,824  |  |         |  | 17,046 |  |         |  | 17,046 | 
|                                                        |                     | Marketable equity securities                                                       |         |       | 3,427   |          |         |       | 3,427   |          |         |       | 2,359   |  |         |  | 2,359   |  |         |  | 13     |  |         |  | 13     | 
|                                                        |                     |                                                                                    |         |       |         |          |         |       |         |          |         |       |         |  |         |  |         |  |         |  |        |  |         | 
|                                                        |                     | Total available for sale                                                           |         |       | 102,647 |          |         |       | 102,647 |          |         |       | 112,888 |  |         |  | 112,888 |  |         |  | 63,258 |  |         |  | 63,258 | 
|                                                        |                     |                                                                                    |         |       |         |          |         |       |         |          |         |       |         |  |         |  |         |  |         |  |        |  |         | 
|Total investment securities                             |                     | $                                                                                  | 106,199 |       |         |          | 106,312 |       |         |          | 141,489 |       |         |  | 141,541 |  |         |  | 111,970 |  |        |  | 112,014 | 
|                                                        |                     |                                                                                    |         |       |         |          |         |       |         |          |         |       |         |  |         |  |         |  |         |  |        |  |         | 



---



|    |                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of securities issued by institutional
    mutual funds, which primarily invest in short-term U.S.
    Government securities and mortgage-related securities.

18



---



##### 



The table below sets forth certain information
regarding the carrying amount, weighted average yields and
contractual maturities of the Companys short-term
investments, debt securities and mortgage-backed securities as
of December 31, 2003.

|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |   |      |      | 
|------------------------------------------------------- | ------------------- | ---------------------------------------------------------------------------------- | ---------------------------------------- | ------------------ | ----- | -------------------- | ---- | ------------------- | ---- | -------- | ----- | -------- | ----- | -------- | ---- | -------- | ---- | -------- | ------ | -------- | ------ | ------ | ---- | - | ---- | ---- | ------- |  | ------ | ------- | ---- | - | ---- | ---- | ------- |  | ------ | ------- | ---- | - | ---- | ---- | 
|                                                        |                     |                                                                                   
|                                                        |                     | At December 31, 2003                                                              
|                                                        |                     |                                                                                   
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                    
|                                                        |                     |                                                                                    |                                          | More than One Year |       | More than Five Years |      |                     |      |         
|                                                        |                     | One Year or Less                                                                   |                                          | to Five Years      |       | to Ten Years         |      | More than Ten Years |      | Total   
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |         
|                                                        |                     |                                                                                    |                                          | Weighted           |       |                      |      | Weighted            |      |          |       | Weighted |       |          |      | Weighted |      |          |        | Weighted
|                                                        |                     | Carrying                                                                           |                                          | Average            |       | Carrying             |      | Average             |      | Carrying |       | Average  |       | Carrying |      | Average  |      | Carrying |        | Average 
|                                                        |                     | Amount                                                                             |                                          | Yield              |       | Amount               |      | Yield               |      | Amount   |       | Yield    |       | Amount   |      | Yield    |      | Amount   |        | Yield   
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |         
|                                                        |                     |                                                                                   
|                                                        |                     | (Dollars in thousands)                                                            
|Daily federal funds sold and short-term
    investments |                     | $                                                                                  | 1,511                                    |                    |       |                      | 0.79 | %                   |      | $        | 16    |          |       |          | 3.28 | %        |      | $        |       |          |        |        |     | % |      | $    |        |  |        |         |     | % |      | $    | 1,527   |  |        |         | 0.82 | %
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |  
|Debt securities:                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |  
|                                                        | Held to maturity:   |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |   |     
|                                                        |                     | U.S. Government obligations, federal agency
    obligations, and other obligations |                                          |                    | 28    |                      |      |                     | 7.35 |          |       |          | 1,997 |          |      |          | 5.80 |          |        |          |       |        |      |   |     |      |         |  |       |         |      |   |     |      |         |  | 2,025  |         |      |   | 5.82 |     
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |  
|                                                        |                     |                                                                                    | Total held to maturity                   |                    |       | 28                   |      |                     |      | 7.35     |       |          |       | 1,997    |      |          |      | 5.80     |        |          |        |       |      |   |      |     |         |  |        |        |      |   |      |     |         |  |        | 2,025   |      |   |      | 5.82 | 
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |  
|                                                        | Available for sale: |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |   |     
|                                                        |                     | U.S. Government obligations, federal agency
    obligations, and other obligations |                                          |                    | 8,967 |                      |      |                     | 3.95 |          |       |          | 3,155 |          |      |          | 4.29 |          |        |          | 5,758  |        |      |   | 3.05 |      |         |  | 9,480  |         |      |   | 3.77 |      |         |  | 27,360 |         |      |   | 3.74 |     
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |  
|                                                        |                     |                                                                                    | Total debt securities available for sale |                    |       | 8,967                |      |                     |      | 3.95     |       |          |       | 3,155    |      |          |      | 4.29     |        |          |        | 5,758  |      |   |      | 3.05 |         |  |        | 9,480   |      |   |      | 3.77 |         |  |        | 27,360  |      |   |      | 3.74 | 
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |  
|Total short-term investments and debt securities        |                     |                                                                                    | 10,506                                   |                    |       |                      | 3.50 |                     |      |          | 5,169 |          |       |          | 4.87 |          |      |          | 5,758  |          |        |        | 3.05 |   |      |      | 9,480   |  |        |         | 3.77 |   |      |      | 30,912  |  |        |         | 3.73 |  
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |  
|Mortgage-backed securities:                             |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |  
|                                                        | Held to maturity:   |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |   |     
|                                                        |                     | GNMA                                                                               |                                          |                    | 3     |                      |      |                     | 8.91 |          |       |          | 374   |          |      |          | 8.22 |          |        |          | 0      |        |      |   |     |      |         |  | 18,807 |         |      |   | 4.75 |      |         |  | 19,184 |         |      |   | 4.82 |     
|                                                        |                     | FNMA                                                                               |                                          |                    |      |                      |      |                     |     |          |       |          |      |          |      |          |     |          |        |          | 19,978 |        |      |   | 3.97 |      |         |  | 9,840  |         |      |   | 4.30 |      |         |  | 29,818 |         |      |   | 4.08 |     
|                                                        |                     | FHLMC                                                                              |                                          |                    |      |                      |      |                     |     |          |       |          |      |          |      |          |     |          |        |          | 19,863 |        |      |   | 4.61 |      |         |  | 76,809 |         |      |   | 4.59 |      |         |  | 96,672 |         |      |   | 4.59 |     
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |  
|                                                        |                     |                                                                                    | Total held to maturity                   |                    |       | 3                    |      |                     |      | 8.91     |       |          |       | 374      |      |          |      | 8.22     |        |          |        | 39,841 |      |   |      | 4.29 |         |  |        | 105,456 |      |   |      | 4.59 |         |  |        | 145,674 |      |   |      | 4.53 | 
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |  
|                                                        | Available for sale: |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |   |     
|                                                        |                     | GNMA                                                                               |                                          |                    |      |                      |      |                     |     |          |       |          |      |          |      |          |     |          |        |          |       |        |      |   |     |      |         |  | 3,493  |         |      |   | 4.59 |      |         |  | 3,493  |         |      |   | 4.59 |     
|                                                        |                     | FNMA                                                                               |                                          |                    |      |                      |      |                     |     |          |       |          |      |          |      |          |     |          |        |          |       |        |      |   |     |      |         |  | 26,687 |         |      |   | 5.13 |      |         |  | 26,687 |         |      |   | 5.13 |     
|                                                        |                     | FHLMC                                                                              |                                          |                    |      |                      |      |                     |     |          |       |          | 467   |          |      |          | 4.33 |          |        |          | 2,897  |        |      |   | 4.89 |      |         |  | 30,168 |         |      |   | 4.84 |      |         |  | 33,532 |         |      |   | 4.83 |     
|                                                        |                     | Privately issued collateralized mortgage
    obligations                           |                                          |                    |      |                      |      |                     |     |          |       |          |      |          |      |          |     |          |        |          |       |        |      |   |     |      |         |  | 20,040 |         |      |   | 4.59 |      |         |  | 20,040 |         |      |   | 4.59 |     
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |  
|                                                        |                     |                                                                                    | Total held for sale                      |                    |       |                     |      |                     |      |         |       |          |       | 467      |      |          |      | 4.33     |        |          |        | 2,897  |      |   |      | 4.89 |         |  |        | 80,388  |      |   |      | 4.86 |         |  |        | 83,752  |      |   |      | 4.86 | 
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |  
|Total mortgage- backed securities                       |                     | $                                                                                  | 3                                        |                    |       |                      | 8.91 | %                   |      | $        | 841   |          |       |          | 6.06 | %        |      | $        | 42,738 |          |        |        | 4.69 | % |      | $    | 185,844 |  |        |         | 4.74 | % |      | $    | 229,426 |  |        |         | 4.65 | %
|                                                        |                     |                                                                                    |                                          |                    |       |                      |      |                     |      |          |       |          |       |          |      |          |      |          |        |          |        |        |      |   |      |      |         |  |        |         |      |   |      |      |         |  |        |         |      |  

19



---



##### 



Mortgage-backed securities available for sale
declined by $30.8 million due to amortization and
pre-payments. Mortgage-backed securities held to maturity
increased by $120.3 million, from a balance of
$25.4 million at December 31, 2002, to a balance of
$145.7 million at December 31, 2003, as a portion of
the Companys loan origination was securitized to reduce
risk-weight capital requirements.

The following table sets forth the Companys
mortgage-backed securities activities for the periods indicated:

|                                                                                   |                                         |                                       |         |         |          |      |         |         |          |   |         |         |         |  
|---------------------------------------------------------------------------------- | --------------------------------------- | ------------------------------------- | ------- | ------- | -------- | ---- | ------- | ------- | -------- | - | ------- | ------- | ------- | -
|                                                                                   |                                         |                                      
|                                                                                   |                                         | For the Year Ended December 31,      
|                                                                                   |                                         |                                      
|                                                                                   |                                         | 2003                                  |         | 2002    |          | 2001
|                                                                                   |                                         |                                       |         |         |          |     
|                                                                                   |                                         |                                      
|                                                                                   |                                         | (In thousands)                       
|Beginning balance                                                                  |                                         | $                                     | 139,944 |         |          |      | 135,744 |         |          |   | 70,655  |        
|                                                                                   | Purchases of mortgage-backed securities |                                       |         | 158,659 |          |      |         | 133,799 |          |   |         | 101,843 |        
|Conversion of real estate loans to
    mortgage-backed securities held to maturity |                                         |                                       | 80,601  |         |          |      |        |         |          |   |        |        
|                                                                                   | Less:                                   |                                       |         |         |          |      |         |         |          |   |         |         |        
|                                                                                   |                                         | Principal repayments                  |         |         | (147,248 | )    |         |         | (130,611 | ) |         |         | (36,544 | )
|                                                                                   |                                         | Change in unrealized (losses) gains   |         |         | (1,478   | )    |         |         | 1,182    |   |         |         | (116    | )
|                                                                                   |                                         | Accretion of premium, net of discount |         |         | (1,052   | )    |         |         | (170     | ) |         |         | (94     | )
|                                                                                   |                                         |                                       |         |         |          |      |         |         |          |   |         |        
|Ending balance                                                                     |                                         | $                                     | 229,426 |         |          |      | 139,944 |         |          |   | 135,744 |        
|                                                                                   |                                         |                                       |         |         |          |      |         |         |          |   |         |        

The following table sets forth certain
information regarding the amortized cost and fair values of the
Companys mortgage-backed securities at the dates indicated.

|                                                                             |                                                          |                 |         |          |  |            |        |                        |   |          |         |            |  |           |         |          |  |            |        |       |   |   |         |        |  |   |         |        |  |  |        |       |   |   |         |        | 
|---------------------------------------------------------------------------- | -------------------------------------------------------- | --------------- | ------- | -------- |  | ---------- | ------ | ---------------------- | - | -------- | ------- | ---------- |  | --------- | ------- | -------- |  | ---------- | ------ | ----- | - | - | ------- | ------ |  | - | ------- | ------ |  |  | ------ | ----- | - | - | ------- | ------ | 
|                                                                             |                                                          |                
|                                                                             |                                                          | At December 31,
|                                                                             |                                                          |                
|                                                                             |                                                          |                 |         |          |  |           
|                                                                             |                                                          | 2003            |         | 2002     |  | 2001      
|                                                                             |                                                          |                 |         |          |  |           
|                                                                             |                                                          | Amortized       |         | Percent  |  |            |        | Amortized              |   | Percent  |         |            |  | Amortized |         | Percent  |  |           
|                                                                             |                                                          | Cost            |         | of Total |  | Fair Value |        | Cost                   |   | of Total |         | Fair Value |  | Cost      |         | of Total |  | Fair Value
|                                                                             |                                                          |                 |         |          |  |            |        |                        |   |          |         |            |  |           |         |          |  |           
|                                                                             |                                                          |                 |         |          |  |            |        |                        |   |          |         |            |  |          
|                                                                             |                                                          |                 |         |          |  |            |        | (Dollars in thousands) |   |          |         |            |  |          
|Mortgage-backed securities and collateralized
    Mortgage obligations:      |                                                          |                 |         |          |  |            |        |                        |   |          |         |            |  |           |         |          |  |            |        |       |   |   |         |        |  |   |         |        |  |  |        |       |   |   |         |       
|Available for sale:                                                          |                                                          |                 |         |          |  |            |        |                        |   |          |         |            |  |           |         |          |  |            |        |       |   |   |         |        |  |   |         |        |  |  |        |       |   |   |         |       
|                                                                             | GNMA                                                     |                 | $       | 3,511    |  |            |        | 1.53                   | % |          | $       | 3,493      |  |           | $       | 5,058    |  |            |        | 3.64  | % |   | $       | 5,101  |  |   | $       | 6,237  |  |  |        | 4.59  | % |   | $       | 6,196  | 
|                                                                             | FNMA                                                     |                 |         | 26,828   |  |            |        | 11.67                  |   |          |         | 26,687     |  |           |         | 28,091   |  |            |        | 20.21 |   |   |         | 28,564 |  |   |         | 11,904 |  |  |        | 8.76  |   |   |         | 11,869 | 
|                                                                             | FHLMC                                                    |                 |         | 33,775   |  |            |        | 14.69                  |   |          |         | 33,532     |  |           |         | 79,424   |  |            |        | 57.15 |   |   |         | 79,870 |  |   |         | 62,952 |  |  |        | 46.30 |   |   |         | 62,634 | 
|                                                                             | Privately issued collateralized mortgage
    obligations |                 |         | 20,150   |  |            |        | 8.76                   |   |          |         | 20,040     |  |           |         | 977      |  |            |        | 0.70  |   |   |         | 980    |  |   |         | 14,046 |  |  |        | 10.33 |   |   |         | 14,223 | 
|                                                                             |                                                          |                 |         |          |  |            |        |                        |   |          |         |            |  |           |         |          |  |            |        |       |   |   |         |        |  |   |         |        |  |  |        |       |   |   |         |       
|Total available for sale                                                     |                                                          |                 | 84,264  |          |  |            | 36.65  |                        |   |          | 83,752  |            |  |           | 113,550 |          |  |            | 81.70  |       |   |   | 114,515 |        |  |   | 95,139  |        |  |  | 69.98  |       |   |   | 94,922  |       
|                                                                             |                                                          |                 |         |          |  |            |        |                        |   |          |         |            |  |           |         |          |  |            |        |       |   |   |         |        |  |   |         |        |  |  |        |       |   |   |         |       
|Held to maturity:                                                            |                                                          |                 |         |          |  |            |        |                        |   |          |         |            |  |           |         |          |  |            |        |       |   |   |         |        |  |   |         |        |  |  |        |       |   |   |         |       
|                                                                             | GNMA                                                     |                 |         | 19,184   |  |            |        | 8.34                   |   |          |         | 19,319     |  |           |         | 4,911    |  |            |        | 3.54  |   |   |         | 5,063  |  |   |         | 7,376  |  |  |        | 5.43  |   |   |         | 7,581  | 
|                                                                             | FNMA                                                     |                 |         | 29,818   |  |            |        | 12.97                  |   |          |         | 29,726     |  |           |         |         |  |            |        |      |   |   |         |       |  |   |         | 45     |  |  |        | 0.03  |   |   |         | 47     | 
|                                                                             | FHLMC                                                    |                 |         | 96,672   |  |            |        | 42.04                  |   |          |         | 95,984     |  |           |         | 20,518   |  |            |        | 14.76 |   |   |         | 21,534 |  |   |         | 33,401 |  |  |        | 24.56 |   |   |         | 33,919 | 
|                                                                             |                                                          |                 |         |          |  |            |        |                        |   |          |         |            |  |           |         |          |  |            |        |       |   |   |         |        |  |   |         |        |  |  |        |       |   |   |         |       
|Total held to maturity                                                       |                                                          |                 | 145,674 |          |  |            | 63.35  |                        |   |          | 145,029 |            |  |           | 25,429  |          |  |            | 18.30  |       |   |   | 26,597  |        |  |   | 40,822  |        |  |  | 30.02  |       |   |   | 41,547  |       
|                                                                             |                                                          |                 |         |          |  |            |        |                        |   |          |         |            |  |           |         |          |  |            |        |       |   |   |         |        |  |   |         |        |  |  |        |       |   |   |         |       
|Total mortgage-backed securities and
    collateralized mortgage obligations |                                                          | $               | 229,937 |          |  |            | 100.00 | %                      |   | $        | 228,781 |            |  | $         | 138,979 |          |  |            | 100.00 | %     |   | $ | 141,112 |        |  | $ | 135,961 |        |  |  | 100.00 | %     |   | $ | 136,469 |       
|                                                                             |                                                          |                 |         |          |  |            |        |                        |   |          |         |            |  |           |         |          |  |            |        |       |   |   |         |        |  |   |         |        |  |  |        |       |   |   |         |       

Loans

The growth in loans, net, was
$126.7 million, which was primarily due to increased
originations of one- to four-family, commercial real estate and
home equity loans. Loans, net, increased from a balance of
$1.1 billion at December 31, 2002, to a balance of
$1.2 billion at December 31, 2003. The growth in the
loans, net, was the result of the Company retaining a greater
portion of its loan originations for portfolio during the
current year.

The Company was able to continue to diversify its
loan portfolio and increased the balances of commercial real
estate, and equity loans.

20



---



##### 



The following table sets forth the composition of
the Companys loan portfolio in dollar amounts and as a
percentage of the portfolio at the dates indicated.

|                                    |                                                        |                        |           |          |           |        |  |          |        |                        |           |          |           |        |  |          |        |        |           |          |           |  |  |      |        |   |           |         |           |  |  |      |        |   |           |         |           |  |  |      |        |  
|----------------------------------- | ------------------------------------------------------ | ---------------------- | --------- | -------- | --------- | ------ |  | -------- | ------ | ---------------------- | --------- | -------- | --------- | ------ |  | -------- | ------ | ------ | --------- | -------- | --------- |  |  | ---- | ------ | - | --------- | ------- | --------- |  |  | ---- | ------ | - | --------- | ------- | --------- |  |  | ---- | ------ | -
|                                    |                                                        |                       
|                                    |                                                        | At December 31,       
|                                    |                                                        |                       
|                                    |                                                        |                        |           |          |           |        |  |          |        |                       
|                                    |                                                        | 2003                   |           | 2002     |           | 2001   |  | 2000     |        | 1999                  
|                                    |                                                        |                        |           |          |           |        |  |          |        |                       
|                                    |                                                        |                        |           | Percent  |           |        |  | Percent  |        |                        |           | Percent  |           |        |  | Percent  |        |        |           | Percent 
|                                    |                                                        | Amount                 |           | of Total |           | Amount |  | of Total |        | Amount                 |           | of Total |           | Amount |  | of Total |        | Amount |           | of Total
|                                    |                                                        |                        |           |          |           |        |  |          |        |                        |           |          |           |        |  |          |        |        |           |         
|                                    |                                                        |                        |           |          |           |        |  |          |        |                        |           |          |           |        |  |          |        |       
|                                    |                                                        |                        |           |          |           |        |  |          |        | (Dollars in thousands) |           |          |           |        |  |          |        |       
|Mortgage loans:                     |                                                        |                        |           |          |           |        |  |          |        |                        |           |          |           |        |  |          |        |        |           |          |           |  |  |      |        |   |           |         |           |  |  |      |        |   |           |         |           |  |  |     
|                                    | Residential:                                           |                        |           |          |           |        |  |          |        |                        |           |          |           |        |  |          |        |        |           |          |           |  |  |      |        |   |           |         |           |  |  |      |        |   |           |         |           |  |  |      |       
|                                    |                                                        | One-to four- family(1) |           | $        | 839,935   |        |  |          | 67.13  | %                      |           | $        | 761,715   |        |  |          | 67.02  | %      |           | $        | 787,267   |  |  |      | 70.30  | % |           | $       | 799,078   |  |  |      | 73.16  | % |           | $       | 846,739   |  |  |      | 77.85  | %
|                                    |                                                        | Multi-family           |           |          | 20,044    |        |  |          | 1.60   |                        |           |          | 21,056    |        |  |          | 1.85   |        |           |          | 25,904    |  |  |      | 2.31   |   |           |         | 19,447    |  |  |      | 1.78   |   |           |         | 22,017    |  |  |      | 2.02   |  
|                                    | Commercial real estate                                 |                        |           | 123,544  |           |        |  | 9.87     |        |                        |           | 96,526   |           |        |  | 8.49     |        |        |           | 107,767  |           |  |  | 9.62 |        |   |           | 89,371  |           |  |  | 8.18 |        |   |           | 75,999  |           |  |  | 6.99 |       
|                                    | Construction and land                                  |                        |           | 116,427  |           |        |  | 9.30     |        |                        |           | 124,071  |           |        |  | 10.92    |        |        |           | 99,337   |           |  |  | 8.87 |        |   |           | 92,561  |           |  |  | 8.48 |        |   |           | 77,079  |           |  |  | 7.09 |       
|                                    | Non-mortgage loans:                                    |                        |           |          |           |        |  |          |        |                        |           |          |           |        |  |          |        |        |           |          |           |  |  |      |        |   |           |         |           |  |  |      |        |   |           |         |           |  |  |      |       
|                                    | Home equity and improvement                            |                        |           | 120,205  |           |        |  | 9.61     |        |                        |           | 94,855   |           |        |  | 8.34     |        |        |           | 66,539   |           |  |  | 5.94 |        |   |           | 57,571  |           |  |  | 5.27 |        |   |           | 43,721  |           |  |  | 4.02 |       
|                                    | Business                                               |                        |           | 26,582   |           |        |  | 2.12     |        |                        |           | 32,792   |           |        |  | 2.88     |        |        |           | 28,103   |           |  |  | 2.51 |        |   |           | 26,525  |           |  |  | 2.43 |        |   |           | 17,815  |           |  |  | 1.64 |       
|                                    | Other loans(2)                                         |                        |           | 4,597    |           |        |  | 0.37     |        |                        |           | 5,685    |           |        |  | .50      |        |        |           | 5,061    |           |  |  | 0.45 |        |   |           | 7,593   |           |  |  | 0.70 |        |   |           | 4,231   |           |  |  | 0.39 |       
|                                    |                                                        |                        |           |          |           |        |  |          |        |                        |           |          |           |        |  |          |        |        |           |          |           |  |  |      |        |   |           |         |           |  |  |      |        |   |           |         |           |  |  |     
|                                    |                                                        | Total loans            |           |          | 1,251,334 |        |  |          | 100.00 | %                      |           |          | 1,136,700 |        |  |          | 100.00 | %      |           |          | 1,119,978 |  |  |      | 100.00 | % |           |         | 1,092,146 |  |  |      | 100.00 | % |           |         | 1,087,601 |  |  |      | 100.00 | %
|                                    |                                                        |                        |           |          |           |        |  |          |        |                        |           |          |           |        |  |          |        |        |           |          |           |  |  |      |        |   |           |         |           |  |  |      |        |   |           |         |           |  |  |     
|Less:                               |                                                        |                        |           |          |           |        |  |          |        |                        |           |          |           |        |  |          |        |        |           |          |           |  |  |      |        |   |           |         |           |  |  |      |        |   |           |         |           |  |  |     
|                                    | Allowance for loan losses                              |                        |           | (13,874  | )         |        |  |          |        |                        |           | (12,656  | )         |        |  |          |        |        |           | (12,328  | )         |  |  |      |        |   |           | (11,381 | )         |  |  |      |        |   |           | (10,654 | )         |  |  |      |       
|                                    | Construction loans in process                          |                        |           | (33,125  | )         |        |  |          |        |                        |           | (24,832  | )         |        |  |          |        |        |           | (30,264  | )         |  |  |      |        |   |           | (33,869 | )         |  |  |      |        |   |           | (30,372 | )         |  |  |      |       
|                                    | Net unearned premium (discount) on loans
    purchased |                        |           | 25       |           |        |  |          |        |                        |           | 36       |           |        |  |          |        |        |           | 48       |           |  |  |      |        |   |           | (10     | )         |  |  |      |        |   |           | (7      | )         |  |  |      |       
|                                    | Mark to market of derivative instruments               |                        |           | (38      | )         |        |  |          |        |                        |           |         |           |        |  |          |        |        |           |         |           |  |  |      |        |   |           |        |           |  |  |      |        |   |           |        |           |  |  |      |       
|                                    | Deferred loan origination costs                        |                        |           | 6,448    |           |        |  |          |        |                        |           | 3,722    |           |        |  |          |        |        |           | 2,976    |           |  |  |      |        |   |           | 2,365   |           |  |  |      |        |   |           | 2,200   |           |  |  |      |       
|                                    |                                                        |                        |           |          |           |        |  |          |        |                        |           |          |           |        |  |          |        |        |           |          |           |  |  |      |        |   |           |         |           |  |  |      |        |   |           |         |           |  |  |     
|Loans, net, and loans held for sale |                                                        | $                      | 1,210,770 |          |           |        |  |          |        | $                      | 1,102,970 |          |           |        |  |          |        | $      | 1,080,410 |          |           |  |  |      |        | $ | 1,049,251 |         |           |  |  |      |        | $ | 1,048,768 |         |           |  |  |     
|                                    |                                                        |                        |           |          |           |        |  |          |        |                        |           |          |           |        |  |          |        |        |           |          |           |  |  |      |        |   |           |         |           |  |  |      |        |   |           |         |           |  |  |     



---



|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes mortgage loans held for sale of
    $12.1 million, $30.2 million, $23.7 million,
    $11.0 million and $16.2 million at December 31,
    2003, 2002, 2001, 2000 and 1999, respectively.
|   
|(2) | Includes consumer loans held for sale of
    $640,000, $1.5 million, $944,000 and $1.8 million at
    December 31, 2003, 2002, 2001 and 2000.                                                   

21



---



##### 



Loan Maturity.The
following table shows certain information at December 31, 2003
regarding the dollar amount of loans maturing in the
Companys portfolio based on their contractual terms to
maturity. The table does not include the effect of prepayments
or scheduled principal amortization.

|             |                                     |                                     |       |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |         |           |   |         |  
|------------ | ----------------------------------- | ----------------------------------- | ----- | --------------------------------------------------------- | ------- | ----------- |  | ------------ | ------ | ----- |  | ------ | ------- |  |  | ------- | ------- |  |  | ------- | ------- |  |  | ------- | --------- | - | ------- | -
|             |                                     |                                    
|             |                                     | At December 31, 2003               
|             |                                     |                                    
|             |                                     | One- to                             |       |                                                          
|             |                                     | Four-                               |       | Multi-                                                    |         | Commercial  |  | Construction |        | Other |  | Total 
|             |                                     | Family                              |       | Family                                                    |         | Real Estate |  | and Land     |        | Loans |  | Loans 
|             |                                     |                                     |       |                                                           |         |             |  |              |        |       |  |       
|             |                                     |                                    
|             |                                     | (In thousands)                     
|Amounts due: |                                     |                                     |       |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |        
|             | One year or less                    |                                     | $     | 280                                                       |         |             |  |             |        |       |  | 140    |         |  |  | 107,325 |         |  |  | 5,027   |         |  |  | 112,772 |          
|             |                                     |                                     |       |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |        
|             | After one year:                     |                                     |       |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |         |          
|             | More than one year to three years   |                                     |       | 1,204                                                     |         |             |  | 12           |        |       |  | 1,971  |         |  |  | 8,974   |         |  |  | 2,823   |         |  |  | 14,984  |          
|             | More than three years to five years |                                     |       | 7,199                                                     |         |             |  | 501          |        |       |  | 15,379 |         |  |  |        |         |  |  | 11,429  |         |  |  | 34,508  |          
|             | More than five years to 10 years    |                                     |       | 70,683                                                    |         |             |  | 1,211        |        |       |  | 7,216  |         |  |  |        |         |  |  | 124,497 |         |  |  | 203,607 |          
|             | More than 10 years to 20 years      |                                     |       | 75,585                                                    |         |             |  | 6,010        |        |       |  | 33,714 |         |  |  |        |         |  |  | 5,342   |         |  |  | 120,651 |          
|             | More than 20 years                  |                                     |       | 684,984                                                   |         |             |  | 12,310       |        |       |  | 65,124 |         |  |  | 128     |         |  |  | 2,266   |         |  |  | 764,812 |          
|             |                                     |                                     |       |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |        
|             |                                     | Total due after one year            |       |                                                           | 839,655 |             |  |              | 20,044 |       |  |        | 123,404 |  |  |         | 9,102   |  |  |         | 146,357 |  |  |         | 1,138,562 |  
|             |                                     |                                     |       |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |        
|             |                                     | Total amount due                    |       | $                                                         | 839,935 |             |  |              | 20,044 |       |  |        | 123,544 |  |  |         | 116,427 |  |  |         | 151,384 |  |  |         | 1,251,334 |  
|             |                                     |                                     |       |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |        
|             |                                     |                                     | Less: |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |         |           |   |        
|             |                                     |                                     |       | Allowance for loan losses                                 |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |         |           |   | (13,874 | )
|             |                                     |                                     |       | Construction loans in process                             |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |         |           |   | (33,125 | )
|             |                                     |                                     |       | Net unearned premium on loans purchased                   |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |         |           |   | 25      |  
|             |                                     |                                     |       | Fair value adjustment on mortgage banking
    derivatives |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |         |           |   | (38     | )
|             |                                     |                                     |       | Deferred loan origination costs                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |         |           |   | 6,448   |  
|             |                                     |                                     |       |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |        
|             |                                     | Loans, net, and loans held for sale |       |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |         | 1,210,770 |  
|             |                                     | Loans held for sale                 |       |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |         | (12,751   | )
|             |                                     |                                     |       |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |        
|             |                                     | Loans, net                          |       |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  | $       | 1,198,019 |  
|             |                                     |                                     |       |                                                           |         |             |  |              |        |       |  |        |         |  |  |         |         |  |  |         |         |  |  |        

The following table sets forth, at
December 31, 2003, the dollar amount of loans contractually
due after December 31, 2004, and whether such loans have
fixed interest rates or adjustable interest rates.

|                       |                     |                             |        |            |         |       |         |         |         |  |         |         |           | 
|---------------------- | ------------------- | --------------------------- | ------ | ---------- | ------- | ----- | ------- | ------- | ------- |  | ------- | ------- | --------- | 
|                       |                     |                            
|                       |                     | Due After December 31, 2004
|                       |                     |                            
|                       |                     | Fixed                       |        | Adjustable |         | Total
|                       |                     |                             |        |            |         |      
|                       |                     |                            
|                       |                     | (In thousands)             
|Residential:           |                     |                             |        |            |         |       |         |         |         |  |         |        
|                       | One- to four-family |                             | $      | 201,417    |         |       |         | 638,238 |         |  |         | 839,655 |          
|                       | Multi-family        |                             |        | 653        |         |       |         | 19,391  |         |  |         | 20,044  |          
|Commercial real estate |                     |                             | 18,107 |            |         |       | 105,297 |         |         |  | 123,404 |        
|Construction and land  |                     |                             | 458    |            |         |       | 8,644   |         |         |  | 9,102   |        
|Other loans            |                     |                             | 4,730  |            |         |       | 141,627 |         |         |  | 146,357 |        
|                       |                     |                             |        |            |         |       |         |         |         |  |         |        
|                       |                     | Total loans                 |        | $          | 225,365 |       |         |         | 913,197 |  |         |         | 1,138,562 | 
|                       |                     |                             |        |            |         |       |         |         |         |  |         |        

The Company originated $1.3 billion in
mortgage loans during the year ended December 31, 2003, and
sold approximately $651 million of mortgage loans. For the
year ended December 31, 2002, the

22



---



##### 



Company originated $1.2 billion in mortgage
loans and sold approximately $703 million in mortgage
loans. Total loan originations were $1.6 billion for the
year ended December 31, 2003, compared to $1.4 billion
for the prior year. The increase is reflective of record volumes
in the industry due to historic low mortgage interest rates in
2003.


The following table sets forth the Companys
loan originations, purchases, sales and principal repayments for
the periods indicated:

|                  |                                                           |                          |           |           |           |      |           |           |           |  |           |           |           | 
|----------------- | --------------------------------------------------------- | ------------------------ | --------- | --------- | --------- | ---- | --------- | --------- | --------- |  | --------- | --------- | --------- | 
|                  |                                                           |                         
|                  |                                                           | Years Ended December 31,
|                  |                                                           |                         
|                  |                                                           | 2003                     |           | 2002      |           | 2001
|                  |                                                           |                          |           |           |           |     
|                  |                                                           |                         
|                  |                                                           | (In thousands)          
|Net loans:        |                                                           |                          |           |           |           |      |           |           |           |  |           |          
|Beginning balance |                                                           | $                        | 1,071,356 |           |           |      | 1,055,798 |           |           |  | 1,036,435 |          
|Loans originated: |                                                           |                          |           |           |           |      |           |           |           |  |           |          
|                  | One- to four-family                                       |                          |           | 1,262,485 |           |      |           | 1,073,833 |           |  |           | 841,133   |          
|                  | Multi-family                                              |                          |           | 1,642     |           |      |           | 900       |           |  |           |          |          
|                  | Commercial real estate                                    |                          |           | 26,458    |           |      |           | 64,054    |           |  |           | 35,333    |          
|                  | Construction and land                                     |                          |           | 33,363    |           |      |           | 66,971    |           |  |           | 62,726    |          
|                  | Equity line of credit drawn                               |                          |           | 96,989    |           |      |           | 89,609    |           |  |           | 56,511    |          
|                  | Business line of credit drawn                             |                          |           | 87,275    |           |      |           | 94,222    |           |  |           | 82,206    |          
|                  | Manufactured housing, recreational vehicles and
    boats |                          |           | 40,041    |           |      |           | 47,184    |           |  |           | 60,530    |          
|                  | Other(1)                                                  |                          |           | 1,924     |           |      |           | 8,312     |           |  |           | 9,341     |          
|                  |                                                           |                          |           |           |           |      |           |           |           |  |           |          
|                  | Total loans originated                                    |                          |           | 1,550,177 |           |      |           | 1,445,085 |           |  |           | 1,147,780 |          
|                  | Loans purchased(2)                                        |                          |           | 11,597    |           |      |           | 16,232    |           |  |           | 25,129    |          
|                  |                                                           |                          |           |           |           |      |           |           |           |  |           |          
|                  |                                                           | Total                    |           |           | 2,633,130 |      |           |           | 2,517,115 |  |           |           | 2,209,344 | 
|Less:             |                                                           |                          |           |           |           |      |           |           |           |  |           |          
|                  | Principal repayments and other, net                       |                          |           | (694,984  | )         |      |           | (661,043  | )         |  |           | (548,547  | )        
|                  | Loan (charge-offs) recoveries, net                        |                          |           | (2,132    | )         |      |           | (1,022    | )         |  |           | 127       |          
|                  | Sale of loans                                             |                          |           | (720,959  | )         |      |           | (750,988  | )         |  |           | (580,514  | )        
|                  | Transfer of mortgage loans to real estate owned           |                          |           | (4,285    | )         |      |           | (1,092    | )         |  |           |          |          
|                  |                                                           |                          |           |           |           |      |           |           |           |  |           |          
|                  | Loans, net and loans held for sale                        |                          |           | 1,210,770 |           |      |           | 1,102,970 |           |  |           | 1,080,410 |          
|                  | Loans held for sale                                       |                          |           | (12,751   | )         |      |           | (31,614   | )         |  |           | (24,612   | )        
|                  |                                                           |                          |           |           |           |      |           |           |           |  |           |          
|Loans, net        |                                                           | $                        | 1,198,019 |           |           |      | 1,071,356 |           |           |  | 1,055,798 |          
|                  |                                                           |                          |           |           |           |      |           |           |           |  |           |          



---



|    |                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Other loans primarily consist of business loans
    and other consumer loans.                                                                                                                                                                                                                                                                   
|   
|(2) | Includes loans purchased from correspondent
    financial institutions which are underwritten pursuant to the
    Companys policies and closed in the name of the financial
    institution but immediately purchased by BostonFed for its
    mortgage portfolio, mortgage banking activities, or for
    Community Reinvestment Act purposes.

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 that are characterized as impaired.
Accordingly, loans categorized as impaired may include
commercial real estate, multi-family, business loans and
restructured loans as well as other identified loans.
Restructured loans are impaired loans where one or more of the
original contract terms have been modified in a concession the
Company would not otherwise consider but for economic or other
reasons pertaining to the debtors difficulties. At
December 31, 2003, non-performing loans totaled
$4.7 million and impaired loans totaled $3.9 million,
consisting of commercial real estate loans and business loans. A
loan may be impaired, restructured and non-performing at the
same time. It is the policy of the Company to generally cease
accruing interest on loans 90 days or more past due and
charging off all accrued interest. For the years ended
December 31, 2003, 2002 and 2001, the amount of additional
interest income that would have been recognized on
non-performing loans, if such loans had continued to perform in
accordance with their contractual terms, was $271,000, $172,000
and $32,000,

23



---



##### 



respectively. For the same periods, the
difference between the amount of interest income which would
have been recognized on impaired loans if such loans were
performing in accordance with their regular terms and actual
amounts recognized was $322,000, $60,000 and $0, respectively.


|                                                                       |                          |                             |       |       |       |      |        |       |       |      |         |     |       |  |         |     |       |  |         |    |       | 
|---------------------------------------------------------------------- | ------------------------ | --------------------------- | ----- | ----- | ----- | ---- | ------ | ----- | ----- | ---- | ------- | --- | ----- |  | ------- | --- | ----- |  | ------- | -- | ----- | 
|                                                                       |                          |                            
|                                                                       |                          | At December 31,            
|                                                                       |                          |                            
|                                                                       |                          | 2003                        |       | 2002  |       | 2001 |        | 2000  |       | 1999
|                                                                       |                          |                             |       |       |       |      |        |       |       |     
|                                                                       |                          |                            
|                                                                       |                          | (Dollars in thousands)     
|Non-accrual loans:                                                     |                          |                             |       |       |       |      |        |       |       |      |         |     |       |  |         |     |       |  |         |   
|                                                                       | Residential real estate: |                             |       |       |       |      |        |       |       |      |         |     |       |  |         |     |       |  |         |    |      
|                                                                       |                          | One- to four-family         |       | $     | 923   |      |        |       | 2,397 |      |         |     | 983   |  |         |     | 418   |  |         |    | 721   | 
|                                                                       | Commercial real estate   |                             |       | 2,346 |       |      |        |      |       |      |         |    |       |  |         |    |       |  |         | 25 |      
|                                                                       | Other loans              |                             |       | 1,419 |       |      |        | 3,100 |       |      |         | 175 |       |  |         | 538 |       |  |         |   |      
|                                                                       |                          |                             |       |       |       |      |        |       |       |      |         |     |       |  |         |     |       |  |         |   
|                                                                       |                          | Total                       |       |       | 4,688 |      |        |       | 5,497 |      |         |     | 1,158 |  |         |     | 956   |  |         |    | 746   | 
|Real estate owned and other repossessed assets,
    net(1)             |                          |                             | 1,782 |       |       |      | 1,026  |       |       |      | 31      |     |       |  | 145     |     |       |  | 376     |   
|                                                                       |                          |                             |       |       |       |      |        |       |       |      |         |     |       |  |         |     |       |  |         |   
|                                                                       |                          | Total non-performing assets |       |       | 6,470 |      |        |       | 6,523 |      |         |     | 1,189 |  |         |     | 1,101 |  |         |    | 1,122 | 
|Restructured loans                                                     |                          |                             | 195   |       |       |      | 5,318  |       |       |      | 203     |     |       |  | 206     |     |       |  | 210     |   
|                                                                       |                          |                             |       |       |       |      |        |       |       |      |         |     |       |  |         |     |       |  |         |   
|Total risk elements                                                    |                          | $                           | 6,665 |       |       |      | 11,841 |       |       |      | 1,392   |     |       |  | 1,307   |     |       |  | 1,332   |   
|                                                                       |                          |                             |       |       |       |      |        |       |       |      |         |     |       |  |         |     |       |  |         |   
|Allowance for loan losses as a percent of loans(2)                     |                          |                             | 1.13  | %     |       |      | 1.13   |       |       |      | 1.13    |     |       |  | 1.07    |     |       |  | 1.01    |   
|Allowance for loan losses as a percent of non-
    performing loans(3) |                          |                             | 296.0 |       |       |      | 230.2  |       |       |      | 1,064.6 |     |       |  | 1,190.5 |     |       |  | 1,428.2 |   
|Non-performing loans as a percent of loans(2)(3)                       |                          |                             | 0.38  |       |       |      | 0.49   |       |       |      | 0.11    |     |       |  | 0.09    |     |       |  | 0.07    |   
|Non-performing assets as a percent of total
    assets(4)              |                          |                             | 0.38  |       |       |      | 0.43   |       |       |      | 0.08    |     |       |  | 0.08    |     |       |  | 0.09    |   



---



|    |                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Real estate owned and other repossessed assets
    are shown net of related valuation allowances.                                                                                                                       
|   
|(2) | Loans include loans, net, and loans held for
    sale, excluding allowance for loan losses.                                                                                                                             
|   
|(3) | Non-performing loans consist of all 90 days
    or more past due and other loans, which have been identified by
    BostonFed as presenting uncertainty with respect to the
    collectibility of interest or principal.
|   
|(4) | Non-performing assets consist of non-performing
    loans, real estate owned and other repossessed assets.                                                                                                              

The following table sets forth delinquencies in
the Companys loan portfolio as of the dates indicated:

|                                                            |                     |                        |   |                      |   |            |      |                 |       |          |   |           |   |          |       |           |       |  |   |    |    |  |       |       |       |  |   |    |    |  |       |       |       | 
|----------------------------------------------------------- | ------------------- | ---------------------- | - | -------------------- | - | ---------- | ---- | --------------- | ----- | -------- | - | --------- | - | -------- | ----- | --------- | ----- |  | - | -- | -- |  | ----- | ----- | ----- |  | - | -- | -- |  | ----- | ----- | ----- | 
|                                                            |                     |                        |   |                     
|                                                            |                     | At December 31, 2003   |   | At December 31, 2002
|                                                            |                     |                        |   |                     
|                                                            |                     |                        |   |                      |   |            |      |                
|                                                            |                     | 60-89 Days             |   | 90 Days or More      |   | 60-89 Days |      | 90 Days or More
|                                                            |                     |                        |   |                      |   |            |      |                
|                                                            |                     |                        |   | Principal            |   |            |      | Principal       |       |          |   | Principal |   |          |       | Principal
|                                                            |                     | Number                 |   | Balance              |   | Number     |      | Balance         |       | Number   |   | Balance   |   | Number   |       | Balance  
|                                                            |                     | of Loans               |   | of Loans             |   | of Loans   |      | of Loans        |       | of Loans |   | of Loans  |   | of Loans |       | of Loans 
|                                                            |                     |                        |   |                      |   |            |      |                 |       |          |   |           |   |          |       |          
|                                                            |                     |                       
|                                                            |                     | (Dollars in thousands)
|Residential:                                                |                     |                        |   |                      |   |            |      |                 |       |          |   |           |   |          |       |           |       |  |   |    |    |  |       |       |       |  |   |    |    |  |       |      
|                                                            | One- to four-family |                        |   | 5                    |   |            | $    | 864             |       |          |   | 4         |   |          | $     | 923       |       |  |   | 11 |    |  | $     | 1,321 |       |  |   | 11 |    |  | $     | 2,397 |      
|Commercial real estate                                      |                     |                        | 1 |                      |   |            | 446  |                 |       |          | 1 |           |   |          | 2,346 |           |       |  | 1 |    |    |  | 1,812 |       |       |  |  |    |    |  |      |      
|Construction and land                                       |                     |                        |  |                      |   |            |     |                 |       |          |  |           |   |          |      |           |       |  |  |    |    |  |      |       |       |  | 2 |    |    |  | 2,165 |      
|Other loans                                                 |                     |                        | 1 |                      |   |            | 400  |                 |       |          | 4 |           |   |          | 1,419 |           |       |  | 1 |    |    |  | 27    |       |       |  | 2 |    |    |  | 935   |      
|                                                            |                     |                        |   |                      |   |            |      |                 |       |          |   |           |   |          |       |           |       |  |   |    |    |  |       |       |       |  |   |    |    |  |       |      
|                                                            |                     | Total                  |   |                      | 7 |            |      | $               | 1,710 |          |   |           | 9 |          |       | $         | 4,688 |  |   |    | 13 |  |       | $     | 3,160 |  |   |    | 15 |  |       | $     | 5,497 | 
|                                                            |                     |                        |   |                      |   |            |      |                 |       |          |   |           |   |          |       |           |       |  |   |    |    |  |       |       |       |  |   |    |    |  |       |      
|Delinquent loans to loans, net, and loans held
    for sale |                     |                        |   |                      |   |            | 0.14 | %               |       |          |   |           |   |          | 0.39  |           |       |  |   |    |    |  | 0.29  |       |       |  |   |    |    |  | 0.49  |      

24



---



##### 



|                                                            |                     |                        |    |                 |    |          |       |           |       |  |   |   |   |  |      |     |       | 
|----------------------------------------------------------- | ------------------- | ---------------------- | -- | --------------- | -- | -------- | ----- | --------- | ----- |  | - | - | - |  | ---- | --- | ----- | 
|                                                            |                     |                       
|                                                            |                     | At December 31, 2001  
|                                                            |                     |                       
|                                                            |                     |                        |    |                
|                                                            |                     | 60-89 Days             |    | 90 Days or More
|                                                            |                     |                        |    |                
|                                                            |                     |                        |    | Principal       |    |          |       | Principal
|                                                            |                     | Number                 |    | Balance         |    | Number   |       | Balance  
|                                                            |                     | of Loans               |    | of Loans        |    | of Loans |       | of Loans 
|                                                            |                     |                        |    |                 |    |          |       |          
|                                                            |                     |                       
|                                                            |                     | (Dollars in thousands)
|Residential:                                                |                     |                        |    |                 |    |          |       |           |       |  |   |   |   |  |      |    
|                                                            | One- to four-family |                        |    | 28              |    |          | $     | 3,726     |       |  |   | 6 |   |  | $    | 983 |      
|Commercial real estate                                      |                     |                        | 2  |                 |    |          | 207   |           |       |  |  |   |   |  |     |    
|Construction and land                                       |                     |                        | 4  |                 |    |          | 4,328 |           |       |  |  |   |   |  |     |    
|Other loans                                                 |                     |                        | 24 |                 |    |          | 454   |           |       |  | 3 |   |   |  | 175  |    
|                                                            |                     |                        |    |                 |    |          |       |           |       |  |   |   |   |  |      |    
|                                                            |                     | Total                  |    |                 | 58 |          |       | $         | 8,715 |  |   |   | 9 |  |      | $   | 1,158 | 
|                                                            |                     |                        |    |                 |    |          |       |           |       |  |   |   |   |  |      |    
|Delinquent loans to loans, net, and loans held
    for sale |                     |                        |    |                 |    |          | 0.81  | %         |       |  |   |   |   |  | 0.11 | %  

All of the impaired loans have been measured
using the discounted cash flow method or the fair value of the
collateral method if the loan is collateral dependent. During
the year ended December 31, 2003, the average recorded
value of impaired loans was $7.5 million; $73,000 of
interest income was recognized and $344,000 of interest income
would have been recognized under original terms. During the year
ended December 31, 2002, the average recorded value of
impaired loans was $4.3 million; $720,000 of interest
income was recognized and $840,000 of interest income would have
been recognized under original terms. In the year ended
December 31, 2001, the interest recognized on impaired
loans was the contractual amount. The composition of impaired
loans by type is shown below:

|                |                        |                |   |       |  |      |  |       |  |  |  |     | 
|--------------- | ---------------------- | -------------- | - | ----- |  | ---- |  | ----- |  |  |  | --- | 
|                |                        |               
|                |                        | December 31,  
|                |                        |               
|                |                        | 2003           |   | 2002  |  | 2001
|                |                        |                |   |       |  |     
|                |                        |               
|                |                        | (In thousands)
|Impaired loans: |                        |                |   |       |  |      |  |       |  |  |  |    
|                | Business               |                | $ | 1,396 |  |      |  | 2,063 |  |  |  |    | 
|                | Construction           |                |   |      |  |      |  | 2,165 |  |  |  |    | 
|                | Commercial real estate |                |   | 2,541 |  |      |  | 4,163 |  |  |  | 216 | 
|                |                        |                |   |       |  |      |  |       |  |  |  |    
|                | Total impaired loans   |                | $ | 3,937 |  |      |  | 8,391 |  |  |  | 216 | 
|                |                        |                |   |       |  |      |  |       |  |  |  |    

The Company maintains an allowance for losses
that are inherent in the Companys loan portfolio. The
allowance for loan losses is established through a provision for
loan losses charged to operations. Loan losses are charged
against the allowance when the Company determines that the
collectibility of the loan principal is unlikely. Recoveries on
loans previously charged off are credited to the allowance. At
December 31, 2003, the Company had established $455,000 as
specific loss reserves (after charge-offs of $1.6 million)
within the allowance for loan losses, for certain impaired
loans. At December 31, 2002, the Company had established
$225,000 as specific loss reserves (after charge-offs of
$925,000) within the allowance for loan losses, for certain
impaired loans. There were no specific loss reserves in the
allowance for loan losses at December 31, 2001. Specific
loss reserves are allocated to individual loans when such loans
are deemed impaired and when the amount of a probable loss can
be estimated on the basis of (i) the fair value of
collateral, (ii) the present value of anticipated future cash
follows or (iii) the loans observable fair market
price.

The Company believes the allowance is adequate to
absorb probable loan losses. The Companys methodology to
estimate loss exposure inherent in the portfolio includes an
analysis of individual loans deemed to be impaired, reserve
allocations for various loan types based on risk ratings
assigned to real estate related commercial, construction,
multi-family and business loans and loan payment status or loss
experience. An unallocated allowance is maintained based on the
Companys assessment of many factors including 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 based on their judgments about
information available to them at the time of their examination.

While the Company 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.

25



---



##### 



The provision for loan losses for the years ended
December 31, 2003, 2002 and 2001 were $3.4 million,
$1.4 million and $820,000, respectively. The increases in
the provision for the years ended December 31, 2003 and
2002, were due to higher charge-off levels, increased levels of
non-performing loans and increases in higher risk commercial
real estate, construction and land, and business lending. During
the year ended December 31, 2003, there were recoveries of
$130,000 credited to and charge-offs of 2.3 million taken
against the allowance. During the year ended December 31,
2002, recoveries of $359,000 were credited to, and charge-offs
of $1.4 million taken against this allowance. The
comparable amounts for the year ended December 31, 2001,
were $361,000 in recoveries and $234,000 in charge-offs. As of
December 31, 2003, 2002 and 2001, the Companys
allowance for loan losses was 1.13% of total loans. The Company
believes the current coverage ratio is reasonable and prudent,
considering the higher levels of non one- to four-family loans.
The Company had non-performing loans of $4.7 million and
$5.5 million at December 31, 2003 and 2002,
respectively. The Company will continue to monitor and modify
its allowance for loan losses as conditions dictate. While the
Company believes its 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 the Company 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.

|                                                                                                               |                    |                                        |        |       |       |      |        |      |       |      |        |     |     |  |        |     |     |  |        |    |    | 
|-------------------------------------------------------------------------------------------------------------- | ------------------ | -------------------------------------- | ------ | ----- | ----- | ---- | ------ | ---- | ----- | ---- | ------ | --- | --- |  | ------ | --- | --- |  | ------ | -- | -- | 
|                                                                                                               |                    |                                       
|                                                                                                               |                    | At or For the Years Ended December 31,
|                                                                                                               |                    |                                       
|                                                                                                               |                    | 2003                                   |        | 2002  |       | 2001 |        | 2000 |       | 1999
|                                                                                                               |                    |                                        |        |       |       |      |        |      |       |     
|                                                                                                               |                    |                                       
|                                                                                                               |                    | (In thousands)                        
|Balance at beginning of period                                                                                 |                    | $                                      | 12,656 |       |       |      | 12,328 |      |       |      | 11,381 |     |     |  | 10,654 |     |     |  | 8,500  |   
|Forward Financial allowance for loan losses at
    acquisition date                                            |                    |                                        |       |       |       |      |       |      |       |      |       |     |     |  |       |     |     |  | 170    |   
|Provision for loan losses                                                                                      |                    |                                        | 3,350  |       |       |      | 1,350  |      |       |      | 820    |     |     |  | 1,000  |     |     |  | 1,626  |   
|Charge-offs:                                                                                                   |                    |                                        |        |       |       |      |        |      |       |      |        |     |     |  |        |     |     |  |        |   
|                                                                                                               | Real estate loans: |                                        |        |       |       |      |        |      |       |      |        |     |     |  |        |     |     |  |        |    |   
|                                                                                                               | Residential:       |                                        |        |       |       |      |        |      |       |      |        |     |     |  |        |     |     |  |        |    |   
|                                                                                                               |                    | One- to four-family                    |        |       | 31    |      |        |      | 18    |      |        |     | 118 |  |        |     | 125 |  |        |    | 19 | 
|                                                                                                               |                    | Multi-family                           |        |       |      |      |        |      |      |      |        |     |    |  |        |     |    |  |        |    | 1  | 
|                                                                                                               | Commercial         |                                        |        | 1,720 |       |      |        |     |       |      |        |    |     |  |        |    |     |  |        |   |   
|                                                                                                               | Construction       |                                        |        |      |       |      |        | 410  |       |      |        |    |     |  |        |    |     |  |        |   |   
|                                                                                                               | Other              |                                        |        | 511   |       |      |        | 953  |       |      |        | 116 |     |  |        | 329 |     |  |        | 36 |   
|                                                                                                               |                    |                                        |        |       |       |      |        |      |       |      |        |     |     |  |        |     |     |  |        |   
|                                                                                                               |                    | Total charge-offs                      |        |       | 2,262 |      |        |      | 1,381 |      |        |     | 234 |  |        |     | 454 |  |        |    | 56 | 
|Recoveries                                                                                                     |                    |                                        | 130    |       |       |      | 359    |      |       |      | 361    |     |     |  | 181    |     |     |  | 414    |   
|                                                                                                               |                    |                                        |        |       |       |      |        |      |       |      |        |     |     |  |        |     |     |  |        |   
|Balance at end of period                                                                                       |                    | $                                      | 13,874 |       |       |      | 12,656 |      |       |      | 12,328 |     |     |  | 11,381 |     |     |  | 10,654 |   
|                                                                                                               |                    |                                        |        |       |       |      |        |      |       |      |        |     |     |  |        |     |     |  |        |   
|Ratio of net charge-offs (net recoveries) during
    the period to average loans outstanding during the period |                    |                                        | 0.19   | %     |       |      | 0.09   |      |       |      | (0.01  | )   |     |  | 0.03   |     |     |  | (0.04  | ) 
|                                                                                                               |                    |                                        |        |       |       |      |        |      |       |      |        |     |     |  |        |     |     |  |        |   

As part of the Companys determination of
the adequacy of the allowance for loan losses, the Company
monitors its loan portfolio and other assets through its Asset
Classification Committee. The Asset Classification Committee
classifies loans depending on risk of loss characteristics. The
most severe classification before a charge-off is required is
sub-standard. At December 31, 2003, 2002 and
2001, the Company classified (including REO) $22.9 million,
$16.9 million and $2.8 million as sub-standard assets,
respectively. The increase in sub-standard assets during the two
most recent years is attributable to some borrowers experiencing
delays in construction, slower than expected sales of
residential and condominium units, lower business demands in
certain industries and deterioration in the occupancy levels of
office buildings in the Companys lending area. Included in
the substandard totals were $6.5 million,
$6.5 million, and $1.2 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. The Asset Classification Committee meets quarterly to
determine the adequacy of the allowance for loan losses.

26



---



##### 



Management believes that the allowance for loan
losses at December 31, 2003, was sufficient to provide for
anticipated losses inherent in the loan portfolio.


The following tables set forth the Companys
percent of allowance for loan losses to total allowance for loan
losses and the percent of loans to total loans in each of the
categories listed at the dates indicated.

|                                              |                                 |                        |       |            |  |               |       |        |   |  |       |        |  
|--------------------------------------------- | ------------------------------- | ---------------------- | ----- | ---------- |  | ------------- | ----- | ------ | - |  | ----- | ------ | -
|                                              |                                 |                       
|                                              |                                 | At December 31,       
|                                              |                                 |                       
|                                              |                                 |                       
|                                              |                                 | 2003                  
|                                              |                                 |                       
|                                              |                                 |                        |       | Percent of |  | Percent of   
|                                              |                                 |                        |       | Allowance  |  | Loans in Each
|                                              |                                 |                        |       | to Total   |  | Category to  
|                                              |                                 | Amount                 |       | Allowance  |  | Total Loans  
|                                              |                                 |                        |       |            |  |              
|                                              |                                 |                       
|                                              |                                 | (Dollars in thousands)
|Residential                                   |                                 | $                      | 3,179 |            |  |               | 22.91 | %      |   |  | 68.73 | %     
|Commercial real estate, construction and land |                                 |                        | 5,802 |            |  |               | 41.82 |        |   |  | 18.98 |       
|Commercial/ business                          |                                 |                        | 1,594 |            |  |               | 11.49 |        |   |  | 2.01  |       
|Other loans (equity and consumer)             |                                 |                        | 665   |            |  |               | 4.79  |        |   |  | 9.97  |       
|Impaired loans                                |                                 |                        | 455   |            |  |               | 3.28  |        |   |  | .31   |       
|Unallocated                                   |                                 |                        | 2,179 |            |  |               | 15.71 |        |   |  |      |       
|                                              |                                 |                        |       |            |  |               |       |        |   |  |       |       
|                                              | Total allowance for loan losses |                        | $     | 13,874     |  |               |       | 100.00 | % |  |       | 100.00 | %
|                                              |                                 |                        |       |            |  |               |       |        |   |  |       |       

|                                        |                                 |                        |       |            |  |               |       |        |   |            |       |               |   |   |       |        |  |  |       |        |   |  |       |        |  
|--------------------------------------- | ------------------------------- | ---------------------- | ----- | ---------- |  | ------------- | ----- | ------ | - | ---------- | ----- | ------------- | - | - | ----- | ------ |  |  | ----- | ------ | - |  | ----- | ------ | -
|                                        |                                 |                       
|                                        |                                 | At December 31,       
|                                        |                                 |                       
|                                        |                                 |                        |       |           
|                                        |                                 | 2002                   |       | 2001      
|                                        |                                 |                        |       |           
|                                        |                                 |                        |       | Percent of |  | Percent of    |       |        |   | Percent of |       | Percent of   
|                                        |                                 |                        |       | Allowance  |  | Loans in Each |       |        |   | Allowance  |       | Loans in Each
|                                        |                                 |                        |       | to Total   |  | Category to   |       |        |   | to Total   |       | Category to  
|                                        |                                 | Amount                 |       | Allowance  |  | Total Loans   |       | Amount |   | Allowance  |       | Total Loans  
|                                        |                                 |                        |       |            |  |               |       |        |   |            |       |              
|                                        |                                 |                       
|                                        |                                 | (Dollars in thousands)
|Residential:                            |                                 | $                      | 2,635 |            |  |               | 20.82 | %      |   |            | 61.10 | %             |   | $ | 3,109 |        |  |  | 25.22 | %      |   |  | 72.60 | %     
|Commercial real estate, const. and land |                                 |                        | 4,755 |            |  |               | 37.57 |        |   |            | 22.33 |               |   |   | 3,898 |        |  |  | 31.62 |        |   |  | 18.49 |       
|Commercial/ business                    |                                 |                        | 1,011 |            |  |               | 7.99  |        |   |            | 5.05  |               |   |   |      |        |  |  |      |        |   |  |      |       
|Other loans                             |                                 |                        | 705   |            |  |               | 5.57  |        |   |            | 10.74 |               |   |   | 1,551 |        |  |  | 12.58 |        |   |  | 8.91  |       
|Impaired loans                          |                                 |                        | 225   |            |  |               | 1.78  |        |   |            | .78   |               |   |   |      |        |  |  |      |        |   |  |      |       
|Unallocated                             |                                 |                        | 3,325 |            |  |               | 26.27 |        |   |            |      |               |   |   | 3,770 |        |  |  | 30.58 |        |   |  |      |       
|                                        |                                 |                        |       |            |  |               |       |        |   |            |       |               |   |   |       |        |  |  |       |        |   |  |       |       
|                                        | Total allowance for loan losses |                        | $     | 12,656     |  |               |       | 100.00 | % |            |       | 100.00        | % |   | $     | 12,328 |  |  |       | 100.00 | % |  |       | 100.00 | %
|                                        |                                 |                        |       |            |  |               |       |        |   |            |       |               |   |   |       |        |  |  |       |        |   |  |       |       

|                       |                                 |                        |       |            |  |               |       |        |   |            |      |               |   |  |       |        |  |  |       |        |   |  |      |        |  
|---------------------- | ------------------------------- | ---------------------- | ----- | ---------- |  | ------------- | ----- | ------ | - | ---------- | ---- | ------------- | - |  | ----- | ------ |  |  | ----- | ------ | - |  | ---- | ------ | -
|                       |                                 |                       
|                       |                                 | At December 31,       
|                       |                                 |                       
|                       |                                 |                        |       |           
|                       |                                 | 2000                   |       | 1999      
|                       |                                 |                        |       |           
|                       |                                 |                        |       | Percent of |  | Percent of    |       |        |   | Percent of |      | Percent of   
|                       |                                 |                        |       | Allowance  |  | Loans in Each |       |        |   | Allowance  |      | Loans in Each
|                       |                                 |                        |       | to Total   |  | Category to   |       |        |   | to Total   |      | Category to  
|                       |                                 | Amount                 |       | Allowance  |  | Total Loans   |       | Amount |   | Allowance  |      | Total Loans  
|                       |                                 |                        |       |            |  |               |       |        |   |            |      |              
|                       |                                 |                       
|                       |                                 | (Dollars in thousands)
|Residential:           |                                 |                        |       |            |  |               |       |        |   |            |      |               |   |  |       |        |  |  |       |        |   |  |      |       
|                       | One- to-four family             |                        | $     | 2,883      |  |               |       | 25.33  | % |            |      | 73.17         | % |  | $     | 2,872  |  |  |       | 26.96  | % |  |      | 77.85  | %
|                       | Multi-family                    |                        |       | 252        |  |               |       | 2.21   |   |            |      | 1.78          |   |  |       | 209    |  |  |       | 1.96   |   |  |      | 2.02   |  
|Commercial real estate |                                 |                        | 1,905 |            |  |               | 16.74 |        |   |            | 8.18 |               |   |  | 2,090 |        |  |  | 19.62 |        |   |  | 6.99 |       
|Construction and land  |                                 |                        | 1,239 |            |  |               | 10.89 |        |   |            | 8.48 |               |   |  | 1,285 |        |  |  | 12.06 |        |   |  | 7.09 |       
|Other loans            |                                 |                        | 1,410 |            |  |               | 12.39 |        |   |            | 8.39 |               |   |  | 1,029 |        |  |  | 9.66  |        |   |  | 6.05 |       
|Unallocated            |                                 |                        | 3,692 |            |  |               | 32.44 |        |   |            |     |               |   |  | 3,169 |        |  |  | 29.74 |        |   |  |     |       
|                       |                                 |                        |       |            |  |               |       |        |   |            |      |               |   |  |       |        |  |  |       |        |   |  |      |       
|                       | Total allowance for loan losses |                        | $     | 11,381     |  |               |       | 100.00 | % |            |      | 100.00        | % |  | $     | 10,654 |  |  |       | 100.00 | % |  |      | 100.00 | %
|                       |                                 |                        |       |            |  |               |       |        |   |            |      |               |   |  |       |        |  |  |       |        |   |  |      |       

Overview of Financial Condition (Liabilities
and Capital)



| |                 
| | ----------------
| | Deposit Accounts

Deposit accounts increased by
$228.3 million, or 23.8%, from a balance of
$960.3 million at December 31, 2002, to a balance of
$1.2 billion at December 31, 2003. The growth is
primarily attributable to the assumption of deposits from the
acquisition of branches. Wholesale-brokered certificates of
deposit, included in deposit accounts, were $117.8 million
at December 31, 2003, reflecting a decline of

27



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##### 



$14.9 million from the $132.7 million
balance at December 31, 2002. The Company used some of the
proceeds from the branch acquisition to repay maturing
wholesale-brokered certificates of deposit.


The following table sets forth the distribution
of the Companys average deposit accounts for the periods
indicated and the average cost on each category of deposits
presented.

|                              |                            |                                 |                        |          |         |         |       |         |       |          |      |         |      |         |         |          |         |         |       |       |       |        |      |      |      |      |         |         |         |         |       |       |       |        |      |      |      |      | 
|----------------------------- | -------------------------- | ------------------------------- | ---------------------- | -------- | ------- | ------- | ----- | ------- | ----- | -------- | ---- | ------- | ---- | ------- | ------- | -------- | ------- | ------- | ----- | ----- | ----- | ------ | ---- | ---- | ---- | ---- | ------- | ------- | ------- | ------- | ----- | ----- | ----- | ------ | ---- | ---- | ---- | ---- | 
|                              |                            |                                
|                              |                            | For the Year Ended December 31,
|                              |                            |                                
|                              |                            |                                 |                        |          |         |        
|                              |                            | 2003                            |                        | 2002     |         | 2001   
|                              |                            |                                 |                        |          |         |        
|                              |                            |                                 |                        | Percent  |         |         |       |         |       | Percent  |      |         |      |         |         | Percent  |         |        
|                              |                            |                                 |                        | of Total |         |         |       |         |       | of Total |      |         |      |         |         | of Total |         |        
|                              |                            | Average                         |                        | Average  |         | Average |       | Average |       | Average  |      | Average |      | Average |         | Average  |         | Average
|                              |                            | Balance                         |                        | Deposits |         | Cost    |       | Balance |       | Deposits |      | Cost    |      | Balance |         | Deposits |         | Cost   
|                              |                            |                                 |                        |          |         |         |       |         |       |          |      |         |      |         |         |          |         |        
|                              |                            |                                
|                              |                            | (Dollars in thousands)         
|Money market deposit accounts |                            | $                               | 80,136                 |          |         |         | 8.04  | %       |       |          | 1.27 |         |      | $       | 60,530  |          |         |         | 6.65  | %     |       |        | 1.56 |      |      | $    | 54,965  |         |         |         | 6.45  | %     |       |        | 2.51 |     
|Savings accounts              |                            |                                 | 220,751                |          |         |         | 22.16 |         |       |          | 1.02 |         |      |         | 200,552 |          |         |         | 22.02 |       |       |        | 1.42 |      |      |      | 174,651 |         |         |         | 20.48 |       |       |        | 2.35 |     
|NOW accounts                  |                            |                                 | 161,697                |          |         |         | 16.22 |         |       |          | 0.29 |         |      |         | 140,470 |          |         |         | 15.42 |       |       |        | 0.32 |      |      |      | 127,779 |         |         |         | 14.98 |       |       |        | 0.58 |     
|Non-interest-bearing accounts |                            |                                 | 97,519                 |          |         |         | 9.78  |         |       |          |     |         |      |         | 99,694  |          |         |         | 10.95 |       |       |        |     |      |      |      | 85,209  |         |         |         | 9.99  |       |       |        |     |     
|                              |                            |                                 |                        |          |         |         |       |         |       |          |      |         |      |         |         |          |         |         |       |       |       |        |      |      |      |      |         |         |         |         |       |       |       |        |      |     
|                              |                            | Total                           |                        |          | 560,103 |         |       |         | 56.20 |          |      |         | 0.66 |         |         |          | 501,246 |         |       |       | 55.04 |        |      |      | 0.84 |      |         |         | 442,604 |         |       |       | 51.90 |        |      |      | 1.41 |     
|                              |                            |                                 |                        |          |         |         |       |         |       |          |      |         |      |         |         |          |         |         |       |       |       |        |      |      |      |      |         |         |         |         |       |       |       |        |      |     
|Certificate accounts:         |                            |                                 |                        |          |         |         |       |         |       |          |      |         |      |         |         |          |         |         |       |       |       |        |      |      |      |      |         |         |         |         |       |       |       |        |      |     
|                              | Less than six months       |                                 |                        | 44,140   |         |         |       | 4.43    |       |          |      | 1.58    |      |         |         | 59,121   |         |         |       | 6.49  |       |        |      | 2.55 |      |      |         | 57,846  |         |         |       | 6.78  |       |        |      | 4.61 |     
|                              | Over six through 12 months |                                 |                        | 65,385   |         |         |       | 6.56    |       |          |      | 2.12    |      |         |         | 75,799   |         |         |       | 8.32  |       |        |      | 3.36 |      |      |         | 71,557  |         |         |       | 8.39  |       |        |      | 5.01 |     
|                              | Over 12 through 36 months  |                                 |                        | 256,236  |         |         |       | 25.70   |       |          |      | 4.16    |      |         |         | 214,215  |         |         |       | 23.52 |       |        |      | 5.14 |      |      |         | 229,028 |         |         |       | 26.87 |       |        |      | 6.41 |     
|                              | Over 36 months             |                                 |                        | 22,050   |         |         |       | 2.21    |       |          |      | 4.71    |      |         |         | 14,901   |         |         |       | 1.64  |       |        |      | 5.45 |      |      |         | 7,527   |         |         |       | 0.88  |       |        |      | 6.20 |     
|                              | IRA/ KEOGH (various terms) |                                 |                        | 48,792   |         |         |       | 4.90    |       |          |      | 4.00    |      |         |         | 45,457   |         |         |       | 4.99  |       |        |      | 4.89 |      |      |         | 44,161  |         |         |       | 5.18  |       |        |      | 5.61 |     
|                              |                            |                                 |                        |          |         |         |       |         |       |          |      |         |      |         |         |          |         |         |       |       |       |        |      |      |      |      |         |         |         |         |       |       |       |        |      |     
|                              |                            | Total certificate accounts      |                        |          | 436,603 |         |       |         | 43.80 |          |      |         | 3.60 |         |         |          | 409,493 |         |       |       | 44.96 |        |      |      | 4.42 |      |         |         | 410,119 |         |       |       | 48.10 |        |      |      | 5.82 |     
|                              |                            |                                 |                        |          |         |         |       |         |       |          |      |         |      |         |         |          |         |         |       |       |       |        |      |      |      |      |         |         |         |         |       |       |       |        |      |     
|                              |                            |                                 | Total average deposits |          | $       | 996,706 |       |         |       | 100.00   | %    |         |      | 1.95    |         |          | $       | 910,739 |       |       |       | 100.00 | %    |      |      | 2.45 |         |         | $       | 852,723 |       |       |       | 100.00 | %    |      |      | 3.53 | 
|                              |                            |                                 |                        |          |         |         |       |         |       |          |      |         |      |         |         |          |         |         |       |       |       |        |      |      |      |      |         |         |         |         |       |       |       |        |      |     

The following table presents, by various rate
categories, the amount of certificate accounts outstanding at
the dates indicated and the periods to maturity of the
certificate accounts outstanding at December 31, 2003.

|                      |               |                                           |         |                 |  |             |         |            |  |            |        |        |  |      |        |        |  |  |        |        |  |  |         |         |  |  |         |         |  |  |         |         | 
|--------------------- | ------------- | ----------------------------------------- | ------- | --------------- |  | ----------- | ------- | ---------- |  | ---------- | ------ | ------ |  | ---- | ------ | ------ |  |  | ------ | ------ |  |  | ------- | ------- |  |  | ------- | ------- |  |  | ------- | ------- | 
|                      |               |                                           |         |                
|                      |               | Period to Maturity from December 31, 2003 |         | Total          
|                      |               |                                           |         | At December 31,
|                      |               | Less than                                 |         | One to          |  | Two to      |         | Three to   |  | Four to    |        |       
|                      |               | One Year                                  |         | Two years       |  | Three years |         | Four years |  | Five years |        | 2003   |  | 2002 |        | 2001  
|                      |               |                                           |         |                 |  |             |         |            |  |            |        |        |  |      |        |       
|                      |               |                                          
|                      |               | (In thousands)                           
|Certificate accounts: |               |                                           |         |                 |  |             |         |            |  |            |        |        |  |      |        |        |  |  |        |        |  |  |         |         |  |  |         |         |  |  |         |        
|                      | 0.01 to 2.00% |                                           | $       | 114,544         |  |             |         | 16,251     |  |            |        |       |  |      |        |       |  |  |        |       |  |  |         | 130,795 |  |  |         | 17,298  |  |  |         |        | 
|                      | 2.01 to 3.00% |                                           |         | 26,394          |  |             |         | 60,639     |  |            |        | 18,111 |  |      |        | 714    |  |  |        | 2,859  |  |  |         | 108,716 |  |  |         | 112,889 |  |  |         | 23,181  | 
|                      | 3.01 to 4.00% |                                           |         | 65,130          |  |             |         | 29,726     |  |            |        | 3,011  |  |      |        | 5,903  |  |  |        | 11,307 |  |  |         | 115,077 |  |  |         | 115,945 |  |  |         | 78,072  | 
|                      | 4.01 to 5.00% |                                           |         | 14,451          |  |             |         | 50,195     |  |            |        | 11,364 |  |      |        | 17,838 |  |  |        | 567    |  |  |         | 94,416  |  |  |         | 64,909  |  |  |         | 87,419  | 
|                      | 5.01 to 6.00% |                                           |         | 5,145           |  |             |         | 10,961     |  |            |        | 9,351  |  |      |        | 3,999  |  |  |        |       |  |  |         | 29,456  |  |  |         | 27,970  |  |  |         | 74,720  | 
|                      | 6.01 to 8.00% |                                           |         | 30,002          |  |             |         | 7,131      |  |            |        | 5,521  |  |      |        |       |  |  |        |       |  |  |         | 42,654  |  |  |         | 83,107  |  |  |         | 132,721 | 
|                      |               |                                           |         |                 |  |             |         |            |  |            |        |        |  |      |        |        |  |  |        |        |  |  |         |         |  |  |         |         |  |  |         |        
|Total                 |               | $                                         | 255,666 |                 |  |             | 174,903 |            |  |            | 47,358 |        |  |      | 28,454 |        |  |  | 14,733 |        |  |  | 521,114 |         |  |  | 422,119 |         |  |  | 396,113 |        
|                      |               |                                           |         |                 |  |             |         |            |  |            |        |        |  |      |        |        |  |  |        |        |  |  |         |         |  |  |         |         |  |  |         |        

Federal Home Loan Bank Advances and other
Borrowings

FHLB advances and other borrowings declined by
$59.9 million to a balance of $398.7 million at
December 31, 2003, compared to $458.6 million at
December 31, 2002. Some of the FHLB advances that matured
were repaid from the funds acquired from the acquisition of
branches in October 2003.

28



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##### 



The following tables set forth certain
information regarding the Companys borrowed funds at or
for the periods ended on the dates indicated:

|                                 |                                                                   |                          |   |         |  |      |  |         |  |  |  |         | 
|-------------------------------- | ----------------------------------------------------------------- | ------------------------ | - | ------- |  | ---- |  | ------- |  |  |  | ------- | 
|                                 |                                                                   |                         
|                                 |                                                                   | At or For the Year Ended
|                                 |                                                                   | December 31,            
|                                 |                                                                   |                         
|                                 |                                                                   | 2003                     |   | 2002    |  | 2001
|                                 |                                                                   |                          |   |         |  |     
|                                 |                                                                   |                         
|                                 |                                                                   | (Dollars in thousands)  
|Federal Home Loan Bank advances: |                                                                   |                          |   |         |  |      |  |         |  |  |  |        
|                                 | Average balance outstanding                                       |                          | $ | 430,930 |  |      |  | 443,931 |  |  |  | 419,867 | 
|                                 | Maximum amount outstanding at any month-end
    during the period |                          |   | 535,894 |  |      |  | 461,877 |  |  |  | 467,000 | 
|                                 | Balance outstanding at end of period                              |                          |   | 365,663 |  |      |  | 426,560 |  |  |  | 449,000 | 
|                                 | Weighted average interest rate during the period                  |                          |   | 3.85    |  |      |  | 4.98    |  |  |  | 5.67    | 
|                                 | Weighted average interest rate at end of period                   |                          |   | 3.82    |  |      |  | 4.38    |  |  |  | 5.29    | 

|                      |                                                                   |                          |   |        |   |      |  |        |  |  |  |        | 
|--------------------- | ----------------------------------------------------------------- | ------------------------ | - | ------ | - | ---- |  | ------ |  |  |  | ------ | 
|                      |                                                                   |                         
|                      |                                                                   | At or For the Year Ended
|                      |                                                                   | December 31,            
|                      |                                                                   |                         
|                      |                                                                   | 2003                     |   | 2002   |   | 2001
|                      |                                                                   |                          |   |        |   |     
|                      |                                                                   |                         
|                      |                                                                   | (Dollars in thousands)  
|Other Borrowed Money: |                                                                   |                          |   |        |   |      |  |        |  |  |  |       
|                      | Average balance outstanding                                       |                          | $ | 32,000 |   |      |  | 32,000 |  |  |  | 32,000 | 
|                      | Maximum amount outstanding at any month-end
    during the period |                          |   | 32,990 |   |      |  | 32,000 |  |  |  | 32,000 | 
|                      | Balance outstanding at end of period                              |                          |   | 32,990 |   |      |  | 32,000 |  |  |  | 32,000 | 
|                      | Weighted average interest rate during the period                  |                          |   | 10.68  | % |      |  | 11.03  |  |  |  | 11.01  | 
|                      | Weighted average interest rate at end of period                   |                          |   | 10.68  |   |      |  | 11.03  |  |  |  | 11.01  | 

Other borrowed money consists of the aggregate
amount corporation obligated mandatorily redeemable capital
securities BFD Preferred Capital Trust I and BFD Preferred
Capital Trust II. A summary of the trust securities issued
and outstanding follows:

|                               |  |                    |        |      |  |            |        |             |  |              |        |           |  |  |           |  |  |  |           |  |  |  |              | 
|------------------------------ |  | ------------------ | ------ | ---- |  | ---------- | ------ | ----------- |  | ------------ | ------ | --------- |  |  | --------- |  |  |  | --------- |  |  |  | ------------ | 
|                               |  |                    |        |      |  |            |        |             |  |             
|                               |  | Amount Outstanding |        |      |  |            |        |             |  | Distribution
|                               |  |                    |        |      |  | Prepayment |        |             |  | Payment     
|December 31                    |  | 2003               |        | 2002 |  | Rate       |        | Option Date |  | Maturity     |        | Frequency
|                               |  |                    |        |      |  |            |        |             |  |              |        |          
|BFD Preferred Capital Trust I  |  | $                  | 10,309 |      |  |            | 10,000 |             |  |              | 11.295 | %         |  |  | 7/19/2010 |  |  |  | 7/19/2030 |  |  |  | Semiannually | 
|BFD Preferred Capital Trust II |  |                    | 22,681 |      |  |            | 22,000 |             |  |              | 10.875 |           |  |  | 10/1/2010 |  |  |  | 10/1/2030 |  |  |  | Semiannually | 

All of the corporation obligated mandatorily
redeemable capital securities may be prepaid at the option of
the Trusts in whole or in part, on or after the prepayment dates
listed in the table above. Trust I is subject to a
prepayment penalty fee of six months worth of interest reduced
each year by 10% commencing at July 19, 2010. There is no
prepayment penalty fee imposed on Trust II after the first
10 years.

In addition, the Company also has the right,
subject to certain conditions, at any time during the term of
the Trust I Capital Securities to defer the payment of
interest on those securities from time to time for a period of
up to ten consecutive semiannual interest payment periods. No
deferral period will end on a date other than an interest
payment date and no deferral will extend beyond July 19,
2030, the stated maturity of the Trust I Capital
Securities. During any deferral period, each installment of
interest that would otherwise have been due and payable will
bear additional interest (to the extent payment of such interest
would be legally enforceable) at the rate of 13.95%, compounded
semiannually.

The Company has the right, at one or more times,
to defer interest payments on the Trust II Junior
Subordinated Debentures for up to ten consecutive semiannual
periods. All deferrals will end on an interest payment date and
will not extend beyond October 1, 2030, the stated maturity
date of the Trust II Junior Subordinated Debentures. If the
Company defers interest payments on the Trust II Junior
Subordinated Debentures, the Trust II will also defer
distributions on the Trust II Capital Securities. During
any deferral period, each installment of interest that would
otherwise have been due and payable will bear additional
interest (to the extent payment of such interest would be
legally enforceable) at the coupon rate, compounded semiannually.

In December 2003, the Financial Accounting
Standards Board (FASB) issued guidance (revised FASB
Interpretation (FIN) No. 46R), which in part
specifically addresses limited purpose trusts formed to issue

29



---



##### 



trust preferred securities. FIN No. 46R,
among other items, requires the Company to deconsolidate its two
trust preferred subsidiaries. Because the Company had already
been classifying the trust preferreds as debt, the impact of
adopting FIN No. 46R as of December 31, 2003 had a
minimal impact.


Total stockholders equity was
$94.6 million at December 31, 2003, or $21.07 per
share, compared to $93.0 million, or $21.17 per share, at
December 31, 2002. Stockholders equity increased by
$1.6 million during the year ended December 31, 2003
as the contributions from net income, the amortization of the
Stock-based Incentive Plans, the Employee Stock Ownership Plan
(ESOP) and exercise of stock options exceeded the
payment of dividends, the change in market valuation, net of
taxes, of the available-for-sale securities portfolio and stock
repurchases. The stockholders equity to total assets ratio
of the Company was 5.6% and 6.1% at December 31, 2003 and
2002, respectively.

Quantitative and Qualitative Disclosures About
Market Risk

One of the principal market risks affecting the
Company is interest rate risk. The 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 to manage the risk consistent with the 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 that is responsible for reviewing the
Companys asset/ liability policies and interest rate risk
position. The Committee 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.

The Company has utilized the following strategies
to manage interest rate risk: (1) emphasizing the
origination and retention of adjustable-rate mortgage loans;
(2) generally selling in the secondary market substantially
all fixed-rate mortgage loans originated with terms of
15 years or greater while generally retaining the servicing
rights thereof; (3) primarily investing in investment
securities or mortgage-backed securities with adjustable
interest rates or if interest rates are fixed, then the duration
of the instrument is generally less than five years; and
(4) attempting to reduce the overall interest rate
sensitivity of liabilities by emphasizing longer-term deposits
including wholesale brokered deposits and utilizing longer term
FHLB advances. A portion of the FHLB advances may be called
depending on the level of interest rates relative to the
interest rate being charged at the applicable call date.
Accordingly, if interest rates rise sufficient to trigger the
call feature, the Companys net interest margin may be
negatively impacted if called advances are replaced by new,
higher cost advances.

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 same 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. These
differences are a primary component of the risk to net interest
income. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate
sensitive liabilities in a given time period. A gap is
considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets
in a given time period. 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 faster pace than 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, 2003, which are anticipated by
the Company, (based upon certain assumptions that may or may not
be indicative of actual repricing or maturity experience by the
Company) 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

30



---



##### 



December 31, 2003, 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 16.6% and 17.8%, respectively. Annual prepayment rates for
adjustable-rate and fixed-rate mortgage-backed securities are
assumed to be 25.0% and 10.4%, 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 annual decay
rates of 12% and 18%, respectively. 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 assets and liabilities are subject to customer
discretion and competitive and other pressures and, therefore,
actual experience may vary from that indicated.


31



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##### 



The following table shows the gap position of the
Company at December 31, 2003 and 2002:

|                                                                                                                           |                                    |                        |         |             |  |             |         |             |  |            |         |           |  |        |         |         |  |   |         |         |  |   |         |         |  |   |         |           | 
|-------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | ---------------------- | ------- | ----------- |  | ----------- | ------- | ----------- |  | ---------- | ------- | --------- |  | ------ | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | --------- | 
|                                                                                                                           |                                    |                        |         | More than   |  | More than   |         | More than   |  | More than  |         |           |  |       
|                                                                                                                           |                                    | 3 Months               |         | 3 Months to |  | 6 Months to |         | 1 Year to 3 |  | 3 Years to |         | More than |  | Total 
|                                                                                                                           |                                    | or Less                |         | 6 Months    |  | 1 Year      |         | Years       |  | 5 Years    |         | 5 Years   |  | Amount
|                                                                                                                           |                                    |                        |         |             |  |             |         |             |  |            |         |           |  |       
|                                                                                                                           |                                    |                       
|                                                                                                                           |                                    | (Dollars in thousands)
|Interest-earning assets                                                                                                    |                                    |                        |         |             |  |             |         |             |  |            |         |           |  |        |         |         |  |   |         |         |  |   |         |         |  |   |         |          
|Short-term investments                                                                                                     |                                    | $                      | 1,453   |             |  | $           | 3       |             |  | $          | 55      |           |  | $      | 16      |         |  | $ | 0       |         |  | $ | 0       |         |  | $ | 1,527   |          
|Investment securities                                                                                                      |                                    |                        | 88,059  |             |  |             | 533     |             |  |            | 5,968   |           |  |        | 3,155   |         |  |   | 1,997   |         |  |   | 4,960   |         |  |   | 104,672 |          
|Fixed rate loans(1)                                                                                                        |                                    |                        | 12,239  |             |  |             | 11,763  |             |  |            | 46,038  |           |  |        | 72,777  |         |  |   | 55,609  |         |  |   | 48,218  |         |  |   | 246,644 |          
|Adjustable rate loans(1)                                                                                                   |                                    |                        | 279,626 |             |  |             | 54,535  |             |  |            | 97,935  |           |  |        | 278,530 |         |  |   | 258,294 |         |  |   | 4,392   |         |  |   | 973,312 |          
|Mortgage-backed securities                                                                                                 |                                    |                        | 11,907  |             |  |             | 9,322   |             |  |            | 19,464  |           |  |        | 59,458  |         |  |   | 49,025  |         |  |   | 80,250  |         |  |   | 229,426 |          
|Stock in FHLB-Boston                                                                                                       |                                    |                        | 28,483  |             |  |             | 0       |             |  |            | 0       |           |  |        | 0       |         |  |   | 0       |         |  |   | 0       |         |  |   | 28,483  |          
|                                                                                                                           |                                    |                        |         |             |  |             |         |             |  |            |         |           |  |        |         |         |  |   |         |         |  |   |         |         |  |   |         |          
|                                                                                                                           | Total interest-earning assets      |                        |         | 421,767     |  |             |         | 76,156      |  |            |         | 169,460   |  |        |         | 413,936 |  |   |         | 364,925 |  |   |         | 137,820 |  |   |         | 1,584,064 | 
|                                                                                                                           |                                    |                        |         |             |  |             |         |             |  |            |         |           |  |        |         |         |  |   |         |         |  |   |         |         |  |   |         |          
|Interest-bearing liabilities                                                                                               |                                    |                        |         |             |  |             |         |             |  |            |         |           |  |        |         |         |  |   |         |         |  |   |         |         |  |   |         |          
|Money market deposit accounts                                                                                              |                                    |                        | 138,986 |             |  |             | 0       |             |  |            | 0       |           |  |        | 0       |         |  |   | 0       |         |  |   | 0       |         |  |   | 138,986 |          
|Savings accounts                                                                                                           |                                    |                        | 9,475   |             |  |             | 8,079   |             |  |            | 16,158  |           |  |        | 64,631  |         |  |   | 64,631  |         |  |   | 64,517  |         |  |   | 227,491 |          
|NOW accounts                                                                                                               |                                    |                        | 9,514   |             |  |             | 9,514   |             |  |            | 19,026  |           |  |        | 76,106  |         |  |   | 76,106  |         |  |   | 21,203  |         |  |   | 211,469 |          
|Certificate accounts                                                                                                       |                                    |                        | 84,218  |             |  |             | 58,098  |             |  |            | 129,916 |           |  |        | 206,191 |         |  |   | 42,691  |         |  |   | 0       |         |  |   | 521,114 |          
|FHLB advances                                                                                                              |                                    |                        | 46,677  |             |  |             | 64,106  |             |  |            | 27,714  |           |  |        | 62,666  |         |  |   | 106,500 |         |  |   | 90,990  |         |  |   | 398,653 |          
|                                                                                                                           |                                    |                        |         |             |  |             |         |             |  |            |         |           |  |        |         |         |  |   |         |         |  |   |         |         |  |   |         |          
|                                                                                                                           | Total interest-bearing liabilities |                        |         | 288,870     |  |             |         | 139,797     |  |            |         | 192,814   |  |        |         | 409,594 |  |   |         | 289,928 |  |   |         | 176,710 |  |   |         | 1,497,713 | 
|                                                                                                                           |                                    |                        |         |             |  |             |         |             |  |            |         |           |  |        |         |         |  |   |         |         |  |   |         |         |  |   |         |          
|Interest-earning assets less interest-bearing
    Liabilities                                                              |                                    | $                      | 132,897 |             |  | $           | (63,641 | )           |  | $          | (23,354 | )         |  | $      | 4,342   |         |  | $ | 74,997  |         |  | $ | (38,890 | )       |  | $ | 86,351  |          
|                                                                                                                           |                                    |                        |         |             |  |             |         |             |  |            |         |           |  |        |         |         |  |   |         |         |  |   |         |         |  |   |         |          
|Cumulative interest rate sensitivity gap
    December 31, 2003                                                             |                                    | $                      | 132,897 |             |  | $           | 69,256  |             |  | $          | 45,902  |           |  | $      | 50,244  |         |  | $ | 125,241 |         |  | $ | 86,351  |         |  | $ | 86,351  |          
|                                                                                                                           |                                    |                        |         |             |  |             |         |             |  |            |         |           |  |        |         |         |  |   |         |         |  |   |         |         |  |   |         |          
|Cumulative interest rate gap as a percentage of
    total assets at December 31, 2003                                      |                                    |                        | 7.84    | %           |  |             | 4.08    | %           |  |            | 2.71    | %         |  |        | 2.96    | %       |  |   | 7.39    | %       |  |   | 5.11    | %       |  |   |         |          
|Cumulative interest rate gap as a percentage of
    total interest-earning assets at December 31, 2003                     |                                    |                        | 8.39    | %           |  |             | 4.37    | %           |  |            | 2.90    | %         |  |        | 3.17    | %       |  |   | 7.91    | %       |  |   | 5.46    | %       |  |   |         |          
|Cumulative interest-earning assets as a
    percentage of cumulative interest-bearing liabilities at
    December 31, 2003 |                                    |                        | 146.01  | %           |  |             | 116.16  | %           |  |            | 107.39  | %         |  |        | 104.87  | %       |  |   | 109.48  | %       |  |   | 105.77  | %       |  |   |         |          
|Cumulative interest rate sensitivity gap
    December 31, 2002                                                             |                                    | $                      | 310,805 |             |  | $           | 249,426 |             |  | $          | 163,877 |           |  | $      | 195,668 |         |  | $ | 217,097 |         |  | $ | 104,430 |         |  | $ | 104,430 |          
|                                                                                                                           |                                    |                        |         |             |  |             |         |             |  |            |         |           |  |        |         |         |  |   |         |         |  |   |         |         |  |   |         |          
|Cumulative interest rate gap as a percentage of
    total assets at December 31, 2002                                      |                                    |                        | 20.37   | %           |  |             | 16.35   | %           |  |            | 10.74   | %         |  |        | 12.83   | %       |  |   | 14.23   | %       |  |   | 6.85    | %       |  |   |         |          
|Cumulative interest rate gap as a percentage of
    total interest-earning assets at December 31, 2002                     |                                    |                        | 21.95   | %           |  |             | 17.61   | %           |  |            | 11.57   | %         |  |        | 13.82   | %       |  |   | 15.33   | %       |  |   | 7.37    | %       |  |   |         |          
|Cumulative interest-earning assets as a
    percentage of cumulative interest-bearing liabilities at
    December 31, 2002 |                                    |                        | 269.83  | %           |  |             | 178.73  | %           |  |            | 129.64  | %         |  |        | 122.17  | %       |  |   | 119.47  | %       |  |   | 107.96  | %       |  |   |         |          



---



|    |                                                  
|--- | -------------------------------------------------
|(1) | Includes total loans net of non-performing loans.

32



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##### 



Certain shortcomings are inherent in the method
of analysis presented in the prior 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 Companys Board of Directors has
established certain minimum NPV limits by interest rate shock.
These approved limits are included in the following table. The
Company is operating above these minimum limits imposed by the
Board of Directors. The OTS also produces a similar analysis
using its own model, based upon data submitted on the
Companys quarterly Thrift Financial Reports for the Bank,
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, 2003 and
2002, as calculated by the Company.

|                           |  |                                             |         |        |  |        |         |       |  |          |       |   |  |  |     |  |  |  |     | 
|-------------------------- |  | ------------------------------------------- | ------- | ------ |  | ------ | ------- | ----- |  | -------- | ----- | - |  |  | --- |  |  |  | --- | 
|                           |  |                                            
|                           |  | Net Portfolio Value as of December 31, 2003
|Interest Rates             |  |                                            
|In Basis Points            |  | $                                           |         | $      |  | %      |         | NPV   |  | Board   
|(Instantaneous Rate Shock) |  | Amount                                      |         | Change |  | Change |         | Ratio |  | Limits %
|                           |  |                                             |         |        |  |        |         |       |  |         
|                           |  |                                            
|                           |  | (Dollar in Thousands)                      
|300                        |  |                                             | 84,303  |        |  |        | (42,844 | )     |  |          | (33.7 | ) |  |  | 5.3 |  |  |  | 4.5 | 
|200                        |  |                                             | 99,903  |        |  |        | (27,244 | )     |  |          | (21.4 | ) |  |  | 6.1 |  |  |  | 5.5 | 
|100                        |  |                                             | 116,184 |        |  |        | (10,963 | )     |  |          | (8.6  | ) |  |  | 7.0 |  |  |  | 6.5 | 
|Static                     |  |                                             | 127,147 |        |  |        |         |       |  |          |       |   |  |  | 7.5 |  |  |  |     | 
|(100)                      |  |                                             | 127,297 |        |  |        | 150     |       |  |          | 0.1   |   |  |  | 7.3 |  |  |  | 6.5 | 

|                           |  |                                             |         |        |  |        |         |       |  |          |      |   |  |  |     |  |  |  |     | 
|-------------------------- |  | ------------------------------------------- | ------- | ------ |  | ------ | ------- | ----- |  | -------- | ---- | - |  |  | --- |  |  |  | --- | 
|                           |  |                                            
|                           |  | Net Portfolio Value as of December 31, 2002
|Interest Rates             |  |                                            
|In Basis Points            |  | $                                           |         | $      |  | %      |         | NPV   |  | Board   
|(Instantaneous Rate Shock) |  | Amount                                      |         | Change |  | Change |         | Ratio |  | Limits %
|                           |  |                                             |         |        |  |        |         |       |  |         
|                           |  |                                            
|                           |  | (Dollar in Thousands)                      
|300                        |  |                                             | 109,353 |        |  |        | (11,935 | )     |  |          | (9.8 | ) |  |  | 7.5 |  |  |  | 4.8 | 
|200                        |  |                                             | 115,481 |        |  |        | (5,807  | )     |  |          | (4.8 | ) |  |  | 7.7 |  |  |  | 5.8 | 
|100                        |  |                                             | 123,207 |        |  |        | 1,919   |       |  |          | 1.6  |   |  |  | 8.1 |  |  |  | 6.8 | 
|Static                     |  |                                             | 121,288 |        |  |        |         |       |  |          |      |   |  |  | 7.8 |  |  |  |     | 
|(100)                      |  |                                             | 113,667 |        |  |        | (7,621  | )     |  |          | (6.3 | ) |  |  | 7.2 |  |  |  | 6.8 | 

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.

During 2003, the Company continued to follow its
past practice of selling, while generally retaining the
servicing rights, certain fixed-rate and adjustable-rate
mortgage loans, which were sold as whole loans. In conjunction
with this mortgage banking activity, the Company uses forward
contracts in order to reduce

33



---



##### 



exposure to interest rate risk. The amount of
forward coverage of the pipeline of mortgages is set
on a day-to-day basis by an operating officer, within policy
guidelines and the levels of mortgage origination activity.
Forward Financial originates and sells, servicing released,
substantially all of its consumer loans to various purchasers
(client lenders). The client lenders impose their
underwriting standards and if they consider an application
satisfactory and accept it, the loan is approved for closing. In
this manner, Forward Financial eliminates its exposure to
interest rate risk with respect to loans sold.


Liquidity and Capital Resources

The primary sources of cash flow for the Company
are dividend payments from the Bank, sales and maturities of
investment securities and, to a lesser extent, earnings on
deposits and dividends on equity securities held by the Company.
Dividend payments by the Bank have primarily been used to fund
stock repurchase programs, pay dividends to stockholders,
interest on trust-preferred securities and other operating
expenses of the Company. The ability of the Bank to pay
dividends and other capital distributions to the Company is
generally limited by OTS regulations. Additionally, the OTS may
prohibit the payment of dividends that are otherwise permissible
by regulation for safety and soundness reasons. As of
December 31, 2003,the Bank had $14.0 million of
dividends that could be paid to the Company without regulatory
approval and the Company had $4.0 million of securities
available for sale and $6.1 million of cash and cash
equivalents. Any dividend by the Bank beyond its current year
net income combined with retained net income of the preceding
two years would require notification to or approval by the OTS.
To the extent the Bank were to apply for a dividend distribution
to the Company in excess of the regulatory permitted dividend
amounts, no assurances can be made such application would be
approved by the regulatory authority.

The Banks primary sources of funds are
deposits (including brokered deposits), principal and interest
payments on loans, sales of loans, investments, mortgage-backed
and related securities and FHLB advances. 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. Management has maintained adequate liquidity so
that it may invest any excess liquidity in higher yielding
interest-earning assets or use such funds to repay higher cost
FHLB advances. The OTS no longer provides specific guidance for
liquidity ratios for the Bank, but does require the Bank to
maintain reasonable and prudent liquidity levels. Management
believes such levels are being maintained.

The Company and Banks most liquid assets
are cash, overnight federal 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.

Liquid assets for the period indicated consisted
of the following:

|                                              |                     |                   |         |                   |  |   |         |         | 
|--------------------------------------------- | ------------------- | ----------------- | ------- | ----------------- |  | - | ------- | ------- | 
|                                              |                     | December 31, 2003 |         | December 31, 2002
|                                              |                     |                   |         |                  
|Cash and cash equivalents                     |                     | $                 | 34,045  |                   |  | $ | 74,672  |        
|Investment securities available for sale      |                     |                   | 102,647 |                   |  |   | 112,888 |        
|Mortgage-backed securities available for sale |                     |                   | 83,752  |                   |  |   | 114,515 |        
|Loans held for sale                           |                     |                   | 12,751  |                   |  |   | 31,614  |        
|                                              |                     |                   |         |                   |  |   |         |        
|                                              | Total liquid assets |                   | $       | 233,195           |  |   | $       | 333,689 | 
|                                              |                     |                   |         |                   |  |   |         |        

The Bank has other sources of liquidity if a need
for additional funds arises, including FHLB advances and
wholesale-brokered deposits and repurchase agreements
(collateralized borrowings). At December 31, 2003, the Bank
had $365.7 million in advances outstanding from the FHLB
and had, with existing collateral, an additional
$350.6 million in overall borrowing capacity from the FHLB.
Borrowing capacity can also be increased upon the delivery of
mortgage notes on non owner-occupied one- to four-family loans,
multi-family and commercial loans. The Bank generally avoids
paying the highest deposit rates in its market and accordingly
utilizes alternative sources of funds such as FHLB advances and
wholesale-brokered deposits to supplement cash flow needs.

At December 31, 2003, the Bank had
commitments to originate and purchase loans, loans in process,
unused outstanding lines of credit and standby letters of
credit, totaling $278.5 million.

34



---



##### 



The following table lists the outstanding
commitments by expiration date (in thousands):

|                            |       |             |         |         |  |           |        |           |  |              |       |       |  |  |        |        |  |  |         |         | 
|--------------------------- | ----- | ----------- | ------- | ------- |  | --------- | ------ | --------- |  | ------------ | ----- | ----- |  |  | ------ | ------ |  |  | ------- | ------- | 
|                            |       | Total       |         | Under   |  |           |        |           |  |             
|                            |       | Commitments |         | 1 year  |  | 1-3 years |        | 4-5 years |  | Over 5 years
|                            |       |             |         |         |  |           |        |           |  |             
|To originate mortgage loans |       | $           | 72,843  |         |  |           | 72,843 |           |  |              |      |       |  |  |       |        |  |  |        |        
|To purchase mortgage loans  |       |             | 3,771   |         |  |           | 3,771  |           |  |              |      |       |  |  |       |        |  |  |        |        
|Loans in process            |       |             | 33,257  |         |  |           | 33,257 |           |  |              |      |       |  |  |       |        |  |  |        |        
|To originate business loans |       |             | 1,676   |         |  |           | 1,676  |           |  |              |      |       |  |  |       |        |  |  |        |        
|Home equity lines           |       |             | 151,735 |         |  |           | 961    |           |  |              | 5,224 |       |  |  | 16,020 |        |  |  | 129,530 |        
|Business lines              |       |             | 12,149  |         |  |           | 1,088  |           |  |              |      |       |  |  | 81     |        |  |  | 10,980  |        
|Standby letters of credit   |       |             | 3,029   |         |  |           | 2,902  |           |  |              |      |       |  |  |       |        |  |  | 127     |        
|                            |       |             |         |         |  |           |        |           |  |              |       |       |  |  |        |        |  |  |         |        
|                            | Total |             | $       | 278,460 |  |           |        | 116,498   |  |              |       | 5,224 |  |  |        | 16,101 |  |  |         | 140,637 | 
|                            |       |             |         |         |  |           |        |           |  |              |       |       |  |  |        |        |  |  |         |        

The following table sets forth contractual
obligations by due periods (in thousands):

|                                                                                       |  |       |         |        |  |           |         |           |  |         |        |  |  |  |         |  |  |  |        | 
|-------------------------------------------------------------------------------------- |  | ----- | ------- | ------ |  | --------- | ------- | --------- |  | ------- | ------ |  |  |  | ------- |  |  |  | ------ | 
|                                                                                       |  |       |         | Under  |  |           |         |           |  | Over   
|                                                                                       |  | Total |         | 1 year |  | 1-3 years |         | 4-5 years |  | 5 years
|                                                                                       |  |       |         |        |  |           |         |           |  |        
|Long-term debt (FHLB advances)                                                         |  | $     | 365,663 |        |  |           | 138,497 |           |  |         | 62,666 |  |  |  | 106,500 |  |  |  | 58,000 | 
|Other Borrowings  Corporation
    obligated mandatorily redeemable capital securities |  |       | 32,990  |        |  |           |         |           |  |         |        |  |  |  |         |  |  |  | 32,990 | 
|Operating leases                                                                       |  |       | 7,965   |        |  |           | 1,548   |           |  |         | 3,033  |  |  |  | 2,784   |  |  |  | 600    | 
|Core data processing and other information
    technology obligations                  |  |       | 3,919   |        |  |           | 1,397   |           |  |         | 2,522  |  |  |  |        |  |  |  |       | 
|Other obligations                                                                      |  |       | 861     |        |  |           | 295     |           |  |         | 566    |  |  |  |        |  |  |  |       | 
|Pension/retirement benefits                                                            |  |       | 3,299   |        |  |           | 2,209   |           |  |         | 892    |  |  |  | 198     |  |  |  |       | 
|                                                                                       |  |       |         |        |  |           |         |           |  |         |        |  |  |  |         |  |  |  |        | 
|Total obligations                                                                      |  | $     | 414,697 |        |  |           | 143,946 |           |  |         | 69,679 |  |  |  | 109,482 |  |  |  | 91,590 | 
|                                                                                       |  |       |         |        |  |           |         |           |  |         |        |  |  |  |         |  |  |  |        | 

The Bank anticipates that it will have sufficient
funds available to meet its current loan origination commitments
and other obligations. Certificate accounts, which are scheduled
to mature in less than one year from December 31, 2003,
totaled $255.7 million. The Bank expects that a substantial
majority of the maturing certificate accounts will be retained
by the Bank at maturity.

At the time of conversion, the Bank established a
liquidation account in an amount equal to its retained earnings
as of June 30, 1995. The liquidation account is reduced to
the extent that eligible account holders reduce their qualifying
deposits. 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, 2003, was approximately $4.6 million.

At December 31, 2003, the consolidated GAAP
capital to assets ratio of the Company was 5.6%. The Bank
exceeded all of its regulatory capital requirements with
tangible, core, risk-based tier 1, and risk-based total capital
ratios of 5.8%, 5.8%, 9.5% and 10.7%, respectively, compared to
the minimum regulatory requirements for adequately capitalized
levels of 2.0%, 4.0%, 4.0% and 8.0%, respectively.

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 throughout 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 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.

35



---



##### 



Recent Accounting Pronouncements

SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure. In December 2002, the FASB issued SFAS
No. 148. SFAS No. 148 amends No. 123,
Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the
fair value based methods of accounting for stock-based employee
compensation. Companies are able to eliminate a
ramp-up effect that the SFAS No. 123 transition
rule creates in the year of adoption. Companies can choose to
elect a method that will provide for comparability amongst years
reported. In addition, this Statement amends the disclosure
requirement of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements
about the fair value based method of accounting for stock-based
employee compensation and the effect of the method used on
reported results. The transition amendments to SFAS No. 123
are effective for financial statements for fiscal years ending
after December 15, 2002. The Company is currently
considering the adoption of fair value based compensation of
stock options. The potential impact to the Company of adopting
such accounting can be seen in Footnote 1(j) Employee
Benefits of the Notes to Consolidated Financial Statements.

FIN No. 46 Consolidation of Variable
Interest Entities  an Interpretation of Accounting
Research Bulletin No. 51. In January 2003, the FASB
issued FIN No. 46. FIN No. 46 established accounting
guidance for consolidation of variable interest entities
(VIE) that function to support the activities of the
primary beneficiary. The primary beneficiary of a VIE is the
entity that absorbs a majority of the VIEs expected
losses, receives a majority of the VIEs expected residual
returns, or both, as a result of ownership, controlling
interest, contractual relationship or other business
relationship with a VIE. Prior to the implementation of FIN
No. 46, VIEs were generally consolidated by an enterprise
when the enterprise had a controlling financial interest through
ownership of a majority of voting interest in the entity. The
Company adopted FIN No. 46 as of February 1, 2003 for
all arrangements entered into after January 31, 2003.

In December 2003, the FASB issued a revised FIN
No. 46, FIN 46R, which in part specifically addresses
limited purpose trusts formed to issue trust preferred
securities. The guidance requires the Company to deconsolidate
its investment in BFD Preferred Capital Trust I and II by
March 31, 2004, but the Company has chosen to early adopt
as of December 31, 2003. The adoption of this
interpretation did not have a material impact on the
Companys financial position or results of operations.

SFAS No. 149 Amendment of Statement
133 on Derivative Instruments and Hedging Activities. In
April 2003, the FASB issued SFAS No. 149, which amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities, resulting in more consistent reporting
of contracts as either derivatives or hybrid instruments. SFAS
No. 149 is effective for contracts entered into or modified
after June 30, 2003, and should be applied prospectively.
Implementation issues that have been effective for fiscal
quarters that began prior to June 15, 2003 should continue
to be applied in accordance with their respective effective
dates. The Company adopted this statement on July 1, 2003.
There was no material impact to the Companys financial
position or results of operations.

SFAS No. 150 Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities
and Equity. In May 2003, the FASB issued SFAS
No. 150, which establishes standards for how certain
financial instruments with characteristics of both liabilities
and equity should be measured and classified. Certain financial
instruments with characteristics of both liabilities and equity
will be required to be classified as a liability. This statement
is effective for financial instruments entered into or modified
after May 31, 2003, and July 1, 2003 for all other
financial instruments with the exception of existing mandatorily
redeemable financial instruments issued by limited life
subsidiaries, which have been indefinitely deferred from the
scope of the statement. The Company does not believe the
adoption of SFAS No. 150 will have a material impact on the
Companys financial position or results of operations.

Statement of Position 03-3
(SOP 03-3): Accounting for Certain Loans
or Debt Securities Acquired in a Transfer. In December
2003, the American Institute of Certified Public Accountants
(AICPA) issued SOP 03-3. SOP 03-3 requires
loans acquired through a transfer, such as a business
combination, where there are differences in expected cash flows
and contractual cash flows due in part to credit quality be
recognized at their fair value. The excess of contractual cash
flows over expected cash flows is not to be recognized as an
adjustment of yield, loss accrual, or valuation allowance.
Valuation allowances can neither

36



---



##### 



be created nor carried over in the
initial accounting for loans acquired in a transfer on loans
subject to SFAS 114, Accounting by Creditors for
Impairment of a Loan. This SOP is effective for loans
acquired after December 31, 2004, with early adoption
encouraged. The Company does not believe the adoption of
SOP 03-3 will have a material impact on the Companys
financial position or results of operations.


37



---



##### 



Independent Auditors Report

The Board of Directors and Stockholders

BostonFed Bancorp, Inc.:


We have audited the accompanying consolidated
balance sheets of BostonFed Bancorp, Inc. and subsidiaries (the
Company) as of December 31, 2003 and 2002, and
the related consolidated statements of income, changes in
stockholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 31, 2003. 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
auditing standards generally accepted in the United States of
America. 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, 2003 and 2002, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America.

As discussed in Note 1 to the consolidated
financial statements, effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.

(KPMG LLP LOGO)

Boston, Massachusetts

March 5, 2004


F-1



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002


|                                                                                                                                 |                                                                                                           |                                            |           |           |           |  |           |         |           | 
|-------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | --------- | --------- |  | --------- | ------- | --------- | 
|                                                                                                                                 |                                                                                                           | 2003                                       |           | 2002     
|                                                                                                                                 |                                                                                                           |                                            |           |          
|                                                                                                                                 |                                                                                                           |                                           
|                                                                                                                                 |                                                                                                           | (In thousands, except share               
|                                                                                                                                 |                                                                                                           | and per share amounts)                    
|ASSETS                                                                                                                          
|Cash and due from banks (note 1)                                                                                                 |                                                                                                           | $                                          | 32,518    |           |           |  | 48,595    |        
|Federal funds sold                                                                                                               |                                                                                                           |                                            | 1,350     |           |           |  | 25,900    |        
|Certificates of deposit                                                                                                          |                                                                                                           |                                            | 177       |           |           |  | 177       |        
|                                                                                                                                 |                                                                                                           |                                            |           |           |           |  |           |        
|                                                                                                                                 |                                                                                                           | Total cash and cash equivalents            |           |           | 34,045    |  |           |         | 74,672    | 
|Investment securities available for sale
    (amortized cost of $101,499 for 2003 and $112,056 for 2002)
    (notes 3 and 4)     |                                                                                                           |                                            | 102,647   |           |           |  | 112,888   |        
|Investment securities held to maturity (fair
    value of $2,137 for 2003 and $2,576 for 2002) (notes 3 and
    4)               |                                                                                                           |                                            | 2,025     |           |           |  | 2,524     |        
|Mortgage-backed securities available for sale
    (amortized cost of $84,264 for 2003 and $113,550 for 2002)
    (notes 3 and 4) |                                                                                                           |                                            | 83,752    |           |           |  | 114,515   |        
|Mortgage-backed securities held to maturity (fair
    value of $145,029 for 2003 and $26,597 for 2002) (notes 3
    and 4)       |                                                                                                           |                                            | 145,674   |           |           |  | 25,429    |        
|Loans held for sale                                                                                                              |                                                                                                           |                                            | 12,751    |           |           |  | 31,614    |        
|Loans, net of allowance for loan losses of
    $13,874 for 2003 and $12,656 for 2002 (notes 5 and 6)                             |                                                                                                           |                                            | 1,198,019 |           |           |  | 1,071,356 |        
|Accrued interest receivable (note 7)                                                                                             |                                                                                                           |                                            | 6,129     |           |           |  | 6,470     |        
|Stock in FHLB of Boston, at cost (note 10)                                                                                       |                                                                                                           |                                            | 28,483    |           |           |  | 24,552    |        
|Bank-owned life insurance                                                                                                        |                                                                                                           |                                            | 25,549    |           |           |  | 24,316    |        
|Premises and equipment, net (note 8)                                                                                             |                                                                                                           |                                            | 19,539    |           |           |  | 10,133    |        
|Real estate owned                                                                                                                |                                                                                                           |                                            | 1,782     |           |           |  | 1,026     |        
|Goodwill and Core Deposit Intangible (note 1)                                                                                    |                                                                                                           |                                            | 17,536    |           |           |  | 10,776    |        
|Deferred income tax asset, net (note 12)                                                                                         |                                                                                                           |                                            | 1,808     |           |           |  | 2,633     |        
|Prepaid expenses and other assets                                                                                                |                                                                                                           |                                            | 15,239    |           |           |  | 12,708    |        
|                                                                                                                                 |                                                                                                           |                                            |           |           |           |  |           |        
|                                                                                                                                 |                                                                                                           | Total assets                               |           | $         | 1,694,978 |  |           |         | 1,525,612 | 
|                                                                                                                                 |                                                                                                           |                                            |           |           |           |  |           |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                        
|Liabilities:                                                                                                                     |                                                                                                           |                                            |           |           |           |  |           |        
|                                                                                                                                 | Deposit accounts (note 9)                                                                                 |                                            | $         | 1,188,548 |           |  |           | 960,278 |          
|                                                                                                                                 | FHLB advances and other borrowings (notes 10
    and 11)                                                  |                                            |           | 398,653   |           |  |           | 458,560 |          
|                                                                                                                                 | Advance payments by borrowers for taxes and
    insurance                                                 |                                            |           | 2,819     |           |  |           | 2,317   |          
|                                                                                                                                 | Accrued expenses and other liabilities                                                                    |                                            |           | 10,309    |           |  |           | 11,484  |          
|                                                                                                                                 |                                                                                                           |                                            |           |           |           |  |           |        
|                                                                                                                                 |                                                                                                           | Total liabilities                          |           |           | 1,600,329 |  |           |         | 1,432,639 | 
|                                                                                                                                 |                                                                                                           |                                            |           |           |           |  |           |        
|Commitments and contingencies (notes 3, 5, 8, 14
    and 15)                                                                     |                                                                                                           |                                            |           |           |           |  |           |        
|Stockholders equity (notes 2 and 13):                                                                                           |                                                                                                           |                                            |           |           |           |  |           |        
|                                                                                                                                 | Preferred stock, $.01 par value. Authorized
    1,000,000 shares; none issued                             |                                            |           |          |           |  |           |        |          
|                                                                                                                                 | Common stock, $.01 par value. Authorized
    17,000,000 shares; 6,589,617 shares issued for 2003 and 2002 |                                            |           | 66        |           |  |           | 66      |          
|                                                                                                                                 | Additional paid-in capital                                                                                |                                            |           | 70,141    |           |  |           | 69,281  |          
|                                                                                                                                 | Retained earnings                                                                                         |                                            |           | 64,684    |           |  |           | 64,242  |          
|                                                                                                                                 | Accumulated other comprehensive income                                                                    |                                            |           | 395       |           |  |           | 1,096   |          
|                                                                                                                                 | Treasury stock, at cost (2,097,821 and 2,164,269
    shares for 2003 and 2002, respectively)              |                                            |           | (40,637   | )         |  |           | (41,698 | )        
|                                                                                                                                 | Unearned stock-based incentive plan                                                                       |                                            |           |          |           |  |           | (14     | )        
|                                                                                                                                 |                                                                                                           |                                            |           |           |           |  |           |        
|                                                                                                                                 |                                                                                                           | Total stockholders equity                 |           |           | 94,649    |  |           |         | 92,973    | 
|                                                                                                                                 |                                                                                                           |                                            |           |           |           |  |           |        
|                                                                                                                                 |                                                                                                           | Total liabilities and stockholders equity |           | $         | 1,694,978 |  |           |         | 1,525,612 | 
|                                                                                                                                 |                                                                                                           |                                            |           |           |           |  |           |        

See accompanying notes to consolidated financial
statements.

F-2



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2003, 2002 and
2001


|                                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |        |        | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------- | ----- | ------ | ------ | ---- | ----- | ------ | ------ |  | ----- | ------ | ------ | 
|                                                   |                                                                                                                                | 2003                                                    |       | 2002   |        | 2001
|                                                   |                                                                                                                                |                                                         |       |        |        |     
|                                                   |                                                                                                                                |                                                        
|                                                   |                                                                                                                                | (In thousands, except share and                        
|                                                   |                                                                                                                                | per share amounts)                                     
|Interest income:                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|                                                   | Loans (note 5)                                                                                                                 |                                                         | $     | 64,788 |        |      |       | 73,418 |        |  |       | 81,914 |       
|                                                   | Investment securities                                                                                                          |                                                         |       | 4,166  |        |      |       | 4,011  |        |  |       | 5,150  |       
|                                                   | Mortgage-backed securities                                                                                                     |                                                         |       | 6,505  |        |      |       | 7,904  |        |  |       | 7,365  |       
|                                                   | Federal funds sold                                                                                                             |                                                         |       | 191    |        |      |       | 270    |        |  |       | 467    |       
|                                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|                                                   |                                                                                                                                | Total interest income                                   |       |        | 75,650 |      |       |        | 85,603 |  |       |        | 94,896 | 
|                                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|Interest expense:                                  |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|                                                   | Deposit accounts (note 9)                                                                                                      |                                                         |       | 19,476 |        |      |       | 22,341 |        |  |       | 30,103 |       
|                                                   | Borrowed funds (notes 10 and 11)                                                                                               |                                                         |       | 20,267 |        |      |       | 25,748 |        |  |       | 27,459 |       
|                                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|                                                   |                                                                                                                                | Total interest expense                                  |       |        | 39,743 |      |       |        | 48,089 |  |       |        | 57,562 | 
|                                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|                                                   |                                                                                                                                | Net interest income                                     |       |        | 35,907 |      |       |        | 37,514 |  |       |        | 37,334 | 
|Provision for loan losses (note 6)                 |                                                                                                                                |                                                         | 3,350 |        |        |      | 1,350 |        |        |  | 820   |       
|                                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|                                                   |                                                                                                                                | Net interest income after provision for loan
    losses |       |        | 32,557 |      |       |        | 36,164 |  |       |        | 36,514 | 
|                                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|Non-interest income:                               |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|                                                   | Gain on sale of loans                                                                                                          |                                                         |       | 10,470 |        |      |       | 12,657 |        |  |       | 10,625 |       
|                                                   | Deposit service fees                                                                                                           |                                                         |       | 3,626  |        |      |       | 3,038  |        |  |       | 2,476  |       
|                                                   | Income from bank-owned life insurance (note 13)                                                                                |                                                         |       | 1,232  |        |      |       | 1,238  |        |  |       | 1,255  |       
|                                                   | Loan processing and servicing fees (note 5)                                                                                    |                                                         |       | (1,942 | )      |      |       | (3,989 | )      |  |       | (275   | )     
|                                                   | Gain on sale of investments (note 3)                                                                                           |                                                         |       | 275    |        |      |       | 387    |        |  |       | 690    |       
|                                                   | Other                                                                                                                          |                                                         |       | 1,673  |        |      |       | 1,560  |        |  |       | 1,828  |       
|                                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|                                                   |                                                                                                                                | Total non-interest income                               |       |        | 15,334 |      |       |        | 14,891 |  |       |        | 16,599 | 
|                                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|Non-interest expense:                              |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|                                                   | Compensation and benefits (note 13)                                                                                            |                                                         |       | 24,307 |        |      |       | 23,940 |        |  |       | 21,674 |       
|                                                   | Occupancy and equipment                                                                                                        |                                                         |       | 4,859  |        |      |       | 4,883  |        |  |       | 4,737  |       
|                                                   | Data processing                                                                                                                |                                                         |       | 2,016  |        |      |       | 1,775  |        |  |       | 1,685  |       
|                                                   | Advertising expense                                                                                                            |                                                         |       | 1,526  |        |      |       | 1,141  |        |  |       | 1,032  |       
|                                                   | Stationery, printing and office supplies                                                                                       |                                                         |       | 961    |        |      |       | 830    |        |  |       | 787    |       
|                                                   | Deposit insurance premiums                                                                                                     |                                                         |       | 173    |        |      |       | 159    |        |  |       | 167    |       
|                                                   | Real estate operations                                                                                                         |                                                         |       | 9      |        |      |       | 200    |        |  |       | 7      |       
|                                                   | Amortization of core deposit intangible in 2003,
    goodwill impairment in 2002 and goodwill amortization in
    2001(note 1) |                                                         |       | 208    |        |      |       | 7,000  |        |  |       | 1,418  |       
|                                                   | Legal settlements                                                                                                              |                                                         |       |       |        |      |       | 1,250  |        |  |       |       |       
|                                                   | Other                                                                                                                          |                                                         |       | 6,118  |        |      |       | 6,102  |        |  |       | 6,741  |       
|                                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|                                                   |                                                                                                                                | Total non-interest expense                              |       |        | 40,177 |      |       |        | 47,280 |  |       |        | 38,248 | 
|                                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|                                                   |                                                                                                                                | Income before income taxes                              |       |        | 7,714  |      |       |        | 3,775  |  |       |        | 14,865 | 
|Income tax expense (note 12)                       |                                                                                                                                |                                                         | 4,415 |        |        |      | 1,387 |        |        |  | 5,209 |       
|                                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|                                                   |                                                                                                                                | Net income                                              |       | $      | 3,299  |      |       |        | 2,388  |  |       |        | 9,656  | 
|                                                   |                                                                                                                                |                                                         |       |        |        |      |       |        |        |  |       |       
|Basic earnings per share                           |                                                                                                                                | $                                                       | 0.75  |        |        |      | 0.54  |        |        |  | 2.18  |       
|Diluted earnings per share                         |                                                                                                                                | $                                                       | 0.71  |        |        |      | 0.51  |        |        |  | 2.05  |       
|Weighted average shares outstanding  basic        |                                                                                                                                |                                                         | 4,425 |        |        |      | 4,413 |        |        |  | 4,436 |       
|Weighted average shares outstanding 
    dilutive |                                                                                                                                |                                                         | 4,637 |        |        |      | 4,676 |        |        |  | 4,702 |       

See accompanying notes to consolidated financial
statements.

F-3



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME

Years ended December 31, 2003, 2002 and
2001


|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |     |   |    |  |         |        |   |  |        |     |   |  |      |    |   |  |        |        |       | 
|---------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ----- | ------ | - | ---------- | -- | -------- | - | ------------- | ------ | -------- | - | ----------- | ------ | --------- | - | ------------- | --- | - | -- |  | ------- | ------ | - |  | ------ | --- | - |  | ---- | -- | - |  | ------ | ------ | ----- | 
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        | Unearned  |   |              
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        | Stock-    |   |              
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   | Accumulated   |        |          |   |             |        | Based     |   |              
|                             |                                                                                                      | Shares of                                                                 |       |        |   | Additional |    |          |   | Other         |        |          |   | Unallocated |        | Incentive |   | Total        
|                             |                                                                                                      | Common                                                                    |       | Common |   | Paid-in    |    | Retained |   | Comprehensive |        | Treasury |   | ESOP        |        | Plan      |   | Stockholders
|                             |                                                                                                      | Stock                                                                     |       | Stock  |   | Capital    |    | Earnings |   | Income        |        | Stock    |   | Shares      |        | (SIP)   |   | Equity       
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |              
|                             |                                                                                                      |                                                                          
|                             |                                                                                                      | (In thousands, except per share amounts)                                 
|Balance at December 31, 2000 |                                                                                                      |                                                                           | 6,590 |        |   | $          | 66 |          |   |               | 67,538 |          |   |             | 57,696 |           |   |               | 88  |   |    |  | (34,281 | )      |   |  | (1,058 | )   |   |  | (136 | )  |   |  | 89,913 |       
|                             | Common stock repurchased (308 shares at an
    average price of $22.45 per share)                    |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        |          |   |               |     |  |    |  |         | (6,907 | ) |  |        |    |   |  |      |   |   |  |        | (6,907 | )    
|                             | Stock options exercised (110 shares at an average
    price of $12.51 per share, net of tax benefit) |                                                                           |       |       |   |            |    |         |   |               |        | (256     | ) |             |        |          |   |               |     |  |    |  |         | 2,030  |   |  |        |    |   |  |      |   |   |  |        | 1,774  |      
|                             | Cash dividends declared and paid ($.58 per share)                                                    |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        | (2,650    | ) |               |     |  |    |  |         |       |   |  |        |    |   |  |      |   |   |  |        | (2,650 | )    
|                             | Reduction in unallocated ESOP shares charged to
    Expense                                          |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        |          |   |               |     |  |    |  |         |       |   |  |        | 529 |   |  |      |   |   |  |        | 529    |      
|                             | Appreciation in fair value of shares charged to
    expense for compensation plans                   |                                                                           |       |       |   |            |    |         |   |               |        | 684      |   |             |        |          |   |               |     |  |    |  |         |       |   |  |        |    |   |  |      |   |   |  |        | 684    |      
|                             | Earned portion of SIP shares charged to expense                                                      |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        |          |   |               |     |  |    |  |         |       |   |  |        |    |   |  |      | 79 |   |  |        | 79     |      
|                             | Tax benefit on SIP distribution                                                                      |                                                                           |       |       |   |            |    |         |   |               |        | 293      |   |             |        |          |   |               |     |  |    |  |         |       |   |  |        |    |   |  |      |   |   |  |        | 293    |      
|                             | Comprehensive income:                                                                                |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |     |   |    |  |         |        |   |  |        |     |   |  |      |    |   |  |        |        |      
|                             |                                                                                                      | Changes in net unrealized gain in investments
    available for sale, net |       |        |  |            |    |          |  |               |        |          |  |             |        |           |  |               |     |   | 17 |  |         |        |  |  |        |     |  |  |      |    |  |  |        |        | 17    | 
|                             | Net income                                                                                           |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        | 9,656     |   |               |     |  |    |  |         |       |   |  |        |    |   |  |      |   |   |  |        | 9,656  |      
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |     |   |    |  |         |        |   |  |        |     |   |  |      |    |   |  |        |       
|                             |                                                                                                      | Comprehensive income                                                      |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |     |   |    |  |         |        |   |  |        |     |   |  |      |    |   |  |        |        | 9,673 | 
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |     |   |    |  |         |        |   |  |        |     |   |  |      |    |   |  |        |       
|Balance at December 31, 2001 |                                                                                                      |                                                                           | 6,590 |        |   |            | 66 |          |   |               | 68,259 |          |   |             | 64,702 |           |   |               | 105 |   |    |  | (39,158 | )      |   |  | (529   | )   |   |  | (57  | )  |   |  | 93,388 |       
|                             | Common stock repurchased (217 shares at an
    average price of $28.21 per share)                    |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        |          |   |               |     |  |    |  |         | (6,109 | ) |  |        |    |   |  |      |   |   |  |        | (6,109 | )    
|                             | Stock options exercised (191 shares at an average
    price of $14.86 per share, net of tax benefit) |                                                                           |       |       |   |            |    |         |   |               |        | (725     | ) |             |        |          |   |               |     |  |    |  |         | 3,569  |   |  |        |    |   |  |      |   |   |  |        | 2,844  |      
|                             | Cash dividends declared and paid ($.63 per share)                                                    |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        | (2,848    | ) |               |     |  |    |  |         |       |   |  |        |    |   |  |      |   |   |  |        | (2,848 | )    
|                             | Reduction in unallocated ESOP shares charged to
    Expense                                          |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        |          |   |               |     |  |    |  |         |       |   |  |        | 529 |   |  |      |   |   |  |        | 529    |      
|                             | Appreciation in fair value of shares charged to
    expense for compensation plans                   |                                                                           |       |       |   |            |    |         |   |               |        | 969      |   |             |        |          |   |               |     |  |    |  |         |       |   |  |        |    |   |  |      |   |   |  |        | 969    |      
|                             | Earned portion of SIP shares charged to expense                                                      |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        |          |   |               |     |  |    |  |         |       |   |  |        |    |   |  |      | 43 |   |  |        | 43     |      
|                             | Tax benefit on SIP distribution                                                                      |                                                                           |       |       |   |            |    |         |   |               |        | 778      |   |             |        |          |   |               |     |  |    |  |         |       |   |  |        |    |   |  |      |   |   |  |        | 778    |      

F-4



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME

Years ended December 31, 2003, 2002 and
2001  (Continued)


|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |       |   |      |   |         |        |   |  |   |   |   |  |     |    |   |  |        |        |       |  
|---------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ----- | ------ | - | ---------- | -- | -------- | - | ------------- | ------ | -------- | - | ----------- | ------ | --------- | - | ------------- | ----- | - | ---- | - | ------- | ------ | - |  | - | - | - |  | --- | -- | - |  | ------ | ------ | ----- | -
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        | Unearned  |   |              
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        | Stock-    |   |              
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   | Accumulated   |        |          |   |             |        | Based     |   |              
|                             |                                                                                                      | Shares of                                                                 |       |        |   | Additional |    |          |   | Other         |        |          |   | Unallocated |        | Incentive |   | Total        
|                             |                                                                                                      | Common                                                                    |       | Common |   | Paid-in    |    | Retained |   | Comprehensive |        | Treasury |   | ESOP        |        | Plan      |   | Stockholders
|                             |                                                                                                      | Stock                                                                     |       | Stock  |   | Capital    |    | Earnings |   | Income        |        | Stock    |   | Shares      |        | (SIP)   |   | Equity       
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |              
|                             |                                                                                                      |                                                                          
|                             |                                                                                                      | (In thousands, except per share amounts)                                 
|                             | Comprehensive income:                                                                                |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |       |   |      |   |         |        |   |  |   |   |   |  |     |    |   |  |        |        |      
|                             |                                                                                                      | Changes in net unrealized gain in investments
    available for sale, net |       |        |  |            |    |          |  |               |        |          |  |             |        |           |  |               |       |   | 991  |   |         |        |  |  |   |   |  |  |     |    |  |  |        |        | 991   |  
|                             | Net income                                                                                           |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        | 2,388     |   |               |       |  |      |   |         |       |   |  |   |  |   |  |     |   |   |  |        | 2,388  |      
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |       |   |      |   |         |        |   |  |   |   |   |  |     |    |   |  |        |       
|                             |                                                                                                      | Comprehensive income                                                      |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |       |   |      |   |         |        |   |  |   |   |   |  |     |    |   |  |        |        | 3,379 |  
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |       |   |      |   |         |        |   |  |   |   |   |  |     |    |   |  |        |       
|Balance at December 31, 2002 |                                                                                                      |                                                                           | 6,590 |        |   |            | 66 |          |   |               | 69,281 |          |   |             | 64,242 |           |   |               | 1,096 |   |      |   | (41,698 | )      |   |  |  |   |   |  | (14 | )  |   |  | 92,973 |       
|                             | Common stock repurchased (43 shares at an
    average price of $24.24 per share)                     |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        |          |   |               |       |  |      |   |         | (1,057 | ) |  |   |  |   |  |     |   |   |  |        | (1,057 | )    
|                             | Stock options exercised (110 shares at an
    average price of $13.78 per share, net of tax benefit) |                                                                           |       |       |   |            |    |         |   |               |        | (602     | ) |             |        |          |   |               |       |  |      |   |         | 2,118  |   |  |   |  |   |  |     |   |   |  |        | 1,516  |      
|                             | Cash dividends declared and paid ($.64 per share)                                                    |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        | (2,857    | ) |               |       |  |      |   |         |       |   |  |   |  |   |  |     |   |   |  |        | (2,857 | )    
|                             | Appreciation in fair value of shares charged to
    expense for compensation plans                   |                                                                           |       |       |   |            |    |         |   |               |        | 988      |   |             |        |          |   |               |       |  |      |   |         |       |   |  |   |  |   |  |     |   |   |  |        | 988    |      
|                             | Earned portion of SIP shares charged to expense                                                      |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        |          |   |               |       |  |      |   |         |       |   |  |   |  |   |  |     | 14 |   |  |        | 14     |      
|                             | Tax benefit on SIP distribution                                                                      |                                                                           |       |       |   |            |    |         |   |               |        | 474      |   |             |        |          |   |               |       |  |      |   |         |       |   |  |   |  |   |  |     |   |   |  |        | 474    |      
|                             | Comprehensive income:                                                                                |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |       |   |      |   |         |        |   |  |   |   |   |  |     |    |   |  |        |        |      
|                             |                                                                                                      | Changes in net unrealized gain in investments
    available for sale, net |       |        |  |            |    |          |  |               |        |          |  |             |        |           |  |               |       |   | (701 | ) |         |        |  |  |   |   |  |  |     |    |  |  |        |        | (701  | )
|                             | Net income                                                                                           |                                                                           |       |       |   |            |    |         |   |               |        |         |   |             |        | 3,299     |   |               |       |  |      |   |         |       |   |  |   |  |   |  |     |   |   |  |        | 3,299  |      
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |       |   |      |   |         |        |   |  |   |   |   |  |     |    |   |  |        |       
|                             |                                                                                                      | Comprehensive income                                                      |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |       |   |      |   |         |        |   |  |   |   |   |  |     |    |   |  |        |        | 2,598 |  
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |       |   |      |   |         |        |   |  |   |   |   |  |     |    |   |  |        |       
|Balance at December 31, 2003 |                                                                                                      |                                                                           | 6,590 |        |   | $          | 66 |          |   |               | 70,141 |          |   |             | 64,684 |           |   |               | 395   |   |      |   | (40,637 | )      |   |  |  |   |   |  |    |    |   |  | 94,649 |       
|                             |                                                                                                      |                                                                           |       |        |   |            |    |          |   |               |        |          |   |             |        |           |   |               |       |   |      |   |         |        |   |  |   |   |   |  |     |    |   |  |        |       

F-5



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Years ended December 31, 2003, 2002 and
2001


|                                          |                                                                                       |                                                                                    |                                                         |          |          |        |  |          |          |         |   |          |          |         |  
|----------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------------------------- | -------- | -------- | ------ |  | -------- | -------- | ------- | - | -------- | -------- | ------- | -
|                                          |                                                                                       | 2003                                                                               |                                                         | 2002     |          | 2001  
|                                          |                                                                                       |                                                                                    |                                                         |          |          |       
|                                          |                                                                                       |                                                                                   
|                                          |                                                                                       | (In thousands)                                                                    
|Net cash flows from operating activities: |                                                                                       |                                                                                    |                                                         |          |          |        |  |          |          |         |   |         
|                                          | Net income                                                                            |                                                                                    | $                                                       | 3,299    |          |        |  | 2,388    |          |         |   | 9,656    |         
|                                          | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                    |                                                         |          |          |        |  |          |          |         |   |          |         
|                                          |                                                                                       | Depreciation, amortization, impairment and
    accretion, net                      |                                                         |          | 3,141    |        |  |          | 8,862    |         |   |          | 2,817    |        
|                                          |                                                                                       | Earned SIP shares                                                                  |                                                         |          | 14       |        |  |          | 43       |         |   |          | 79       |        
|                                          |                                                                                       | Reduction in unallocated ESOP shares                                               |                                                         |          |         |        |  |          | 529      |         |   |          | 529      |        
|                                          |                                                                                       | Appreciation in fair value of shares charged to
    expense for compensation plans |                                                         |          | 988      |        |  |          | 969      |         |   |          | 684      |        
|                                          |                                                                                       | Income from bank-owned life insurance                                              |                                                         |          | (1,232   | )      |  |          | (1,238   | )       |   |          | (1,255   | )      
|                                          |                                                                                       | Provision for loan losses                                                          |                                                         |          | 3,350    |        |  |          | 1,350    |         |   |          | 820      |        
|                                          |                                                                                       | Provision for valuation allowance for real estate
    owned                        |                                                         |          |         |        |  |          | 200      |         |   |          |         |        
|                                          |                                                                                       | Loans originated for sale                                                          |                                                         |          | (621,494 | )      |  |          | (757,990 | )       |   |          | (592,310 | )      
|                                          |                                                                                       | Proceeds from sale of loans                                                        |                                                         |          | 650,827  |        |  |          | 763,645  |         |   |          | 591,139  |        
|                                          |                                                                                       | Gain on sale of investment securities                                              |                                                         |          | (275     | )      |  |          | (387     | )       |   |          | (690     | )      
|                                          |                                                                                       | Deferred income tax expense (benefit)                                              |                                                         |          | 1,272    |        |  |          | (2,383   | )       |   |          | 571      |        
|                                          |                                                                                       | Gain on sale of real estate acquired through
    foreclosure                       |                                                         |          | (14      | )      |  |          |         |         |   |          |         |        
|                                          |                                                                                       | Gain on sale of loans                                                              |                                                         |          | (10,470  | )      |  |          | (12,657  | )       |   |          | (10,625  | )      
|                                          |                                                                                       | Gain on sale of office premises                                                    |                                                         |          |         |        |  |          |         |         |   |          | (217     | )      
|                                          |                                                                                       | Decrease (increase) in accrued interest
    receivable                             |                                                         |          | 341      |        |  |          | (153     | )       |   |          | 1,058    |        
|                                          |                                                                                       | (Increase) decrease in prepaid expenses and other
    assets                       |                                                         |          | (1,554   | )      |  |          | 456      |         |   |          | (1,904   | )      
|                                          |                                                                                       | (Decrease) increase in accrued expenses and other
    liabilities                  |                                                         |          | (3,583   | )      |  |          | 2,136    |         |   |          | 128      |        
|                                          |                                                                                       |                                                                                    |                                                         |          |          |        |  |          |          |         |   |         
|                                          |                                                                                       |                                                                                    | Net cash provided by operating activities               |          |          | 24,610 |  |          |          | 5,770   |   |          |          | 480     |  
|                                          |                                                                                       |                                                                                    |                                                         |          |          |        |  |          |          |         |   |         
|Cash flows from investing activities:     |                                                                                       |                                                                                    |                                                         |          |          |        |  |          |          |         |   |         
|                                          | Net cash received from branch acquisition                                             |                                                                                    |                                                         | 310,548  |          |        |  |         |          |         |   |         |         
|                                          | Proceeds from sales of investment securities
    available for sale                   |                                                                                    |                                                         | 33,655   |          |        |  | 12,121   |          |         |   | 26,743   |         
|                                          | Proceeds from maturities of investment securities
    available for sale              |                                                                                    |                                                         | 8,000    |          |        |  | 2,003    |          |         |   | 25,412   |         
|                                          | Proceeds from maturities of investment securities
    held to maturity                |                                                                                    |                                                         | 500      |          |        |  | 25       |          |         |   | 1,750    |         
|                                          | Purchase of investment securities available for
    sale                              |                                                                                    |                                                         | (34,712  | )        |        |  | (64,647  | )        |         |   | (52,053  | )       
|                                          | Purchase of investment securities held to maturity                                    |                                                                                    |                                                         |         |          |        |  | (1,996   | )        |         |   |         |         
|                                          | Purchase of mortgage-backed securities available
    for sale                         |                                                                                    |                                                         | (102,417 | )        |        |  | (133,799 | )        |         |   | (101,843 | )       
|                                          | Purchase of mortgage-backed securities held to
    maturity                           |                                                                                    |                                                         | (56,242  | )        |        |  |         |          |         |   |         |         
|                                          | Principal repayments of investments securities
    available-for-sale                 |                                                                                    |                                                         | 3,668    |          |        |  | 1,606    |          |         |   | 1,217    |         
|                                          | Principal repayments on mortgage-backed
    securities held to maturity               |                                                                                    |                                                         | 16,580   |          |        |  | 15,380   |          |         |   | 14,439   |         
|                                          | Principal repayments on mortgage-backed
    securities available for sale             |                                                                                    |                                                         | 130,668  |          |        |  | 115,231  |          |         |   | 22,105   |         
|                                          | Increase in portfolio loans, net                                                      |                                                                                    |                                                         | (214,899 | )        |        |  | (18,000  | )        |         |   | (20,183  | )       
|                                          | Purchase of FHLB stock                                                                |                                                                                    |                                                         | (3,931   | )        |        |  | (344     | )        |         |   | (3,559   | )       
|                                          | Purchases of premises and equipment                                                   |                                                                                    |                                                         | (3,727   | )        |        |  | (1,413   | )        |         |   | (1,663   | )       
|                                          | Proceeds from sale of real estate owned                                               |                                                                                    |                                                         | 3,690    |          |        |  |         |          |         |   | 147      |         
|                                          | Proceeds from sale of office premises                                                 |                                                                                    |                                                         |         |          |        |  |         |          |         |   | 790      |         
|                                          | Additional investment in real estate owned                                            |                                                                                    |                                                         | (147     | )        |        |  | (134     | )        |         |   | (2       | )       
|                                          |                                                                                       |                                                                                    |                                                         |          |          |        |  |          |          |         |   |         
|                                          |                                                                                       |                                                                                    | Net cash provided by (used in) investing
    activities |          |          | 91,234 |  |          |          | (73,967 | ) |          |          | (86,700 | )
|                                          |                                                                                       |                                                                                    |                                                         |          |          |        |  |          |          |         |   |         
|(Continued)                              

F-6



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Years ended December 31, 2003, 2002 and
2001


|                                                            |                                                                                    |                |                                                          |          |        |          |        |          |        |         |        |          |        |         | 
|----------------------------------------------------------- | ---------------------------------------------------------------------------------- | -------------- | -------------------------------------------------------- | -------- | ------ | -------- | ------ | -------- | ------ | ------- | ------ | -------- | ------ | ------- | 
|                                                            |                                                                                    | 2003           |                                                          | 2002     |        | 2001    
|                                                            |                                                                                    |                |                                                          |          |        |         
|                                                            |                                                                                    |               
|                                                            |                                                                                    | (In thousands)
|Cash flows from financing activities:                       |                                                                                    |                |                                                          |          |        |          |        |          |        |         |        |         
|                                                            | (Decrease) increase in deposits accounts                                           |                | $                                                        | (93,678  | )      |          |        | 75,762   |        |         |        | 34,869   |       
|                                                            | Proceeds from Federal Home Loan Bank advances                                      |                |                                                          | 864,816  |        |          |        | 380,356  |        |         |        | 510,078  |       
|                                                            | Repayments of Federal Home Loan Bank advances                                      |                |                                                          | (925,713 | )      |          |        | (402,796 | )      |         |        | (405,412 | )     
|                                                            | Increase (decrease) in advanced payments by
    borrowers for taxes and insurance  |                |                                                          | 502      |        |          |        | (297     | )      |         |        | (250     | )     
|                                                            | Cash dividends paid                                                                |                |                                                          | (2,857   | )      |          |        | (2,848   | )      |         |        | (2,650   | )     
|                                                            | Common stock repurchased                                                           |                |                                                          | (1,057   | )      |          |        | (6,109   | )      |         |        | (6,907   | )     
|                                                            | Stock options exercised                                                            |                |                                                          | 1,516    |        |          |        | 2,844    |        |         |        | 1,774    |       
|                                                            |                                                                                    |                |                                                          |          |        |          |        |          |        |         |        |         
|                                                            |                                                                                    |                | Net cash (used) provided by financing
    activities     |          |        | (156,471 | )      |          |        | 46,912  |        |          |        | 131,502 | 
|                                                            |                                                                                    |                |                                                          |          |        |          |        |          |        |         |        |         
|                                                            |                                                                                    |                | Net (decrease) increase in cash and cash
    equivalents |          |        | (40,627  | )      |          |        | (21,285 | )      |          |        | 45,282  | 
|Cash and cash equivalents at beginning of year              |                                                                                    |                | 74,672                                                   |          |        |          | 95,957 |          |        |         | 50,675 |         
|                                                            |                                                                                    |                |                                                          |          |        |          |        |          |        |         |        |         
|Cash and cash equivalents at end of year                    |                                                                                    | $              | 34,045                                                   |          |        |          | 74,672 |          |        |         | 95,957 |         
|                                                            |                                                                                    |                |                                                          |          |        |          |        |          |        |         |        |         
|Supplemental disclosure of cash flow information:           |                                                                                    |                |                                                          |          |        |          |        |          |        |         |        |         
|                                                            | Payments during the year for:                                                      |                |                                                          |          |        |          |        |          |        |         |        |          |       
|                                                            |                                                                                    | Interest       |                                                          | $        | 39,743 |          |        |          | 48,515 |         |        |          | 54,187 |        
|                                                            |                                                                                    | Taxes          |                                                          |          | 3,531  |          |        |          | 3,342  |         |        |          | 4,824  |        
|Supplemental schedule of non-cash investing
    activities: |                                                                                    |                |                                                          |          |        |          |        |          |        |         |        |         
|                                                            | Transfers of mortgage loans to real estate owned                                   |                |                                                          | 4,285    |        |          |        | 1,092    |        |         |        |         |       
|                                                            | Conversion of real estate loans to
    mortgage-backed securities held to maturity |                |                                                          | 80,601   |        |          |        |         |        |         |        |         |       
|                                                            | Fair value of assets acquired                                                      |                |                                                          | 7,374    |        |          |        |         |        |         |        |         |       
|                                                            | Liabilities assumed from branch acquisition                                        |                |                                                          | 324,890  |        |          |        |         |        |         |        |         |       
|                                                            | Goodwill and other intangibles                                                     |                |                                                          | 6,968    |        |          |        |         |        |         |        |         |       

See accompanying notes to consolidated financial
statements.

F-7



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and 2002


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

BostonFed Bancorp, Inc. (the Company)
became a savings and loan holding company on December 31,
2003, effective with the merger of the former Broadway National
Bank (BNB) into Boston Federal Savings Bank
(BFS or the Bank). The Company is
headquartered in Burlington, Massachusetts and through the Bank,
provides a variety of loan, deposit and other services to its
customers through a network of banking and finance locations.
The Companys deposit gathering is concentrated in the
communities surrounding its banking offices located in the
greater Boston metropolitan area municipalities of Arlington,
Bedford, Belmont, Billerica, Boston, Burlington, Chelsea,
Lexington, Newton, Needham, Peabody, Revere, Sudbury, Wellesley
and Woburn. Diversified Ventures, Inc., d/b/a Forward Financial
Company (Forward Financial), a subsidiary of the
Bank, originates loans primarily directly with customers
purchasing or refinancing manufactured homes, recreational
vehicles and boats, currently in 20 states and subsequently
sells substantially all such loans.

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. As a result of the aforementioned
merger, the Company became subject to the regulations of, and
periodic examination by, the Office of Thrift Supervision
(OTS). The Federal Deposit Insurance Corporation
(FDIC) insures the deposits of the Bank through the
Savings Association Insurance Fund (SAIF) and
insures the deposits in the Chelsea and Revere Offices through
the Bank Insurance Fund (BIF).

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 period.
Actual results could differ from those estimates. Material
estimates that are particularly susceptible to change relate to
the determination of the allowance for loan losses, valuation of
originated mortgage servicing rights (OMSRs) and
goodwill impairment evaluation.

(a) Principles
of Consolidation

The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries: the
Bank, B.F. Funding Corporation (B.F. Funding), BFD
Preferred Capital Trust I and BFD Preferred Capital
Trust II. B.F. Funding was a business corporation formed at
the direction of the Company under the laws of the Commonwealth
of Massachusetts on August 25, 1995. It was established to
lend funds to a Company sponsored employee stock ownership plan
trust for the purchase of stock at the initial public offering.
B.F. Funding was dissolved in September of 2003. The Bank
includes its wholly owned subsidiaries Forward Financial,
Ellsmere Insurance Agency, Leader Corporation, BFS Security
Corporation, BNB Security Corporation, BFD Preferred Capital
Corporation and BNB Preferred Capital Corporation. 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.

(b) 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 certain deposit levels and amounted to
$7,766 at December 31, 2003.

(c) 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.

Premiums and discounts on investment and
mortgage-backed securities are amortized or accreted into income
by use of a method that approximates 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

F-8



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
income. Gains and losses on the sale of investment and
mortgage-backed securities are recognized at the time of sale on
a specific identification basis.

(d) 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 fifteen years) fixed-rate residential one to four family
mortgage loans are originated for sale and adjustable-rate loans
are originated both for portfolio and for sale. Occasionally,
the Company originates long-term 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 that reflect current market
rates. Gain or loss is recognized at the time of sale.

Capitalized mortgage servicing rights are
recognized, based on the allocated fair value of the rights to
service mortgage loans for others. Mortgage servicing rights are
amortized to loan processing and servicing fee income using a
method which approximates the level yield method in proportion
to, and over the period of, estimated net servicing income.
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 prepayments exceed estimated prepayments, the balance of
the applicable mortgage-servicing asset is adjusted by an
impairment charge to earnings. A valuation allowance for OMSRs
is maintained and adjustments to the valuation allowance, which
may be necessary due to changes in pre-payment speed estimates
of OMSRs, are charged or credited to earnings. The risk
characteristics of the underlying loans used to measure
impairment include interest rate and loan origination date.

Accrual of interest on loans is generally
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 nonaccrual 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.

(e) Allowance
for Loan Losses

The Company maintains an allowance for losses
that are inherent in the Companys loan portfolio. The
allowance for loan losses is established through a provision for
loan losses charged to operations. Loan losses are charged
against the allowance when the Company determines that the
collectibility of the loan principal is unlikely. Recoveries on
loans previously charged off are credited to the allowance.

The Company believes the allowance is adequate to
absorb probable loan losses. The Companys methodology to
estimate loss exposure inherent in the portfolio includes an
analysis of individual loans deemed to be impaired, reserve
allocations for various loan types based on payment status or
loss experience and an unallocated allowance that is maintained
based on the Companys assessment of many factors including
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

F-9



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 the Company 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.

Impaired loans may be multi-family, commercial
real estate, construction and business 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 collateral dependent
loans, the lower of the fair value of the collateral or the
recorded amount of the loan. The Company 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. The Company does not set any minimum delay of
payments as a factor in reviewing for impaired classification.
Impaired loans are charged off when the Company 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. Restructured loans are impaired loans where one or
more of the original contract terms have been modified in a
concession the Company would not otherwise consider but for
economic or other reasons pertaining to the debtors
difficulties.

(f) Goodwill
and Other Intangible Assets

On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets(SFAS 142). This statement addresses the
method of identifying goodwill and other intangible assets
acquired in a business combination and eliminated amortization
of further goodwill. The statement requires periodic (at least
annually) evaluation of goodwill and other intangible asset
balances for impairment. As a result of the Companys
adoption of SFAS 142, the Company periodically assesses the
carrying value of goodwill and other intangible assets to
determine whether there is any impairment. In 2002, given the
continued downturn in the manufactured housing industry,
budgeted sales targets were not met and budget forecasts were
revised at Forward Financial. The negative trends caused the
Company to perform a discounted cash flow analysis, utilizing
lowered expectations, and determined that an impairment loss was
evident. During the third quarter of 2002, the Company recorded
a $7,000 write-down of goodwill associated with the purchase of
Forward Financial, reducing the goodwill associated with that
transaction to $7,800.

At December 31, 2003 the combined total of
goodwill and core deposit intangible was $17,500. The core
deposit intangible resulted from the acquisition of the Boston
area branch offices of the Encore Bank. See Footnote
17  Acquisition and Merger. The Company evaluated
goodwill and other intangible assets during 2003 and determined
that no impairment had occurred.

F-10



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The changes in the carrying amount of goodwill
and other intangibles for the years ended December 31, 2003
and 2002 are as follows:

|                                       |                      |            |        |              |   |              |       |       |       |  |        |        |       | 
|-------------------------------------- | -------------------- | ---------- | ------ | ------------ | - | ------------ | ----- | ----- | ----- |  | ------ | ------ | ----- | 
|                                       |                      |            |        |              |   | Total       
|                                       |                      |            |        | Core Deposit |   | Identifiable
|                                       |                      | Goodwill   |        | Intangibles  |   | Intangibles 
|                                       |                      |            |        |              |   |             
|Balance at December 31, 2001           |                      | $          | 17,776 |              |   |              |      |       |       |  | 17,776 |       
|                                       | Goodwill Impairment  |            |        | (7,000       | ) |              |       |      |       |  |        | (7,000 | )    
|Balance at December 31, 2002           |                      |            | 10,776 |              |   |              |      |       |       |  | 10,776 |       
|                                       | Recorded during year |            |        | 1,968        |   |              |       | 5,000 |       |  |        | 6,968  |      
|                                       | Amortization expense |            |        |             |   |              |       | (208  | )     |  |        | (208   | )    
|Balance at December 31, 2003           |                      |            | 12,744 |              |   |              | 4,792 |       |       |  | 17,536 |       
|Estimated annual amortization expense: |                      |            |        |              |   |              |       |       |       |  |        |       
|                                       |                      | 2004       |        |              |  |              |       |       | 1,220 |  |        |        | 1,220 | 
|                                       |                      | 2005       |        |              |  |              |       |       | 1,042 |  |        |        | 1,042 | 
|                                       |                      | 2006       |        |              |  |              |       |       | 863   |  |        |        | 863   | 
|                                       |                      | 2007       |        |              |  |              |       |       | 685   |  |        |        | 685   | 
|                                       |                      | 2008       |        |              |  |              |       |       | 506   |  |        |        | 506   | 
|                                       |                      | Thereafter |        |              |  |              |       |       | 476   |  |        |        | 476   | 

The following table adjusts net income and
earnings per share for 2001 as if SFAS 142 had been adopted
at the beginning of 2001.

|                                            |  |      |       |      |  |      |       |  |  |  |        | 
|------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ------ | 
|                                            |  | 2003 |       | 2002 |  | 2001
|                                            |  |      |       |      |  |     
|Reported net income                         |  | $    | 3,299 |      |  |      | 2,388 |  |  |  | 9,656  | 
|Add back goodwill amortization (net of tax) |  |      |      |      |  |      |      |  |  |  | 938    | 
|                                            |  |      |       |      |  |      |       |  |  |  |        | 
|Adjusted net income                         |  | $    | 3,299 |      |  |      | 2,388 |  |  |  | 10,594 | 
|                                            |  |      |       |      |  |      |       |  |  |  |        | 
|Basic earnings per share                    |  | $    | 0.75  |      |  |      | 0.54  |  |  |  | 2.18   | 
|Goodwill amortization (net of tax)          |  |      |      |      |  |      |      |  |  |  | 0.21   | 
|                                            |  |      |       |      |  |      |       |  |  |  |        | 
|Adjusted basic earnings per share           |  | $    | 0.75  |      |  |      | 0.54  |  |  |  | 2.39   | 
|                                            |  |      |       |      |  |      |       |  |  |  |        | 
|Diluted earnings per share                  |  | $    | 0.71  |      |  |      | 0.51  |  |  |  | 2.05   | 
|Goodwill amortization (net of tax)          |  |      |      |      |  |      |      |  |  |  | .20    | 
|                                            |  |      |       |      |  |      |       |  |  |  |        | 
|Adjusted diluted earnings per share         |  | $    | 0.71  |      |  |      | 0.51  |  |  |  | 2.25   | 
|                                            |  |      |       |      |  |      |       |  |  |  |        | 

(g) 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).
Leasehold improvements are amortized over the lesser of the
estimated life of the related assets or the lease term by use of
the straight-line method. Rental income on leased facilities is
included as a reduction of occupancy and equipment expense.

(h) 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 Company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
Company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 realization of such asset. A valuation allowance related
to deferred tax assets is recognized when, in managements
judgment, it is more likely than not that all, or a portion, of
such deferred tax assets will not be realized.

F-11



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(i) Pension

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

(j) Employee
Benefits

Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), encourages
all entities to adopt a fair value based method of accounting
for employee stock compensation plans, whereby compensation cost
is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the
vesting period. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by Accounting
Principles Board No. 25, Accounting for Stock Issued
to Employees (APB No. 25), whereby
compensation cost is the excess, if any, of the quoted market
price of the underlying stock at the grant date (or other
measurement date) over the amount an employee must pay to
acquire the stock upon exercise of the stock option. The Company
measures compensation cost for stock-based compensation plans
using the intrinsic value method as prescribed by APB
No. 25. No stock-based employee compensation cost is
reflected in net income, as all options granted under the
Companys plans had an exercise price equal to the market
value of the underlying common stock on the date of grant.

As a result of SFAS No. 123, the Company
must make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been
applied. Had the Company determined compensation expense
consistent with the fair value approach, the Companys net
income and earnings per share would have been reduced to the
proforma amounts indicated below for the years ended
December 31:

|                                                                                                                                                   |  |      |       |      |  |      |       |   |  |  |       |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                                                                                                                                   |  | 2003 |       | 2002 |  | 2001
|                                                                                                                                                   |  |      |       |      |  |     
|Net income as reported                                                                                                                             |  | $    | 3,299 |      |  |      | 2,388 |   |  |  | 9,656 |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effect |  |      | (95   | )    |  |      | (145  | ) |  |  | (301  | )
|                                                                                                                                                   |  |      |       |      |  |      |       |   |  |  |       |  
|Pro forma net income                                                                                                                               |  |      | 3,204 |      |  |      | 2,243 |   |  |  | 9,355 |  
|                                                                                                                                                   |  |      |       |      |  |      |       |   |  |  |       |  
|Basic earnings per share as reported                                                                                                               |  | $    | 0.75  |      |  |      | 0.54  |   |  |  | 2.18  |  
|Diluted earnings per share as reported                                                                                                             |  |      | 0.71  |      |  |      | 0.51  |   |  |  | 2.05  |  
|Pro forma basic earnings per share                                                                                                                 |  |      | 0.72  |      |  |      | 0.51  |   |  |  | 2.11  |  
|Pro forma diluted earnings per share                                                                                                               |  |      | 0.69  |      |  |      | 0.48  |   |  |  | 1.99  |  

The per share weighted average fair value of
stock options granted during 2003, 2002 and 2001 were $9.36,
$6.03 and $7.02 per share, respectively, determined using the
Black-Scholes option pricing model with the following weighted
average assumptions:

|                        |  |      |       |      |  |      |       |   |  |  |       |  
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                        |  | 2003 |       | 2002 |  | 2001
|                        |  |      |       |      |  |     
|Expected dividend yield |  |      | 2.00  | %    |  |      | 2.50  | % |  |  | 2.75  | %
|Risk-free interest rate |  |      | 3.49  | %    |  |      | 3.07  | % |  |  | 4.85  | %
|Expected volatility     |  |      | 28.60 | %    |  |      | 26.96 | % |  |  | 33.66 | %
|Expected life (years)   |  |      | 6.0   |      |  |      | 5.0   |   |  |  | 6.5   |  



| |                                                                             
| | ----------------------------------------------------------------------------
| | (k) Transfers and Servicing of Assets
    and Extinguishments of Liabilities

The Company accounts and reports for transfers
and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial
components approach that focuses on control. This approach
distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. After a transfer of
financial assets, the Company recognizes all financial and
servicing assets it controls and liabilities it has incurred and
derecognizes financial assets it no longer controls and
liabilities that have been extinguished. This financial
components approach focuses on the assets and liabilities that
exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the
transfer. If a transfer does not meet the criteria for a sale,
the Company accounts for a transfer as a secured borrowing with
a pledge of collateral.

F-12



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | (l) Earnings Per Share

Basic earnings per share is computed by dividing
net income by the weighted average number of shares of common
stock outstanding during the year, 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). Diluted earnings per share reflects the effect on
weighted average shares outstanding of the number of additional
shares outstanding if dilutive stock options were converted into
common stock using the treasury stock method.

A reconciliation of the weighted average shares
outstanding for the years ended December 31 follows:

|                                 |                |      |       |       |  |      |       |       |  |  |       |       | 
|-------------------------------- | -------------- | ---- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                 |                | 2003 |       | 2002  |  | 2001
|                                 |                |      |       |       |  |     
|Basic shares                     |                |      | 4,425 |       |  |      | 4,413 |       |  |  | 4,436 |      
|Dilutive impact of stock options |                |      | 212   |       |  |      | 263   |       |  |  | 266   |      
|                                 |                |      |       |       |  |      |       |       |  |  |       |      
|                                 | Diluted shares |      |       | 4,637 |  |      |       | 4,676 |  |  |       | 4,702 | 
|                                 |                |      |       |       |  |      |       |       |  |  |       |      

At December 31, 2003, there were 4,000
option shares with an exercise price of $34.37, which were not
considered dilutive for purposes of earnings per share
calculations. At December 31, 2002, the respective totals
were 13,500 option shares with an exercise price of $27.51.

(m) Comprehensive
Income

Comprehensive income represents the change in
equity of the Company during a period from transactions and
other events and circumstances from non-shareholder sources. It
includes all changes in equity during a period except those
resulting from investments by and distributions to shareholders.
The following table shows the components of other comprehensive
income for the years ended December 31:

|                                        |                                 |                                                                                                                                                                    |                      |      |      |       |       |  |       |       |       |  |      |       | 
|--------------------------------------- | ------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------- | ---- | ---- | ----- | ----- |  | ----- | ----- | ----- |  | ---- | ----- | 
|                                        |                                 | 2003                                                                                                                                                               |                      | 2002 |      | 2001 
|                                        |                                 |                                                                                                                                                                    |                      |      |      |      
|Net income                              |                                 | $                                                                                                                                                                  | 3,299                |      |      |       | 2,388 |  |       |       | 9,656 | 
|Other comprehensive income, net of tax: |                                 |                                                                                                                                                                    |                      |      |      |       |       |  |       |       |       | 
|                                        | Unrealized gains on securities: |                                                                                                                                                                    |                      |      |      |       |       |  |       |       |       |  |     
|                                        |                                 | Unrealized holding (losses) gains arising
    during the period, net of tax (benefit) expense of $(335),
    $755, and $413 for 2003, 2002, and 2001, respectively |                      |      | (539 | )     |       |  | 1,227 |       |       |  | 466  |      
|                                        |                                 | Reclassification adjustment for
    (gains) included in net income, net of taxes of $113, $151,
    and $241 for 2003, 2002 and 2001, respectively                 |                      |      | (162 | )     |       |  | (236  | )     |       |  | (449 | )    
|                                        |                                 |                                                                                                                                                                    |                      |      |      |       |       |  |       |       |       | 
|                                        |                                 |                                                                                                                                                                    | (701                 | )    |      |       | 991   |  |       |       | 17    | 
|                                        |                                 |                                                                                                                                                                    |                      |      |      |       |       |  |       |       |       | 
|                                        |                                 |                                                                                                                                                                    | Comprehensive income |      | $    | 2,598 |       |  |       | 3,379 |       |  |      | 9,673 | 
|                                        |                                 |                                                                                                                                                                    |                      |      |      |       |       |  |       |       |       | 



| |                                                             
| | ------------------------------------------------------------
| | (n) Financial Instruments 
    Mortgage Banking Derivatives

The Company enters into commitments to fund
residential mortgage loans with the intention of selling them in
the secondary market. The Company also enters into forward sales
agreements for certain funded loans and loan commitments. The
Company records unfunded commitments intended for loans held for
sale and forward sales agreements at fair value with changes in
fair value recorded as a component of gain on sale of loans.
Loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated fair value in the
aggregate.

(o) Recent
Accounting Pronouncements

SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure. In December 2002, the FASB issued SFAS
No. 148. SFAS No. 148 amends No. 123,
Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the
fair value based methods of accounting for stock-based employee
compensation. Companies are able to eliminate a
ramp-up effect that the SFAS No. 123 transition
rule creates in the year of adoption. Companies can choose to

F-13



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

elect a method that will provide for
comparability amongst years reported. In addition, this
Statement amends the disclosure requirement of SFAS No. 123
to require prominent disclosures in both annual and interim
financial statements about the fair value based method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. The transition
amendments to SFAS No. 123 are effective for financial
statements for fiscal years ending after December 15, 2002.
The Company is currently considering the adoption of fair value
based compensation of stock options. The potential impact to the
Company of adopting such accounting can be seen in Footnote 1(j)
of the Notes to Consolidated Financial Statements.

FIN No. 46 Consolidation of Variable
Interest Entities  an Interpretation of Accounting
Research Bulletin No. 51. In January 2003, the FASB
issued FIN No. 46. FIN 46 established accounting
guidance for consolidation of variable interest entities
(VIE) that function to support the activities of the
primary beneficiary. The primary beneficiary of a VIE is the
entity that absorbs a majority of the VIEs expected
losses, receives a majority of the VIEs expected residual
returns, or both, as a result of ownership, controlling
interest, contractual relationship or other business
relationship with a VIE. Prior to the implementation of
FIN 46, VIEs were generally consolidated by an enterprise
when the enterprise had a controlling financial interest through
ownership of a majority of voting interest in the entity. The
Company adopted FIN No. 46 as of February 1, 2003 for
all arrangements entered into after January 31, 2003. FIN
No. 46 had no impact on arrangements entered into prior to
January 31, 2003.

In December 2003, the FASB issued a revised FIN
No. 46, FIN 46R, which in part specifically addresses
limited purpose trusts formed to issue trust preferred
securities. The guidance requires the Company to deconsolidate
its investment in BFD Preferred Capital Trust I and II by
March 31, 2004, but the Company has chosen to early adopt
as of December 31, 2003. The adoption of this
interpretation did not have a material impact on the
Companys financial position or results of operations.

SFAS No. 149 Amendment of Statement
133 on Derivative Instruments and Hedging Activities In
April 2003, the FASB issued SFAS No. 149, which amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities, resulting in more consistent reporting
of contracts as either derivatives or hybrid instruments. SFAS
No. 149 is effective for contracts entered into or modified
after June 30, 2003, and should be applied prospectively.
Implementation issues that have been effective for fiscal
quarters that began prior to June 15, 2003 should continue
to be applied in accordance with their respective effective
dates. The Company adopted this statement on July 1, 2003.
There was no material impact to the Companys financial
position or results of operations.

SFAS No. 150 Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities
and Equity. In May 2003, the FASB issued SFAS
No. 150, which establishes standards for how certain
financial instruments with characteristics of both liabilities
and equity should be measured and classified. Certain financial
instruments with characteristics of both liabilities and equity
will be required to be classified as a liability. This statement
is effective for financial instruments entered into or modified
after May 31, 2003, and July 1, 2003 for all other
financial instruments with the exception of existing mandatorily
redeemable financial instruments issued by limited life
subsidiaries, which have been indefinitely deferred from the
scope of the statement. The Company does not believe the
adoption of SFAS 150 will have a material impact on the
Companys financial position or results of operations.

Statement of Position 03-3 (SOP
03-3): Accounting for Certain Loans or Debt
Securities Acquired in a Transfer. In December 2003, the
American Institute of Certified Public Accountants
(AICPA) issued SOP 03-3. SOP 03-3 requires
loans acquired through a transfer, such as a business
combination, where there are differences in expected cash flows
and contractual cash flows due in part to credit quality be
recognized at their fair value. The excess of contractual cash
flows over expected cash flows is not to be recognized as an
adjustment of yield, loss accrual, or valuation allowance.
Valuation allowances cannot be created nor carried
over in the initial accounting for loans acquired in a
transfer on loans subject to SFAS 114, Accounting by
Creditors for Impairment of a Loan. This SOP is effective
for loans acquired after December 31, 2004, with early
adoption encouraged. The Company does not believe the adoption
of SOP 03-3 will have a material impact on the
Companys financial position or results of operations.

F-14



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(2) Stockholders Equity (Dollars in
Thousands)

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 has authorized 1,000,000 shares of
preferred stock with a par value of $0.01 per share (the
Preferred Stock). 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, 2003 and 2002, there were no shares of
preferred stock issued.

The Bank is subject to various regulatory capital
requirements administered by its regulator, the OTS. Failure to
meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by the regulator
that, if undertaken, could have a direct material effect on the
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 assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The
Banks capital amounts and classifications are also subject
to qualitative judgments by the regulator about components, risk
weightings and other factors.

Quantitative measures established by regulation
to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the table below) of
risk-weighted, core and tangible capital (as defined).
Management represents, as of December 31, 2003, that the
Bank met all capital adequacy requirements to which it is
subject.

As of December 31, 2003, the Bank was
categorized as well capitalized based on the most
recent calculation. Under capital adequacy
guidelines and the regulatory framework to be categorized as
well capitalized the Bank must maintain minimum
risk-weighted capital, core capital, leverage and tangible
ratios as set forth in the table. These regulatory capital
requirements are set forth in terms of (1) Risk-based Total
Capital (Total Capital to Risk Weighted Assets), (2) Core
Capital (Tier I Capital to Adjusted Tangible Assets),
(3) Risk-based Tier I Capital (Tier I Capital to Risk
Weighted Assets), and (4) Tangible Capital (Tier I
Capital to Tangible Assets).

The actual capital amounts and ratios of the Bank
as of December 31, 2003 are presented in the table below.
At December 31, 2002, the Company was a multi-bank holding
company regulated by the Federal Reserve, the Bank was regulated
by the OTS and BNB was regulated by the Office of the
Comptroller of the Currency. The actual capital and the
applicable regulatory requirements at December 31, 2002 are
also included in the following table:

|                         |      |                           |  |          |         |             |  |                   |      |        |  |       |        |  |  |  |     |   |  |   |         |  |  |  |      |  
|------------------------ | ---- | ------------------------- |  | -------- | ------- | ----------- |  | ----------------- | ---- | ------ |  | ----- | ------ |  |  |  | --- | - |  | - | ------- |  |  |  | ---- | -
|                         |      |                           |  |          |         |             |  |                   |      |       
|                         |      |                           |  |          |         |             |  | To Be Well       
|                         |      |                           |  |          |         | For Capital |  | Capitalized Under
|                         |      |                           |  | Adequacy |         | Regulatory 
|                         |      | Actual                    |  | Purposes |         | Definitions
|                         |      |                           |  |          |         |            
|                         |      | Amount                    |  | Ratio    |         | Amount      |  | Ratio             |      | Amount |  | Ratio
|                         |      |                           |  |          |         |             |  |                   |      |        |  |      
|                         |      |                          
|                         |      | (Dollars in thousands)   
|As of December 31, 2003: |      |                           |  |          |         |             |  |                   |      |        |  |       |        |  |  |  |     |   |  |   |         |  |  | 
|                         | BFS: |                           |  |          |         |             |  |                   |      |        |  |       |        |  |  |  |     |   |  |   |         |  |  |  |     
|                         |      | Risk-based Total Capital  |  | $        | 110,616 |             |  |                   | 10.7 | %      |  | $     | 82,402 |  |  |  | 8.0 | % |  | $ | 103,003 |  |  |  | 10.0 | %
|                         |      | Core Capital              |  |          | 97,728  |             |  |                   | 5.8  |        |  |       | 66,919 |  |  |  | 4.0 |   |  |   | 83,649  |  |  |  | 5.0  |  
|                         |      | Risk-based Tier I Capital |  |          | 97,728  |             |  |                   | 9.5  |        |  |       | 41,201 |  |  |  | 4.0 |   |  |   | 61,802  |  |  |  | 6.0  |  
|                         |      | Tangible Capital          |  |          | 97,728  |             |  |                   | 5.8  |        |  |       | 33,460 |  |  |  | 2.0 |   |  |   | 83,649  |  |  |  | 5.0  |  
|As of December 31, 2002: |      |                           |  |          |         |             |  |                   |      |        |  |       |        |  |  |  |     |   |  |   |         |  |  | 
|Risk-based Total Capital |      |                           |  |          |         |             |  |                   |      |        |  |       |        |  |  |  |     |   |  |   |         |  |  | 
|                         |      | Company Consolidated      |  | $        | 125,270 |             |  |                   | 12.9 | %      |  | $     | 78,018 |  |  |  | 8.0 | % |  | $ | 97,523  |  |  |  | 10.0 | %
|                         |      | BFS                       |  |          | 100,678 |             |  |                   | 11.2 |        |  |       | 71,886 |  |  |  | 8.0 |   |  |   | 89,857  |  |  |  | 10.0 |  
|                         |      | BNB                       |  |          | 11,174  |             |  |                   | 13.8 |        |  |       | 6,464  |  |  |  | 8.0 |   |  |   | 8,080   |  |  |  | 10.0 |  

F-15



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                           |                      |                        |  |          |  |             |  |                   |  |        |  |        |  |  |  |     |  |  |  |        |  |  |  |     | 
|-------------------------- | -------------------- | ---------------------- |  | -------- |  | ----------- |  | ----------------- |  | ------ |  | ------ |  |  |  | --- |  |  |  | ------ |  |  |  | --- | 
|                           |                      |                        |  |          |  |             |  |                   |  |       
|                           |                      |                        |  |          |  |             |  | To Be Well       
|                           |                      |                        |  |          |  | For Capital |  | Capitalized Under
|                           |                      |                        |  | Adequacy |  | Regulatory 
|                           |                      | Actual                 |  | Purposes |  | Definitions
|                           |                      |                        |  |          |  |            
|                           |                      | Amount                 |  | Ratio    |  | Amount      |  | Ratio             |  | Amount |  | Ratio 
|                           |                      |                        |  |          |  |             |  |                   |  |        |  |       
|                           |                      |                       
|                           |                      | (Dollars in thousands)
|Core Capital:              |                      |                        |  |          |  |             |  |                   |  |        |  |        |  |  |  |     |  |  |  |        |  |  |  |    
|                           | BFS                  |                        |  | 89,441   |  |             |  | 6.6               |  |        |  | 54,102 |  |  |  | 4.0 |  |  |  | 67,628 |  |  |  | 5.0 | 
|Risk-based Tier I Capital: |                      |                        |  |          |  |             |  |                   |  |        |  |        |  |  |  |     |  |  |  |        |  |  |  |    
|                           | Company Consolidated |                        |  | 111,691  |  |             |  | 11.5              |  |        |  | 39,009 |  |  |  | 4.0 |  |  |  | 58,514 |  |  |  | 6.0 | 
|                           | BFS                  |                        |  | 89,441   |  |             |  | 10.0              |  |        |  | 35,943 |  |  |  | 4.0 |  |  |  | 53,914 |  |  |  | 6.0 | 
|                           | BNB                  |                        |  | 10,172   |  |             |  | 12.6              |  |        |  | 3,232  |  |  |  | 4.0 |  |  |  | 4,848  |  |  |  | 6.0 | 
|Tangible Capital:          |                      |                        |  |          |  |             |  |                   |  |        |  |        |  |  |  |     |  |  |  |        |  |  |  |    
|                           | BFS                  |                        |  | 89,441   |  |             |  | 6.6               |  |        |  | 27,051 |  |  |  | 2.0 |  |  |  | 67,628 |  |  |  | 5.0 | 
|Leverage Capital:          |                      |                        |  |          |  |             |  |                   |  |        |  |        |  |  |  |     |  |  |  |        |  |  |  |    
|                           | Company Consolidated |                        |  | 111,691  |  |             |  | 7.4               |  |        |  | 60,820 |  |  |  | 4.0 |  |  |  | 76,025 |  |  |  | 5.0 | 
|                           | BNB                  |                        |  | 10,172   |  |             |  | 6.0               |  |        |  | 6,750  |  |  |  | 4.0 |  |  |  | 8,437  |  |  |  | 5.0 | 

At December 31, 2003 and 2002, the
consolidated capital to assets ratios were 5.6% and 6.1%,
respectively, as measured by generally accepted accounting
principles. During 2002, the Companys Board of Directors
approved the tenth 5% repurchase program in the amount of
222,971 shares 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, 2003, the Company repurchased 43,480 shares at
an average price of $24.24 per share under the current program.
There are 143,904 shares remaining to be repurchased under the
current program.

Prior to the Companys initial public
offering, in order to grant priority to eligible depositors, BFS
established a liquidation account at the time of conversion in
an amount equal to the retained earnings of BFS 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 BFS (and only
in such an event), eligible depositors who continue to maintain
accounts at BFS 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 $4,619 (unaudited) and $5,348
(unaudited) at December 31, 2003 and 2002,
respectively.

F-16



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(3) | Investment and Mortgage-Backed Securities
    Available for Sale and Held to Maturity (Dollars In
    Thousands)

Investment and Mortgage-Backed Securities
Available for Sale

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

|                       |                                                            |                                                |                             |                  |       |                   |       |            |     |       |      |      |     |      |        |        |       |         | 
|---------------------- | ---------------------------------------------------------- | ---------------------------------------------- | --------------------------- | ---------------- | ----- | ----------------- | ----- | ---------- | --- | ----- | ---- | ---- | --- | ---- | ------ | ------ | ----- | ------- | 
|                       |                                                            |                                               
|                       |                                                            | December 31, 2003                             
|                       |                                                            |                                               
|                       |                                                            | Amortized Cost                                 |                             | Unrealized Gains |       | Unrealized Losses |       | Fair Value
|                       |                                                            |                                                |                             |                  |       |                   |       |           
|Investment securities: |                                                            |                                                |                             |                  |       |                   |       |            |     |       |      |      |     |      |        |       
|                       | U.S. government, federal agency and other
    obligations: |                                                |                             |                  |       |                   |       |            |     |       |      |      |     |      |        |        |      
|                       |                                                            | Maturing within 1 year                         |                             | $                | 8,872 |                   |       |            | 96  |       |      |      | (1  | )    |        |        | 8,967 |        
|                       |                                                            | Maturing after 1 year but within 5 years       |                             |                  | 3,072 |                   |       |            | 83  |       |      |      |    |      |        |        | 3,155 |        
|                       |                                                            | Maturing after 5 years but within
    10 years |                             |                  | 5,724 |                   |       |            | 58  |       |      |      | (24 | )    |        |        | 5,758 |        
|                       |                                                            | Maturing after 10 years                        |                             |                  | 9,253 |                   |       |            | 238 |       |      |      | (11 | )    |        |        | 9,480 |        
|                       |                                                            |                                                |                             |                  |       |                   |       |            |     |       |      |      |     |      |        |       
|                       |                                                            |                                                | 26,921                      |                  |       |                   | 475   |            |     |       | (36  | )    |     |      | 27,360 |       
|                       |                                                            |                                                |                             |                  |       |                   |       |            |     |       |      |      |     |      |        |       
|                       | Mutual funds                                               |                                                |                             | 72,184           |       |                   |       | 10         |     |       |      | (334 | )   |      |        | 71,860 |      
|                       | Other marketable equity securities                         |                                                |                             | 2,394            |       |                   |       | 1,033      |     |       |      |     |     |      |        | 3,427  |      
|                       |                                                            |                                                |                             |                  |       |                   |       |            |     |       |      |      |     |      |        |       
|                       |                                                            |                                                | 74,578                      |                  |       |                   | 1,043 |            |     |       | (334 | )    |     |      | 75,287 |       
|                       |                                                            |                                                |                             |                  |       |                   |       |            |     |       |      |      |     |      |        |       
|                       |                                                            |                                                | Total investment securities |                  | $     | 101,499           |       |            |     | 1,518 |      |      |     | (370 | )      |        |       | 102,647 | 
|                       |                                                            |                                                |                             |                  |       |                   |       |            |     |       |      |      |     |      |        |       

|                            |                                                |                   |        |                  |  |                   |     |            |  |  |      |      |   |  |        |        | 
|--------------------------- | ---------------------------------------------- | ----------------- | ------ | ---------------- |  | ----------------- | --- | ---------- |  |  | ---- | ---- | - |  | ------ | ------ | 
|                            |                                                |                  
|                            |                                                | December 31, 2003
|                            |                                                |                  
|                            |                                                | Amortized Cost    |        | Unrealized Gains |  | Unrealized Losses |     | Fair Value
|                            |                                                |                   |        |                  |  |                   |     |           
|Mortgage-backed securities: |                                                |                   |        |                  |  |                   |     |            |  |  |      |      |   |  |        |       
|                            | Maturing after 1 year but within 5 years       |                   | $      | 473              |  |                   |     | 2          |  |  |      | (8   | ) |  |        | 467    | 
|                            | Maturing after 5 years but within
    10 years |                   |        | 2,937            |  |                   |     | 1          |  |  |      | (41  | ) |  |        | 2,897  | 
|                            | Maturing after 10 years                        |                   |        | 80,854           |  |                   |     | 163        |  |  |      | (629 | ) |  |        | 80,388 | 
|                            |                                                |                   |        |                  |  |                   |     |            |  |  |      |      |   |  |        |       
|                            |                                                | $                 | 84,264 |                  |  |                   | 166 |            |  |  | (678 | )    |   |  | 83,752 |       
|                            |                                                |                   |        |                  |  |                   |     |            |  |  |      |      |   |  |        |       

|                       |                                                            |                                                |                             |                  |        |                   |     |            |     |       |      |      |     |      |        |        |        |         | 
|---------------------- | ---------------------------------------------------------- | ---------------------------------------------- | --------------------------- | ---------------- | ------ | ----------------- | --- | ---------- | --- | ----- | ---- | ---- | --- | ---- | ------ | ------ | ------ | ------- | 
|                       |                                                            |                                               
|                       |                                                            | December 31, 2002                             
|                       |                                                            |                                               
|                       |                                                            | Amortized Cost                                 |                             | Unrealized Gains |        | Unrealized Losses |     | Fair Value
|                       |                                                            |                                                |                             |                  |        |                   |     |           
|Investment securities: |                                                            |                                                |                             |                  |        |                   |     |            |     |       |      |      |     |      |        |       
|                       | U.S. government, federal agency and other
    obligations: |                                                |                             |                  |        |                   |     |            |     |       |      |      |     |      |        |        |       
|                       |                                                            | Maturing within 1 year                         |                             | $                | 2,514  |                   |     |            | 8   |       |      |      | (1  | )    |        |        | 2,521  |        
|                       |                                                            | Maturing after 1 year but within 5 years       |                             |                  | 10,851 |                   |     |            | 217 |       |      |      |    |      |        |        | 11,068 |        
|                       |                                                            | Maturing after 5 years but within
    10 years |                             |                  | 6,931  |                   |     |            | 144 |       |      |      |    |      |        |        | 7,075  |        
|                       |                                                            | Maturing after 10 years                        |                             |                  | 14,126 |                   |     |            | 437 |       |      |      | (21 | )    |        |        | 14,542 |        
|                       |                                                            |                                                |                             |                  |        |                   |     |            |     |       |      |      |     |      |        |       
|                       |                                                            |                                                | 34,422                      |                  |        |                   | 806 |            |     |       | (22  | )    |     |      | 35,206 |       
|                       |                                                            |                                                |                             |                  |        |                   |     |            |     |       |      |      |     |      |        |       
|                       | Mutual funds                                               |                                                |                             | 75,240           |        |                   |     | 120        |     |       |      | (37  | )   |      |        | 75,323 |       
|                       | Other marketable equity securities                         |                                                |                             | 2,394            |        |                   |     | 83         |     |       |      | (118 | )   |      |        | 2,359  |       
|                       |                                                            |                                                |                             |                  |        |                   |     |            |     |       |      |      |     |      |        |       
|                       |                                                            |                                                | 77,634                      |                  |        |                   | 203 |            |     |       | (155 | )    |     |      | 77,682 |       
|                       |                                                            |                                                |                             |                  |        |                   |     |            |     |       |      |      |     |      |        |       
|                       |                                                            |                                                | Total investment securities |                  | $      | 112,056           |     |            |     | 1,009 |      |      |     | (177 | )      |        |        | 112,888 | 
|                       |                                                            |                                                |                             |                  |        |                   |     |            |     |       |      |      |     |      |        |       

F-17



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                            |                                                |                                  |   |                  |         |                   |  |            |       |  |  |     |     |   |  |        |         | 
|--------------------------- | ---------------------------------------------- | -------------------------------- | - | ---------------- | ------- | ----------------- |  | ---------- | ----- |  |  | --- | --- | - |  | ------ | ------- | 
|                            |                                                |                                 
|                            |                                                | December 31, 2002               
|                            |                                                |                                 
|                            |                                                | Amortized Cost                   |   | Unrealized Gains |         | Unrealized Losses |  | Fair Value
|                            |                                                |                                  |   |                  |         |                   |  |           
|Mortgage-backed securities: |                                                |                                  |   |                  |         |                   |  |            |       |  |  |     |     |   |  |       
|                            | Maturing after 1 year but within 5 years       |                                  | $ | 270              |         |                   |  | 9          |       |  |  |    |     |   |  | 279    |        
|                            | Maturing after 5 years but within
    10 years |                                  |   | 16,442           |         |                   |  | 63         |       |  |  | (28 | )   |   |  | 16,477 |        
|                            | Maturing after 10 years                        |                                  |   | 96,838           |         |                   |  | 980        |       |  |  | (59 | )   |   |  | 97,759 |        
|                            |                                                |                                  |   |                  |         |                   |  |            |       |  |  |     |     |   |  |       
|                            |                                                | Total mortgage-backed securities |   | $                | 113,550 |                   |  |            | 1,052 |  |  |     | (87 | ) |  |        | 114,515 | 
|                            |                                                |                                  |   |                  |         |                   |  |            |       |  |  |     |     |   |  |       

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.

Included in U.S. government, federal agency and
other obligations are investments that can be called prior to
final maturity with an amortized cost of $2,000 and a fair value
of $2,007 at December 31, 2003.

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

|                                                         |  |                |        |            |  |                |        |            |  |  |         |  |  |  |         | 
|-------------------------------------------------------- |  | -------------- | ------ | ---------- |  | -------------- | ------ | ---------- |  |  | ------- |  |  |  | ------- | 
|                                                         |  |               
|                                                         |  | December 31,  
|                                                         |  |               
|                                                         |  |                |        |           
|                                                         |  | 2003           |        | 2002      
|                                                         |  |                |        |           
|                                                         |  | Amortized Cost |        | Fair Value |  | Amortized Cost |        | Fair Value
|                                                         |  |                |        |            |  |                |        |           
|GNMA                                                     |  | $              | 3,511  |            |  |                | 3,493  |            |  |  | 5,058   |  |  |  | 5,101   | 
|FNMA                                                     |  |                | 26,828 |            |  |                | 26,687 |            |  |  | 28,091  |  |  |  | 28,564  | 
|FHLMC                                                    |  |                | 33,775 |            |  |                | 33,532 |            |  |  | 79,424  |  |  |  | 79,870  | 
|Privately issued collateralized mortgage
    obligations |  |                | 20,150 |            |  |                | 20,040 |            |  |  | 977     |  |  |  | 980     | 
|                                                         |  |                |        |            |  |                |        |            |  |  |         |  |  |  |         | 
|                                                         |  | $              | 84,264 |            |  |                | 83,752 |            |  |  | 113,550 |  |  |  | 114,515 | 
|                                                         |  |                |        |            |  |                |        |            |  |  |         |  |  |  |         | 

Proceeds from the sale of investment securities
and mortgage-backed securities available for sale amounted to
$33,655, $12,121, and $26,743, in 2003, 2002, and 2001,
respectively. Realized losses on investment securities and
mortgage-backed securities available for sale were $151, $3, and
$186 in 2003, 2002 and 2001, respectively. Realized gains
amounted to $426, $390 and $876 in 2003, 2002 and 2001,
respectively.

Investment and Mortgage-Backed Securities Held
to Maturity

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

|                                                           |                                  |                   |         |                  |  |                   |     |            |  |  |        |        |   |  |         |         | 
|---------------------------------------------------------- | -------------------------------- | ----------------- | ------- | ---------------- |  | ----------------- | --- | ---------- |  |  | ------ | ------ | - |  | ------- | ------- | 
|                                                           |                                  |                  
|                                                           |                                  | December 31, 2003
|                                                           |                                  |                  
|                                                           |                                  | Amortized Cost    |         | Unrealized Gains |  | Unrealized Losses |     | Fair Value
|                                                           |                                  |                   |         |                  |  |                   |     |           
|Investment securities:                                     |                                  |                   |         |                  |  |                   |     |            |  |  |        |        |   |  |         |        
|U.S. government, federal agency and other
    obligations: |                                  |                   |         |                  |  |                   |     |            |  |  |        |        |   |  |         |        
|Maturing within 1 year                                     |                                  | $                 | 28      |                  |  |                   | 26  |            |  |  |       |        |   |  | 54      |        
|Maturing after 1 year but within 5 years                   |                                  |                   | 1,997   |                  |  |                   | 86  |            |  |  |       |        |   |  | 2,083   |        
|                                                           |                                  |                   |         |                  |  |                   |     |            |  |  |        |        |   |  |         |        
|                                                           | Total investment securities      |                   | $       | 2,025            |  |                   |     | 112        |  |  |        |       |   |  |         | 2,137   | 
|                                                           |                                  |                   |         |                  |  |                   |     |            |  |  |        |        |   |  |         |        
|Mortgage-backed securities:                                |                                  |                   |         |                  |  |                   |     |            |  |  |        |        |   |  |         |        
|Maturing within 1 year                                     |                                  | $                 | 3       |                  |  |                   |    |            |  |  |       |        |   |  | 3       |        
|Maturing after 1 year but within 5 years                   |                                  |                   | 374     |                  |  |                   | 23  |            |  |  |       |        |   |  | 397     |        
|Maturing after 5 years but within
    10 years             |                                  |                   | 39,841  |                  |  |                   | 368 |            |  |  | (102   | )      |   |  | 40,107  |        
|Maturing after 10 years                                    |                                  |                   | 105,456 |                  |  |                   | 305 |            |  |  | (1,239 | )      |   |  | 104,522 |        
|                                                           |                                  |                   |         |                  |  |                   |     |            |  |  |        |        |   |  |         |        
|                                                           | Total mortgage-backed securities |                   | $       | 145,674          |  |                   |     | 696        |  |  |        | (1,341 | ) |  |         | 145,029 | 
|                                                           |                                  |                   |         |                  |  |                   |     |            |  |  |        |        |   |  |         |        

F-18



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                           |                                  |                   |        |                  |  |                   |     |            |  |  |   |   |  |  |        |        | 
|---------------------------------------------------------- | -------------------------------- | ----------------- | ------ | ---------------- |  | ----------------- | --- | ---------- |  |  | - | - |  |  | ------ | ------ | 
|                                                           |                                  |                  
|                                                           |                                  | December 31, 2002
|                                                           |                                  |                  
|                                                           |                                  | Amortized Cost    |        | Unrealized Gains |  | Unrealized Losses |     | Fair Value
|                                                           |                                  |                   |        |                  |  |                   |     |           
|Investment securities:                                     |                                  |                   |        |                  |  |                   |     |            |  |  |   |   |  |  |        |       
|U.S. government, federal agency and other
    Obligations: |                                  |                   |        |                  |  |                   |     |            |  |  |   |   |  |  |        |       
|Maturing within 1 year                                     |                                  | $                 | 503    |                  |  |                   | 38  |            |  |  |  |   |  |  | 541    |       
|Maturing after 1 year but within 5 years                   |                                  |                   | 2,021  |                  |  |                   | 14  |            |  |  |  |   |  |  | 2,035  |       
|                                                           |                                  |                   |        |                  |  |                   |     |            |  |  |   |   |  |  |        |       
|                                                           | Total investment securities      |                   | $      | 2,524            |  |                   |     | 52         |  |  |   |  |  |  |        | 2,576  | 
|                                                           |                                  |                   |        |                  |  |                   |     |            |  |  |   |   |  |  |        |       
|Mortgage-backed securities:                                |                                  |                   |        |                  |  |                   |     |            |  |  |   |   |  |  |        |       
|Maturing after 1 year but within 5 years                   |                                  | $                 | 580    |                  |  |                   | 37  |            |  |  |  |   |  |  | 617    |       
|Maturing after 5 years but within
    10 years             |                                  |                   | 13,666 |                  |  |                   | 721 |            |  |  |  |   |  |  | 14,387 |       
|Maturing after 10 years                                    |                                  |                   | 11,183 |                  |  |                   | 410 |            |  |  |  |   |  |  | 11,593 |       
|                                                           |                                  |                   |        |                  |  |                   |     |            |  |  |   |   |  |  |        |       
|                                                           | Total mortgage-backed securities |                   | $      | 25,429           |  |                   |     | 1,168      |  |  |   |  |  |  |        | 26,597 | 
|                                                           |                                  |                   |        |                  |  |                   |     |            |  |  |   |   |  |  |        |       

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.

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

|      |  |                |         |            |  |                |         |            |  |   |        |  |  |  |        | 
|----- |  | -------------- | ------- | ---------- |  | -------------- | ------- | ---------- |  | - | ------ |  |  |  | ------ | 
|      |  |               
|      |  | December 31,  
|      |  |               
|      |  |                |         |           
|      |  | 2003           |         | 2002      
|      |  |                |         |           
|      |  | Amortized Cost |         | Fair Value |  | Amortized Cost |         | Fair Value
|      |  |                |         |            |  |                |         |           
|GNMA  |  | $              | 19,184  |            |  |                | 19,319  |            |  | $ | 4,911  |  |  |  | 5,063  | 
|FNMA  |  |                | 29,818  |            |  |                | 29,726  |            |  |   |       |  |  |  |       | 
|FHLMC |  |                | 96,672  |            |  |                | 95,984  |            |  |   | 20,518 |  |  |  | 21,534 | 
|      |  |                |         |            |  |                |         |            |  |   |        |  |  |  |        | 
|      |  | $              | 145,674 |            |  |                | 145,029 |            |  | $ | 25,429 |  |  |  | 26,597 | 
|      |  |                |         |            |  |                |         |            |  |   |        |  |  |  |        | 

(4) Temporarily Impaired Securities
(Dollars in Thousands)

The table below shows the Companys
investments, mortgage-backed securities and mutual funds
described in the above footnote 3, which were at an unrealized
loss position as of December 31, 2003. At December 31,
2003, the Company had $201,309 of investments, mortgage-backed
securities and mutual funds with $2,389 of unrealized losses on
those instruments. The vast majority of the unrealized losses,
which are $2,093 on investments, mortgage-backed securities and
mutual funds of $135,611, have been at a loss position for less
than 12 months and $65,698 of these investments,
mortgage-backed securities and mutual funds, with unrealized
losses of $296, have been at a loss position for longer than
12 months. The Company believes that these investments,
mortgage-backed securities and mutual funds are only temporarily
impaired and that the full principal will be collected as
anticipated. All of the securities are at a loss position
because they were acquired when the general level of interest
rates were lower than that on December 31, 2003.

|                                                                                 |  |                     |         |                     |  |            |       |            |  |            |        |            |  |  |     |  |  |  |         |  |  |  |       | 
|-------------------------------------------------------------------------------- |  | ------------------- | ------- | ------------------- |  | ---------- | ----- | ---------- |  | ---------- | ------ | ---------- |  |  | --- |  |  |  | ------- |  |  |  | ----- | 
|                                                                                 |  |                     |         |                     |  |           
|                                                                                 |  | Less Than 12 Months |         | 12 Months or Longer |  | Total     
|                                                                                 |  |                     |         |                     |  |           
|                                                                                 |  |                     |         | Unrealized          |  |            |       | Unrealized |  |            |        | Unrealized
|Description of Securities                                                        |  | Fair Value          |         | Losses              |  | Fair Value |       | Losses     |  | Fair Value |        | Losses    
|                                                                                 |  |                     |         |                     |  |            |       |            |  |            |        |           
|U.S. Treasury obligations and direct obligations
    of U.S. government agencies |  | $                   | 1,801   |                     |  |            | 32    |            |  |            | 546    |            |  |  | 4   |  |  |  | 2,347   |  |  |  | 36    | 
|All mortgage backed-securities                                                   |  |                     | 128,456 |                     |  |            | 2,019 |            |  |            |       |            |  |  |    |  |  |  | 128,456 |  |  |  | 2,019 | 
|Mutual funds                                                                     |  |                     | 5,354   |                     |  |            | 42    |            |  |            | 65,152 |            |  |  | 292 |  |  |  | 70,506  |  |  |  | 334   | 
|                                                                                 |  |                     |         |                     |  |            |       |            |  |            |        |            |  |  |     |  |  |  |         |  |  |  |       | 
|Total temporarily impaired securities                                            |  | $                   | 135,611 |                     |  |            | 2,093 |            |  |            | 65,698 |            |  |  | 296 |  |  |  | 201,309 |  |  |  | 2,389 | 
|                                                                                 |  |                     |         |                     |  |            |       |            |  |            |        |            |  |  |     |  |  |  |         |  |  |  |       | 

F-19



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(5) Loans (Dollars In
Thousands)

The Companys primary banking activities are
conducted principally in eastern Massachusetts. The Company
grants single-family and multi-family residential loans,
commercial real estate loans, business loans and a variety of
consumer loans. In addition, the Company grants loans for the
construction of residential homes, multi-family properties,
commercial real estate properties and for land development.
Except for consumer loans processed by Forward Financial, the
vast majority of the loans granted by the Company are secured by
real estate collateral. Through the Banks subsidiary,
Forward Financial, the Company originates loans, primarily
directly with the consumer, on manufactured housing,
recreational vehicles and boats currently in 20 states
across the United States. Forward Financial sells substantially
all of the loans it originates. The ability and willingness of
the one to four 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 business in
the economy and in the real estate sector, particularly in the
borrowers geographic areas.

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

|                          |                                                           |                    |           |         |           |  |         |         |           | 
|------------------------- | --------------------------------------------------------- | ------------------ | --------- | ------- | --------- |  | ------- | ------- | --------- | 
|                          |                                                           | 2003               |           | 2002   
|                          |                                                           |                    |           |        
|Mortgage loans:           |                                                           |                    |           |         |           |  |         |        
|                          | Residential one- to four-family                           |                    | $         | 827,184 |           |  |         | 731,552 |          
|                          | Multi-family                                              |                    |           | 20,044  |           |  |         | 21,056  |          
|                          | Construction and land                                     |                    |           | 116,427 |           |  |         | 124,071 |          
|                          | Commercial real estate                                    |                    |           | 123,544 |           |  |         | 96,526  |          
|                          |                                                           |                    |           |         |           |  |         |        
|                          |                                                           |                    | 1,087,199 |         |           |  | 973,205 |        
|                          |                                                           |                    |           |         |           |  |         |        
|Consumer and other loans: |                                                           |                    |           |         |           |  |         |        
|                          | Home equity and improvement                               |                    |           | 120,205 |           |  |         | 94,855  |          
|                          | Consumer                                                  |                    |           | 4,597   |           |  |         | 4,234   |          
|                          | Business                                                  |                    |           | 26,582  |           |  |         | 32,792  |          
|                          |                                                           |                    |           |         |           |  |         |        
|                          |                                                           |                    | 151,384   |         |           |  | 131,881 |        
|                          |                                                           |                    |           |         |           |  |         |        
|                          |                                                           | Total loans, gross |           |         | 1,238,583 |  |         |         | 1,105,086 | 
|                          |                                                           |                    |           |         |           |  |         |        
|Less:                     |                                                           |                    |           |         |           |  |         |        
|                          | Allowance for loan losses                                 |                    |           | (13,874 | )         |  |         | (12,656 | )        
|                          | Construction loans in process                             |                    |           | (33,125 | )         |  |         | (24,832 | )        
|                          | Net unearned premium on loans purchased                   |                    |           | 25      |           |  |         | 36      |          
|                          | Fair value adjustment on mortgage banking
    derivatives |                    |           | (38     | )         |  |         |        |          
|                          | Deferred loan origination costs                           |                    |           | 6,448   |           |  |         | 3,722   |          
|                          |                                                           |                    |           |         |           |  |         |        
|                          |                                                           | Loan, net          |           | $       | 1,198,019 |  |         |         | 1,071,356 | 
|                          |                                                           |                    |           |         |           |  |         |        

The Company services mortgage loans for investors
which are not included in the accompanying consolidated balance
sheets totaling approximately $976,603 and $1,084,797 at
December 31, 2003 and 2002, respectively.

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

|                                      |                      |      |        |       |  |      |        |       |  |  |        |       | 
|------------------------------------- | -------------------- | ---- | ------ | ----- |  | ---- | ------ | ----- |  |  | ------ | ----- | 
|                                      |                      | 2003 |        | 2002  |  | 2001
|                                      |                      |      |        |       |  |     
|Balance, beginning of year            |                      | $    | 6,917  |       |  |      | 6,907  |       |  |  | 5,068  |      
|Capitalized mortgage servicing rights |                      |      | 4,981  |       |  |      | 6,968  |       |  |  | 4,652  |      
|Amortization and impairment           |                      |      | (4,815 | )     |  |      | (6,958 | )     |  |  | (2,813 | )    
|                                      |                      |      |        |       |  |      |        |       |  |  |        |      
|                                      | Balance, end of year |      | $      | 7,083 |  |      |        | 6,917 |  |  |        | 6,907 | 
|                                      |                      |      |        |       |  |      |        |       |  |  |        |      

F-20



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has determined that the fair value of
mortgage servicing rights at December 31, 2003,
approximates their carrying amount. Capitalized mortgage
servicing rights are periodically evaluated for impairment.
Adjustments to the carrying value are included in amortization
expense. The balance of the valuation allowance for mortgage
servicing rights at December 31, 2003, was approximately
$500.

Regulatory limits for loans to one borrower are
limited to 15% of capital and applicable allowance for loan
losses. The regulatory limit for the Bank, at December 31,
2003, was approximately $16,600. The Bank did not have any
borrower relationship, net of participation with other financial
institutions, which exceeded the regulatory limit at
December 31, 2003.

In the ordinary course of business, the Company
makes loans to its directors and senior 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:

|                           |                      |      |        |       |  |  |       |       | 
|-------------------------- | -------------------- | ---- | ------ | ----- |  |  | ----- | ----- | 
|                           |                      | 2003 |        | 2002 
|                           |                      |      |        |      
|Balance, beginning of year |                      | $    | 1,243  |       |  |  | 1,114 |      
|Originations               |                      |      | 1,668  |       |  |  | 852   |      
|Payments                   |                      |      | (1,263 | )     |  |  | (795  | )    
|Other changes              |                      |      | 34     |       |  |  | 72    |      
|                           |                      |      |        |       |  |  |       |      
|                           | Balance, end of year |      | $      | 1,682 |  |  |       | 1,243 | 
|                           |                      |      |        |       |  |  |       |      

At December 31, 2003 and 2002, total
impaired loans were $3,937 and $8,391, respectively. In the
opinion of management, specific valuation allowances totaling
$455 were established (after charge-offs of $1,600) for $3,743
of the impaired loans at December 31, 2003 and $225 were
established (after charge-offs of $925,000) for $6,016 of the
impaired loans at December 31, 2002. The average recorded
value of impaired loans was $7,537 in 2003, $4,297 in 2002 and
$211 during 2001. The Company follows the same policy for
recognition of income on impaired loans as it does for
nonaccrual loans. At December 31, 2003 and 2002, there were
no commitments to lend additional funds to those borrowers whose
loans were classified as impaired.

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

|                                         |                                      |      |     |      |  |      |     |    |  |  |    |   | 
|---------------------------------------- | ------------------------------------ | ---- | --- | ---- |  | ---- | --- | -- |  |  | -- | - | 
|                                         |                                      | 2003 |     | 2002 |  | 2001
|                                         |                                      |      |     |      |  |     
|Income in accordance with original terms |                                      | $    | 544 |      |  |      | 445 |    |  |  | 14 |  
|Income recognized                        |                                      |      | 221 |      |  |      | 385 |    |  |  | 14 |  
|                                         |                                      |      |     |      |  |      |     |    |  |  |    |  
|                                         | Foregone interest income during year |      | $   | 322  |  |      |     | 60 |  |  |    |  | 
|                                         |                                      |      |     |      |  |      |     |    |  |  |    |  

Nonaccrual loans at December 31, 2003 and
2002 were $4,688 and $5,497, respectively.

The following table summarizes information
regarding the reduction in interest income on nonaccrual loans
for the year ended December 31:

|                                         |                                      |      |     |      |  |      |     |     |  |  |    |    | 
|---------------------------------------- | ------------------------------------ | ---- | --- | ---- |  | ---- | --- | --- |  |  | -- | -- | 
|                                         |                                      | 2003 |     | 2002 |  | 2001
|                                         |                                      |      |     |      |  |     
|Income in accordance with original terms |                                      | $    | 401 |      |  |      | 641 |     |  |  | 91 |   
|Income recognized                        |                                      |      | 130 |      |  |      | 469 |     |  |  | 59 |   
|                                         |                                      |      |     |      |  |      |     |     |  |  |    |   
|                                         | Foregone interest income during year |      | $   | 271  |  |      |     | 172 |  |  |    | 32 | 
|                                         |                                      |      |     |      |  |      |     |     |  |  |    |   

F-21



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(6) Allowance for Loan Losses (Dollars In
Thousands)

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

|                            |                      |      |        |        |  |      |        |        |  |  |        |        | 
|--------------------------- | -------------------- | ---- | ------ | ------ |  | ---- | ------ | ------ |  |  | ------ | ------ | 
|                            |                      | 2003 |        | 2002   |  | 2001
|                            |                      |      |        |        |  |     
|Balance, beginning of year  |                      | $    | 12,656 |        |  |      | 12,328 |        |  |  | 11,381 |       
|Provision charged to income |                      |      | 3,350  |        |  |      | 1,350  |        |  |  | 820    |       
|Recoveries                  |                      |      | 130    |        |  |      | 359    |        |  |  | 361    |       
|Charge-offs                 |                      |      | (2,262 | )      |  |      | (1,381 | )      |  |  | (234   | )     
|                            |                      |      |        |        |  |      |        |        |  |  |        |       
|                            | Balance, end of year |      | $      | 13,874 |  |      |        | 12,656 |  |  |        | 12,328 | 
|                            |                      |      |        |        |  |      |        |        |  |  |        |       

(7) Accrued Interest Receivable (Dollars
In Thousands)

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

|                                          |  |      |       |      |  |  |       | 
|----------------------------------------- |  | ---- | ----- | ---- |  |  | ----- | 
|                                          |  | 2003 |       | 2002
|                                          |  |      |       |     
|Investment and mortgage-backed securities |  | $    | 1,429 |      |  |  | 1,267 | 
|Loans                                     |  |      | 4,700 |      |  |  | 5,203 | 
|                                          |  |      |       |      |  |  |       | 
|                                          |  | $    | 6,129 |      |  |  | 6,470 | 
|                                          |  |      |       |      |  |  |       | 

(8) Premises and Equipment (Dollars In
Thousands)

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

|                                               |  |      |         |      |  |  |         |  
|---------------------------------------------- |  | ---- | ------- | ---- |  |  | ------- | -
|                                               |  | 2003 |         | 2002
|                                               |  |      |         |     
|Land                                           |  | $    | 4,745   |      |  |  | 2,429   |  
|Buildings                                      |  |      | 11,256  |      |  |  | 6,140   |  
|Furniture, fixtures and equipment              |  |      | 15,449  |      |  |  | 12,879  |  
|Leasehold improvements                         |  |      | 2,170   |      |  |  | 1,925   |  
|                                               |  |      |         |      |  |  |         |  
|                                               |  |      | 33,620  |      |  |  | 23,373  |  
|Less accumulated depreciation and amortization |  |      | (14,081 | )    |  |  | (13,240 | )
|                                               |  |      |         |      |  |  |         |  
|                                               |  | $    | 19,539  |      |  |  | 10,133  |  
|                                               |  |      |         |      |  |  |         |  

Depreciation expense for the years ended
December 31, 2003, 2002 and 2001 was $1,648, $1,576 and
$1,442, respectively.

The Company presently leases office space at
seven locations and land in one location to which it is
committed to minimum annual rentals plus lease escalations. Such
leases expire at various dates with options to renew. Minimum
future rental expense is as follows:

|                         |  |   |       | 
|------------------------ |  | - | ----- | 
|Years ended December 31: |  |   |       | 
|2004                     |  | $ | 1,548 | 
|2005                     |  |   | 1,512 | 
|2006                     |  |   | 1,521 | 
|2007                     |  |   | 1,483 | 
|2008 and thereafter      |  |   | 1,901 | 
|                         |  |   |       | 
|                         |  | $ | 7,965 | 
|                         |  |   |       | 

Rent expense was $1,664 in 2003, $1,812 in 2002
and $1,776 in 2001.

F-22



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                         |  |   |       | 
|------------------------ |  | - | ----- | 
|Years ended December 31: |  |   |       | 
|2004                     |  | $ | 406   | 
|2005                     |  |   | 364   | 
|2006                     |  |   | 358   | 
|2007                     |  |   | 304   | 
|2008 and thereafter      |  |   | 145   | 
|                         |  |   |       | 
|                         |  | $ | 1,577 | 
|                         |  |   |       | 

Rental income was $252, $178 and $185 in 2003,
2002, and 2001, respectively.

(9) Deposit Accounts (Dollars in
Thousands)

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

|                                           |                      |                                |           |         |         |  |         |         |         | 
|------------------------------------------ | -------------------- | ------------------------------ | --------- | ------- | ------- |  | ------- | ------- | ------- | 
|                                           |                      | 2003                           |           | 2002   
|                                           |                      |                                |           |        
|NOW                                        |                      | $                              | 211,469   |         |         |  | 150,342 |        
|Regular and statement savings              |                      |                                | 227,491   |         |         |  | 218,133 |        
|Money market                               |                      |                                | 138,986   |         |         |  | 62,530  |        
|Demand deposits and official checks        |                      |                                | 89,488    |         |         |  | 107,154 |        
|                                           |                      |                                |           |         |         |  |         |        
|                                           |                      | Total non-certificate accounts |           |         | 667,434 |  |         |         | 538,159 | 
|                                           |                      |                                |           |         |         |  |         |        
|Certificate accounts:                      |                      |                                |           |         |         |  |         |        
|                                           | 3 to 9 months        |                                |           | 57,271  |         |  |         | 52,164  |        
|                                           | 1 to 3 years         |                                |           | 320,818 |         |  |         | 246,636 |        
|                                           | Greater than 3 years |                                |           | 91,702  |         |  |         | 75,987  |        
|                                           | IRA/ Keogh           |                                |           | 51,323  |         |  |         | 47,332  |        
|                                           |                      |                                |           |         |         |  |         |        
|                                           |                      | Total certificate accounts     |           |         | 521,114 |  |         |         | 422,119 | 
|                                           |                      |                                |           |         |         |  |         |        
|                                           |                      | $                              | 1,188,548 |         |         |  | 960,278 |        
|                                           |                      |                                |           |         |         |  |         |        
|Expected maturity of certificate accounts: |                      |                                |           |         |         |  |         |        
|                                           | Within one year      |                                | $         | 255,666 |         |  |         | 227,898 |        
|                                           | One to two years     |                                |           | 174,903 |         |  |         | 99,230  |        
|                                           | Two to three years   |                                |           | 47,358  |         |  |         | 53,250  |        
|                                           | Over three years     |                                |           | 43,187  |         |  |         | 41,741  |        
|                                           |                      |                                |           |         |         |  |         |        
|                                           |                      | $                              | 521,114   |         |         |  | 422,119 |        
|                                           |                      |                                |           |         |         |  |         |        

Aggregate amount of certificate accounts of $100
or more were $93,300 and $53,700 at December 31, 2003 and
2002, 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:

|                              |  |      |        |      |  |      |        |  |  |  |        | 
|----------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                              |  | 2003 |        | 2002 |  | 2001
|                              |  |      |        |      |  |     
|NOW                           |  | $    | 470    |      |  |      | 447    |  |  |  | 735    | 
|Regular and statement savings |  |      | 2,250  |      |  |      | 2,838  |  |  |  | 4,104  | 
|Money market                  |  |      | 1,017  |      |  |      | 946    |  |  |  | 1,380  | 
|Certificate accounts          |  |      | 15,739 |      |  |      | 18,110 |  |  |  | 23,884 | 
|                              |  |      |        |      |  |      |        |  |  |  |        | 
|                              |  | $    | 19,476 |      |  |      | 22,341 |  |  |  | 30,103 | 
|                              |  |      |        |      |  |      |        |  |  |  |        | 

F-23



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company had $117,756 and $132,709 of brokered
deposits with a weighted average rate of 4.95% and 5.39% at
December 31, 2003 and 2002, respectively. Brokered deposits
are scheduled to mature as follows:

|     |       |        |        |         | 
|---- | ----- | ------ | ------ | ------- | 
|Year |       | Amount
|     |       |       
|2004 |       | $      | 56,315 |        
|2005 |       |        | 26,679 |        
|2006 |       |        | 25,550 |        
|2007 |       |        | 3,400  |        
|2008 |       |        | 5,812  |        
|     |       |        |        |        
|     | Total |        | $      | 117,756 | 
|     |       |        |        |        



|     |                                                                            
|---- | ---------------------------------------------------------------------------
|(10) | Federal Home Loan Bank (FHLB) of Boston
    Advances (Dollars in Thousands)

A summary of FHLB advances at December 31
follows:

|                       |  |           |         |               |  |          |         |           |  |                 |      |          |  |   |         |  |  |  |         |  |  |  |      |  
|---------------------- |  | --------- | ------- | ------------- |  | -------- | ------- | --------- |  | --------------- | ---- | -------- |  | - | ------- |  |  |  | ------- |  |  |  | ---- | -
|                       |  |           |         |              
|                       |  | 2003      |         | 2002         
|                       |  |           |         |              
|                       |  |           |         | Redeemable at |  | Weighted |         |           |  | Redeemable      |      | Weighted
|                       |  | Scheduled |         | Initial Call  |  | Average  |         | Scheduled |  | at Initial Call |      | Average 
|                       |  | Maturity  |         | Date(1)       |  | Rate(2)  |         | Maturity  |  | Date(1)         |      | Rate(2) 
|                       |  |           |         |               |  |          |         |           |  |                 |      |         
|Within 1 Year          |  | $         | 138,497 |               |  |          | 266,163 |           |  |                 | 2.45 | %        |  | $ | 177,500 |  |  |  | 324,500 |  |  |  | 3.80 | %
|Over 1 year to 2 years |  |           | 35,333  |               |  |          | 35,000  |           |  |                 | 4.65 |          |  |   | 59,500  |  |  |  | 39,500  |  |  |  | 4.09 |  
|Over 2 year to 3 years |  |           | 27,333  |               |  |          | 10,000  |           |  |                 | 3.76 |          |  |   | 25,867  |  |  |  | 25,867  |  |  |  | 5.66 |  
|Over 3 year to 5 years |  |           | 106,500 |               |  |          | 54,500  |           |  |                 | 4.75 |          |  |   | 75,693  |  |  |  | 16,693  |  |  |  | 4.62 |  
|Over 5 years           |  |           | 58,000  |               |  |          |        |           |  |                 | 4.89 |          |  |   | 88,000  |  |  |  | 20,000  |  |  |  | 5.23 |  
|                       |  |           |         |               |  |          |         |           |  |                 |      |          |  |   |         |  |  |  |         |  |  |  |      |  
|                       |  | $         | 365,663 |               |  |          | 365,663 |           |  |                 | 3.82 | %        |  | $ | 426,560 |  |  |  | 426,560 |  |  |  | 4.39 | %
|                       |  |           |         |               |  |          |         |           |  |                 |      |          |  |   |         |  |  |  |         |  |  |  |      |  



---



|    |                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Callable FHLB advances are shown in the
    respective periods assuming that the callable debt is redeemed
    at the initial call date while all other advances are shown in
    the periods corresponding to their scheduled maturity date.
|   
|(2) | Weighted average rate based on scheduled maturity
    dates.                                                                                                                                                                                 

FHLB advances are collateralized by the
Companys FHLB stock, deposits at the FHLB and a blanket
lien on certain qualified investment securities and residential
mortgages held in the Companys portfolio. The
Companys overall borrowing capacity was approximately
$716,300 and $532,652 at December 31, 2003 and 2002,
respectively. Borrowing capacity can also be increased upon the
delivery of mortgage notes on non owner- occupied one to
four-family loans, multi-family and commercial loans.

As a member of the FHLB of Boston, the Company,
at December 31, 2003, was required to maintain a minimum
investment in the capital stock of the FHLB 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 FHLB of
Boston, whichever is greater. The investment exceeded the
required level by approximately $9,883 and $2,566 at
December 31, 2003 and 2002, respectively. Any excess may be
redeemed by the Company or called by FHLB of Boston at par.
Recent legislation has changed the structure of the Federal Home
Loan Banks funding obligations, revised the capital
structure of the Federal Home Loan Banks and implemented
entirely voluntary membership of Federal Home Loan Banks. Such
changes take effect in April 2004. Management believes the
effect these changes will have with respect to its FHLB
membership will not be material.

Interest expense on FHLB advances was $16,589 in
2003, $22,104 in 2002 and $23,885 in 2001.

The Company maintains a $5,000 line of credit
from a financial institution, which can be used for general
corporate purposes. There was no outstanding balance on the line
of credit at December 31, 2003 and 2002.

F-24



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|     |                                                                                                                    
|---- | -------------------------------------------------------------------------------------------------------------------
|(11) | Other Borrowed Money  Corporation
    Obligated Mandatory Redeemable Capital Securities (Dollars In
    Thousands)

On July 12, 2000, the Company sponsored the
creation of BFD Preferred Capital Trust I (Trust I), a
New York common law trust. The Company is the owner of all of
the common securities of Trust I. On July 26, 2000,
the Trust I issued $10,000 of its 11.295% Capital
Securities through a pooled trust preferred securities offering.
The proceeds from this issuance, along with the Companys
$309 capital contribution for the Trust I common securities,
were used to acquire $10,309 aggregate principal amount of the
Companys 11.295% Junior Subordinated notes due
July 19, 2030, which constitute the sole asset of the
Trust I. The Company has, through the Trust agreement
establishing the Trust, the Guarantee Agreement, the notes and
the related Indenture, taken together, fully irrevocably and
unconditionally guaranteed all of the Trust Is obligations
under the Capital Securities.

On August 18, 2000, the Company sponsored
the creation of BFD Preferred Capital Trust II
(Trust II), a statutory business trust created under the
laws of Delaware. The Company is the owner of all of the common
securities of the Trust II. On September 22, 2000, the
Trust II issued $22,000 of its 10.875% Capital Securities.
The proceeds from this issuance, along with the Companys
$681 capital contribution for the Trust II common
securities, were used to acquire $22,681 aggregate principal
amount of the Companys 10.875% junior subordinated
debentures due October 1, 2030, which constitute the sole
assets of the Trust II. The Company has, through the
Declaration of Trust and the Amended and Restated Declaration of
Trust establishing the Trust, the Common Securities and the
Capital Securities Guarantee Agreements, the debentures and
related Indenture, taken together, fully irrevocably and
unconditionally guaranteed all of the Trust IIs
obligations under the Capital Securities.

The aggregate amount of Trust I and II
securities outstanding totaled $32,990 at December 31,
2003. A summary of the trust securities issued and outstanding
follows:

|                               |  |                    |        |      |  |            |        |             |  |              |        |           |  |  |           |  |  |  |           |  |  |  |              | 
|------------------------------ |  | ------------------ | ------ | ---- |  | ---------- | ------ | ----------- |  | ------------ | ------ | --------- |  |  | --------- |  |  |  | --------- |  |  |  | ------------ | 
|                               |  |                    |        |      |  |            |        |             |  |             
|                               |  | Amount Outstanding |        |      |  |            |        |             |  |             
|                               |  | December 31        |        |      |  |            |        |             |  | Distribution
|                               |  |                    |        |      |  | Prepayment |        |             |  | Payment     
|                               |  | 2003               |        | 2002 |  | Rate       |        | Option Date |  | Maturity     |        | Frequency
|                               |  |                    |        |      |  |            |        |             |  |              |        |          
|BFD Preferred Capital Trust I  |  | $                  | 10,309 |      |  |            | 10,000 |             |  |              | 11.295 | %         |  |  | 7/19/2010 |  |  |  | 7/19/2030 |  |  |  | Semiannually | 
|BFD Preferred Capital Trust II |  |                    | 22,681 |      |  |            | 22,000 |             |  |              | 10.875 |           |  |  | 10/1/2010 |  |  |  | 10/1/2030 |  |  |  | Semiannually | 

All of the corporation obligated mandatorily
redeemable capital securities may be prepaid at the option of
the Trusts in whole or in part, on or after the prepayment dates
listed in the table above. Trust I is subject to a
prepayment penalty fee of six months worth of interest reduced
each year by 10% commencing at July 19, 2010. There is no
prepayment penalty fee imposed on Trust II after the first
10 years.

In addition, the Company also has the right,
subject to certain conditions, at any time during the term of
the Trust I Capital Securities to defer the payment of
interest on those securities from time to time for a period of
up to ten consecutive semiannual interest payment periods. No
deferral period will end on a date other than an interest
payment date and no deferral will extend beyond July 19,
2030, the stated maturity of the Trust I Capital
Securities. During any deferral period, each installment of
interest that would otherwise have been due and payable will
bear additional interest (to the extent payment of such interest
would be legally enforceable) at the rate of 13.95%, compounded
semiannually.

The Company has the right, at one or more times,
to defer interest payments on the Trust II Junior
Subordinated Debentures for up to ten consecutive semiannual
periods. All deferrals will end on an interest payment date and
will not extend beyond October 1, 2030, the stated maturity
date of the Trust II Junior Subordinated Debentures. If the
Company defers interest payments on the Trust II Junior
Subordinated Debentures, the Trust II will also defer
distributions on the Trust II Capital Securities.

In December 2003, the Financial Accounting
Standards Board (FASB) issued guidance (revised FASB
Interpretation (FIN) No. 46), which in part
specifically addresses limited purpose trusts formed to issue
trust preferred securities. FIN No. 46, among other items,
requires the Company to deconsolidate its two trust preferreds.
Because the Company had already been classifying the trust
preferreds as debt, the impact of adopting FIN No. 46 as of
December 31, 2003 had a minimal impact.

F-25



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|     |                                    
|---- | -----------------------------------
|(12) | Income Taxes (Dollars In Thousands)

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

|                             |         |                        |                          |       |       |       |  |        |        |       |  |       |       |       | 
|---------------------------- | ------- | ---------------------- | ------------------------ | ----- | ----- | ----- |  | ------ | ------ | ----- |  | ----- | ----- | ----- | 
|                             |         | 2003                   |                          | 2002  |       | 2001 
|                             |         |                        |                          |       |       |      
|Current income tax expense:  |         |                        |                          |       |       |       |  |        |        |       |  |      
|                             | Federal |                        | $                        | 303   |       |       |  | 3,558  |        |       |  | 4,462 |      
|                             | State   |                        |                          | 2,840 |       |       |  | 212    |        |       |  | 176   |      
|                             |         |                        |                          |       |       |       |  |        |        |       |  |      
|                             |         | Total current expense  |                          |       | 3,143 |       |  |        | 3,770  |       |  |       | 4,638 |      
|                             |         |                        |                          |       |       |       |  |        |        |       |  |      
|Deferred income tax expense: |         |                        |                          |       |       |       |  |        |        |       |  |      
|                             | Federal |                        |                          | 1,138 |       |       |  | (2,430 | )      |       |  | 404   |      
|                             | State   |                        |                          | 134   |       |       |  | 47     |        |       |  | 167   |      
|                             |         |                        |                          |       |       |       |  |        |        |       |  |      
|                             |         | Total deferred expense |                          |       | 1,272 |       |  |        | (2,383 | )     |  |       | 571   |      
|                             |         |                        |                          |       |       |       |  |        |        |       |  |      
|                             |         |                        | Total income tax expense |       | $     | 4,415 |  |        |        | 1,387 |  |       |       | 5,209 | 
|                             |         |                        |                          |       |       |       |  |        |        |       |  |      

During 2003, the Company recognized a $1,868
charge to state tax expense due to a settlement with the
Massachusetts Department of Revenue (Mass. DOR) on a
state tax dispute related to Real Estate Investment Trusts
(REITs). This amount is included in the
reconciliation of the statutory rate within state taxes.

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:

|                      |                                                  |                            |   |       |       |  |  |       |       | 
|--------------------- | ------------------------------------------------ | -------------------------- | - | ----- | ----- |  |  | ----- | ----- | 
|                      |                                                  | 2003                       |   | 2002 
|                      |                                                  |                            |   |      
|Deferred tax assets:  |                                                  |                            |   |       |       |  |  |      
|                      | Allowance for loan losses                        |                            | $ | 5,749 |       |  |  | 5,591 |      
|                      | Valuation for Real Estate Owned                  |                            |   |      |       |  |  | 70    |      
|                      | Deferred compensation                            |                            |   | 224   |       |  |  | 57    |      
|                      | Goodwill                                         |                            |   | 1,684 |       |  |  | 2,051 |      
|                      | Mark to market  Loans Held for Sale             |                            |   | 153   |       |  |  | 116   |      
|                      | Depreciation                                     |                            |   | 105   |       |  |  | 126   |      
|                      |                                                  |                            |   |       |       |  |  |      
|                      |                                                  | Gross deferred assets      |   |       | 7,915 |  |  |       | 8,011 | 
|                      |                                                  |                            |   |       |       |  |  |      
|Deferred liabilities: |                                                  |                            |   |       |       |  |  |      
|                      | Mortgage servicing                               |                            |   | 2,963 |       |  |  | 2,893 |      
|                      | Deferred loan fees                               |                            |   | 2,581 |       |  |  | 1,465 |      
|                      | Premises and equipment                           |                            |   | 310   |       |  |  | 319   |      
|                      | Unrealized gain on securities available for sale |                            |   | 253   |       |  |  | 701   |      
|                      |                                                  |                            |   |       |       |  |  |      
|                      |                                                  | Gross deferred liabilities |   |       | 6,107 |  |  |       | 5,378 | 
|                      |                                                  |                            |   |       |       |  |  |      
|                      |                                                  | Net deferred tax asset     |   | $     | 1,808 |  |  |       | 2,633 | 
|                      |                                                  |                            |   |       |       |  |  |      

At December 31, 2003 and 2002, the net
deferred tax asset is supported by recoverable income taxes. For
the year ended December 31, 2003, the Company generated
approximately $2,100 of taxable income. In addition, 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. 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.

As a result of the Tax Reform Act of 1996, the
special tax bad debt provisions were amended to eliminate the
reserve method for the Companys subsidiary Bank. However,
the base year reserve of

F-26



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

approximately $13,300 remains subject to
recapture in the event that the Bank makes non-dividend
distributions to the Company in excess of its earnings and
profits or redeems its stock. Non-dividend distributions include
distributions in excess of the Banks current and
accumulated earnings and profits, as calculated for federal
income tax purposes, distributions in redemption of stock, and
distributions in partial or complete liquidation. Dividends paid
out of the Banks current or accumulated earnings and
profits will not be so included in the Banks income.

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:

|                                            |                                                         |                           |       |       |      |      |       |      |      |   |       |      |      |  
|------------------------------------------- | ------------------------------------------------------- | ------------------------- | ----- | ----- | ---- | ---- | ----- | ---- | ---- | - | ----- | ---- | ---- | -
|                                            |                                                         | 2003                      |       | 2002  |      | 2001
|                                            |                                                         |                           |       |       |      |     
|Computed expected expense at statutory rate |                                                         | $                         | 2,700 |       |      |      | 1,321 |      |      |   | 5,202 |     
|Items affecting federal income tax rate:    |                                                         |                           |       |       |      |      |       |      |      |   |       |     
|                                            | State income tax, net of federal income tax
    benefit |                           |       | 1,933 |      |      |       | 169  |      |   |       | 223  |     
|                                            | Allocated ESOP share appreciation                       |                           |       | 286   |      |      |       | 248  |      |   |       | 170  |     
|                                            | Bank-owned life insurance                               |                           |       | (431  | )    |      |       | (433 | )    |   |       | (439 | )   
|                                            | Other                                                   |                           |       | (73   | )    |      |       | 82   |      |   |       | 53   |     
|                                            |                                                         |                           |       |       |      |      |       |      |      |   |       |     
|Effective income tax expense                |                                                         | $                         | 4,415 |       |      |      | 1,387 |      |      |   | 5,209 |     
|                                            |                                                         |                           |       |       |      |      |       |      |      |   |       |     
|                                            |                                                         | Effective income tax rate |       |       | 57.2 | %    |       |      | 36.8 | % |       |      | 35.0 | %
|                                            |                                                         |                           |       |       |      |      |       |      |      |   |       |     

The effective income tax rate in 2003 was higher
than the expected rate due to the REIT Settlement with the Mass.
DOR.



|     |                                                                                 
|---- | --------------------------------------------------------------------------------
|(13) | Employee Benefits (Dollars in Thousands,
    Except Share and Per Share Amounts)



|    |                              
|--- | -----------------------------
|(a) | Employee Stock Ownership Plan

The Company maintains an Employee Stock Ownership
Plan (ESOP), which is designed to provide retirement benefits
for eligible employees of the Bank. Beginning in 2001, the ESOP
allocation was distributed in a manner that also provided
retirement benefits to eligible employees of BNB and Forward
Financial. Because the Plan invests primarily in the stock of
the Company, it provided eligible employees an opportunity to
acquire an ownership interest in the Company. Employees were
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 were allocated to eligible participants on
the basis of compensation.

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 (dissolved
in September, 2003), bearing interest at the prime rate.
Repayment of the loan was secured by contributions the Bank was
obliged to make under a contribution agreement with the ESOP.
The Bank made contributions to the ESOP totaling $529 each in
2002 and 2001 to enable the ESOP to make principal payments on
the loan. The amount contributed was charged to compensation and
benefits expense. The Company incurred a compensation and
benefit expense of $972 in 2003, representing the average market
value of shares previously acquired with the dividends earned on
unallocated shares. For 2002 and 2001, compensation and benefits
of $969 and $684, respectively related to the appreciation in
the fair value of allocated ESOP shares. The $972, $969 and $684
compensation and benefits in the years ended December 31,
2003, 2002 and 2001, respectively, were credited to additional
paid-in-capital. The balance of the loan was repaid at the end
of 2002.

Shares used as collateral to secure the loan were
released and available for allocation to eligible employees as
the principal balance of the loan was 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.

At December 31, 2001, shares held in
suspense to be released at the next annual distribution date
when the loan was paid down amounted to 52,920, which shares
were distributed at December 31, 2002.

F-27



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Additionally, at December 31, 2003, a total
of 35,400 shares were held in suspense, representing shares
acquired with the proceeds of dividends paid on unallocated ESOP
shares. These shares were distributed to eligible employees at
December 31, 2003. Upon completion of this distribution,
there were no unallocated ESOP shares as of December 31,
2003. The fair value of all unallocated ESOP shares was $925 and
$2,062 at December 31, 2002 and 2001, 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.

(b) 1996 Stock-Based Incentive
Plan

The Company maintains a 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. In 1996, the SIP acquired 263,584 shares in
the open market at an average price of $12.255 per share and has
since acquired additional shares with the proceeds of dividends.
These original acquisition shares represent deferred
compensation, which is initially recorded as a reduction in
stockholders equity and charged to compensation expense
over the vesting period of the award. Upon vesting, shares
acquired from dividends are distributed pro-rata to recipients
of awards.

Awards are granted in the form of common stock
held by the SIP. A total of 242,500 shares were awarded on
April 30, 1996, a total of 8,584 shares were awarded
on October 15, 1996 and 7,500 shares were awarded on
February 17, 2000. During 2001 a total of 6,000 shares
were awarded and in 2002, 1,000 shares were awarded, some
of which were shares acquired with accumulated dividends. Awards
outstanding vest in five annual installments generally
commencing one year from the date of the award. As of
December 31, 2003, all shares have been awarded 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. The Company
recognized $14, $43 and $79 related to the original cost of
earned shares in compensation and benefit expense in 2003, 2002
and 2001, respectively.

A recipient will be entitled to all voting and
other stockholder rights. The awarded, but unvested SIP shares
are considered outstanding in the calculation of earnings per
share.

(c) Stock Option
Plans

The Company adopted a stock option plan in 1996
(the 1996 Plan) for officers, key employees and directors.
Pursuant to the terms of the 1996 plan, the number of common
shares reserved for issuance is 658,961, all of which have been
awarded. 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
granted vest over a five-year period from the date of grant.
During 1997, the Company adopted the 1997 stock option plan (the
1997 Plan). Pursuant to the terms of the 1997 plan,
250,000 common shares are reserved for issuance of which
24,000 remain unawarded. During 2003, the Company granted
employees options to purchase 4,000 shares of common stock
at $34.37. During 2002, the Company granted employees options to
purchase 13,500 shares of common stock at $27.51 and in 2001,
the Company granted directors and employees options to purchase
27,000 shares of common stock at between $21.80 and $23.65
per share.

A summary of option activity follows:

|                           |           |           |         |                  |   |           |       |                  |  |  |         |          |   |   |       |       | 
|-------------------------- | --------- | --------- | ------- | ---------------- | - | --------- | ----- | ---------------- |  |  | ------- | -------- | - | - | ----- | ----- | 
|                           |           |           |         |                 
|                           |           | 2003      |         | 2002            
|                           |           |           |         |                 
|                           |           |           |         | Weighted         |   |           |       | Weighted        
|                           |           | Number of |         | Average Exercise |   | Number of |       | Average Exercise
|                           |           | Shares    |         | Price            |   | Shares    |       | Price           
|                           |           |           |         |                  |   |           |       |                 
|Balance, beginning of year |           |           | 569,626 |                  |   | $         | 14.97 |                  |  |  | 754,863 |          |   | $ | 14.80 |      
|                           | Granted   |           |         | 4,000            |   |           |       | 34.37            |  |  |         | 13,500   |   |   |       | 27.51 | 
|                           | Forfeited |           |         | (3,400           | ) |           |       | 14.70            |  |  |         | (7,500   | ) |   |       | 22.46 | 
|                           | Exercised |           |         | (109,928         | ) |           |       | 13.78            |  |  |         | (191,237 | ) |   |       | 14.86 | 
|                           |           |           |         |                  |   |           |       |                  |  |  |         |          |   |   |       |      
|Balance, end of year       |           |           | 460,298 |                  |   | $         | 15.43 |                  |  |  | 569,626 |          |   | $ | 14.97 |      
|                           |           |           |         |                  |   |           |       |                  |  |  |         |          |   |   |       |      
|Options exercisable        |           |           | 409,098 |                  |   | $         | 14.63 |                  |  |  | 493,826 |          |   | $ | 14.23 |      

F-28



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                           |           |           |         |                  |   |   |       |       | 
|-------------------------- | --------- | --------- | ------- | ---------------- | - | - | ----- | ----- | 
|                           |           |          
|                           |           | 2001     
|                           |           |          
|                           |           | Number of |         | Weighted Average
|                           |           | Shares    |         | Exercise Price  
|                           |           |           |         |                 
|Balance, beginning of year |           |           | 838,661 |                  |   | $ | 14.26 |      
|                           | Granted   |           |         | 27,000           |   |   |       | 22.28 | 
|                           | Forfeited |           |         | (1,000           | ) |   |       | 18.82 | 
|                           | Exercised |           |         | (109,798         | ) |   |       | 12.51 | 
|                           |           |           |         |                  |   |   |       |      
|Balance, end of year       |           |           | 754,863 |                  |   | $ | 14.80 |      
|                           |           |           |         |                  |   |   |       |      
|Options exercisable        |           |           | 636,671 |                  |   | $ | 14.11 |      

A summary of options outstanding and exercisable
by price range as of December 31 follows:

|                    |         |                     |  |                  |     |                   |  |                  |       |  |  |  |         |  |  |   |       | 
|------------------- | ------- | ------------------- |  | ---------------- | --- | ----------------- |  | ---------------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                    |         |                    
|Options Outstanding |         | Options Exercisable
|                    |         |                    
|Outstanding         |         | Weighted Average    |  |                  |     | Exercisable as of |  |                 
|as of               |         | Remaining           |  | Weighted Average |     | December 31,      |  | Weighted Average
|December 31, 2003   |         | Contractual Life    |  | Exercise Price   |     | 2003              |  | Exercise Price  
|                    |         |                     |  |                  |     |                   |  |                 
|                    | 254,348 |                     |  |                  | 2.3 |                   |  | $                | 12.44 |  |  |  | 254,348 |  |  | $ | 12.44 | 
|                    | 500     |                     |  |                  | 2.8 |                   |  |                  | 13.44 |  |  |  | 500     |  |  |   | 13.44 | 
|                    | 7,500   |                     |  |                  | 2.9 |                   |  |                  | 14.82 |  |  |  | 7,500   |  |  |   | 14.82 | 
|                    | 61,900  |                     |  |                  | 3.5 |                   |  |                  | 18.82 |  |  |  | 61,900  |  |  |   | 18.82 | 
|                    | 2,000   |                     |  |                  | 3.9 |                   |  |                  | 19.75 |  |  |  | 2,000   |  |  |   | 19.75 | 
|                    | 9,500   |                     |  |                  | 4.2 |                   |  |                  | 22.22 |  |  |  | 9,500   |  |  |   | 22.22 | 
|                    | 5,000   |                     |  |                  | 4.4 |                   |  |                  | 23.38 |  |  |  | 5,000   |  |  |   | 23.38 | 
|                    | 500     |                     |  |                  | 5.0 |                   |  |                  | 18.13 |  |  |  | 500     |  |  |   | 18.13 | 
|                    | 9,500   |                     |  |                  | 5.2 |                   |  |                  | 18.50 |  |  |  | 9,500   |  |  |   | 18.50 | 
|                    | 40,900  |                     |  |                  | 6.0 |                   |  |                  | 14.57 |  |  |  | 31,700  |  |  |   | 14.57 | 
|                    | 10,000  |                     |  |                  | 6.2 |                   |  |                  | 13.82 |  |  |  | 7,000   |  |  |   | 13.82 | 
|                    | 1,000   |                     |  |                  | 6.5 |                   |  |                  | 12.91 |  |  |  | 600     |  |  |   | 12.91 | 
|                    | 1,000   |                     |  |                  | 6.7 |                   |  |                  | 19.81 |  |  |  | 600     |  |  |   | 19.81 | 
|                    | 1,750   |                     |  |                  | 6.8 |                   |  |                  | 18.44 |  |  |  | 750     |  |  |   | 18.44 | 
|                    | 12,900  |                     |  |                  | 7.0 |                   |  |                  | 19.41 |  |  |  | 5,500   |  |  |   | 19.41 | 
|                    | 19,500  |                     |  |                  | 7.3 |                   |  |                  | 21.80 |  |  |  | 7,500   |  |  |   | 21.80 | 
|                    | 5,000   |                     |  |                  | 7.8 |                   |  |                  | 23.65 |  |  |  | 2,000   |  |  |   | 23.65 | 
|                    | 13,500  |                     |  |                  | 8.9 |                   |  |                  | 27.51 |  |  |  | 2,700   |  |  |   | 27.51 | 
|                    | 4,000   |                     |  |                  | 9.9 |                   |  |                  | 34.37 |  |  |  |        |  |  |   |      | 
|                    |         |                     |  |                  |     |                   |  |                  |       |  |  |  |         |  |  |   |       | 
|                    | 460,298 |                     |  |                  | 3.7 |                   |  | $                | 15.43 |  |  |  | 409,098 |  |  | $ | 14.63 | 
|                    |         |                     |  |                  |     |                   |  |                  |       |  |  |  |         |  |  |   |       | 

The 1996 Plan and the 1997 Plan stock option
grants are accounted by measuring compensation at the grant date
as the difference between the fair market value of the
Companys stock and the exercise price of the options
granted. The Company grants options at the fair market value of
the stock at the date of grant. Accordingly, no compensation
cost has been charged against income for these plans.

(d) 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. 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 and SFAS No. 132 is not
possible. Contributions are based on individual employer
experience. According to Pentegras Administrators, as of
June 30, 2003, 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.
During the year ended December 31, 2003, the Company
incurred a pension expense of $1,415. During 2002, the

F-29



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company accrued a pension expense of $530 for the
first half of the plans fiscal year ending June 30,
2003. There was no pension expense recorded for 2001, except for
an administration fee of approximately $5. The Company
anticipates it will incur a pension expense of approximately
$1,700 for the plans fiscal year ending June 30, 2004.

(e) Deferred Thrift Incentive
Plan

The Bank has an employee tax deferred thrift
incentive plan (the 401(k) plan) under which
employee contributions to the plan are matched pursuant to the
provisions of the plan. All employees who meet specified age and
length of service requirements are eligible to participate in
the 401(k) plan. The amount matched by the Bank is included in
compensation and employee benefits expense. The amount matched
was $259 in 2003, $249 in 2002 and $242 in 2001.

(f) Supplemental Executive
Retirement Plan

The Company established a supplemental executive
retirement plan (the SERP) in October 1999 for
certain of its senior executives under which participants are
entitled to an annual retirement benefit. The purpose of the
SERP is to restore benefits that would have been received under
the Companys defined benefit and defined contribution
plans but for limitations imposed by federal tax limitations.
Expenses associated with SERP totaled $328, $399 and $181 in
2003, 2002 in 2001, respectively.

(g) Short-Term Incentive
Plan

The Company maintains a short-term incentive
plan. Generally all of the Banks employees (except Forward
Financials) are eligible to participate in the incentive
plan, and awards are granted based on the achievement of certain
performance measures. Forward Financial has individualized plans
for certain members of management, focused on performance and
the attainment of measurable business goals. Compensation
expense related to the short-term incentive plan awards amounted
to $1,033, $1,199 and $1,411 during 2003, 2002 and 2001,
respectively.

(h) Bank-Owned Life
Insurance

Bank owned life insurance (BOLI)
represents life insurance on the lives of certain employees. The
Company is the beneficiary of the insurance policies. Increases
in the cash value of the policies, as well as insurance proceeds
received, are recorded in non-interest income, and are not
subject to income taxes. The cash surrender value of the
Companys BOLI increased by $1,233 $1,238 and $1,255 during
the years ended December 31, 2003, 2002 and 2001,
respectively.

(i) Executive Officer Employment
Agreements

The Company entered into employment agreements
with its President and Chief Executive Officer, and two
Executive Vice Presidents and Forward Financials President
and Senior Vice President. The employment agreements generally
provide for the continued payment of specified compensation and
benefits for two or three years, as applicable, and provide
payments for the remaining term of the agreement after the
officers are terminated, unless the termination is for
cause 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 payment to the officer upon
voluntary or involuntary termination, under certain
circumstances, after a change of control, as defined in their
change of control agreements.

(j) 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 Company and/or its Bank. 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

F-30



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

(14) Litigation (Dollars in Thousands,
Except Per Share Amounts)

During the quarter ended March 31, 2002, the
Company settled a lawsuit, which had been filed against a
subsidiary. The Company incurred a cost of $500 during the first
quarter to settle the lawsuit, resulting in a reduction in
diluted earnings per share of approximately $0.07. During the
quarter ended September 30, 2002, the Company settled a
lawsuit, which had been filed against another subsidiary. The
Company incurred a cost of $750 during the third quarter to
settle the lawsuit, resulting in a reduction in diluted earnings
per share of approximately $0.11.

Various other 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.

(15) Financial Instruments with
Off-Balance-Sheet Risk (Dollars 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 is represented by the contractual amount
or unpaid principal balance of these 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.

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.

The Company sells the vast majority of its
adjustable rate loans held for sale to various private
institutional investors on a best efforts basis and most fixed
rate loans held for sale to FHLMC and FNMA. In addition, 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 delivers a mortgage loan (or
loans) with aggregate principal balances equaling the contract
amount of the forward commitment. Risks may arise from the
possible inability of the Company to originate loans to fulfill
the contracts, in which case the Company would repurchase the
forward commitments at the then prevailing market prices.

F-31



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company had the following outstanding
commitments at December 31:

|                                                                                                                      |                |      |        |         |  |  |         |         | 
|--------------------------------------------------------------------------------------------------------------------- | -------------- | ---- | ------ | ------- |  |  | ------- | ------- | 
|                                                                                                                      |                | 2003 |        | 2002   
|                                                                                                                      |                |      |        |        
|Commitments to originate mortgage loans                                                                               |                | $    | 72,843 |         |  |  | 84,941  |        
|Commitments to purchase mortgage loans                                                                                |                |      | 3,771  |         |  |  | 2,613   |        
|Commitments to originate business loans                                                                               |                |      | 1,676  |         |  |  | 1,607   |        
|Loans in process                                                                                                      |                |      | 33,125 |         |  |  | 24,832  |        
|Unused lines of credit:                                                                                               |                |      |        |         |  |  |         |        
|                                                                                                                      | Home equity    |      |        | 151,735 |  |  |         | 129,724 | 
|                                                                                                                      | Business loans |      |        | 12,149  |  |  |         | 18,457  | 
|Standby letters of credit                                                                                             |                |      | 3,029  |         |  |  | 3,120   |        
|Optional commitments to sell loans and
    commitments to sell loans or swap loans for mortgage-backed
    securities |                |      | 20,656 |         |  |  | 100,652 |        

(16) Fair Values of Financial Instruments
(Dollars 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.

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 active 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:

(a) Cash and Cash
Equivalents

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

(b) 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.

(c) Mortgage Loans Held for Sale
and Mortgage Banking Derivitives

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

F-32



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(d) 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.

(e) 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.

(f) 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.

(g) 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.

(h) Federal Home Loan Bank
Advances and Other Borrowings

Fair values for FHLB advances and other
borrowings 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.

(i) Corporation Obligated
Mandatorily Redeemable Capital Securities

Fair values for the corporation obligated
mandatorily redeemable capital securities are estimated using a
discounted cash flow technique that applies interest rates
currently being offered on similar securities to a schedule of
expected maturities of these capital securities.

(j) 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.

F-33



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                       |                                                           |                 |   |            |  |                 |  |            |  |  |  |           |  |  |  |           | 
|---------------------- | --------------------------------------------------------- | --------------- | - | ---------- |  | --------------- |  | ---------- |  |  |  | --------- |  |  |  | --------- | 
|                       |                                                           |                 |   |           
|                       |                                                           | 2003            |   | 2002      
|                       |                                                           |                 |   |           
|                       |                                                           | Carrying Amount |   | Fair Value |  | Carrying Amount |  | Fair Value
|                       |                                                           |                 |   |            |  |                 |  |           
|Financial assets:      |                                                           |                 |   |            |  |                 |  |            |  |  |  |           |  |  |  |          
|                       | Cash and cash equivalents                                 |                 | $ | 34,045     |  |                 |  | 34,045     |  |  |  | 74,672    |  |  |  | 74,672    | 
|                       | Investment securities available for sale                  |                 |   | 102,647    |  |                 |  | 102,647    |  |  |  | 112,888   |  |  |  | 112,888   | 
|                       | Investment securities held to maturity                    |                 |   | 2,025      |  |                 |  | 2,137      |  |  |  | 2,524     |  |  |  | 2,576     | 
|                       | Mortgage-backed securities available for sale             |                 |   | 83,752     |  |                 |  | 83,752     |  |  |  | 114,515   |  |  |  | 114,515   | 
|                       | Mortgage-backed securities held to maturity               |                 |   | 145,674    |  |                 |  | 145,029    |  |  |  | 25,429    |  |  |  | 26,597    | 
|                       | Loans, net and mortgage loans held for sale               |                 |   | 1,210,770  |  |                 |  | 1,218,628  |  |  |  | 1,102,970 |  |  |  | 1,128,524 | 
|                       | Accrued interest receivable                               |                 |   | 6,129      |  |                 |  | 6,129      |  |  |  | 6,470     |  |  |  | 6,470     | 
|                       | Stock in FHLB of Boston                                   |                 |   | 28,483     |  |                 |  | 28,483     |  |  |  | 24,552    |  |  |  | 24,552    | 
|Financial liabilities: |                                                           |                 |   |            |  |                 |  |            |  |  |  |           |  |  |  |          
|                       | Deposit accounts                                          |                 |   | 1,188,548  |  |                 |  | 1,152,275  |  |  |  | 960,278   |  |  |  | 961,331   | 
|                       | FHLB advances and other borrowings                        |                 |   | 398,653    |  |                 |  | 415,488    |  |  |  | 458,560   |  |  |  | 489,450   | 
|                       | Advance payments by borrowers for taxes and
    insurance |                 |   | 2,818      |  |                 |  | 2,818      |  |  |  | 2,317     |  |  |  | 2,317     | 

(17) Acquisition and Merger (Dollars in
Thousands)

On October 24, 2003, the Company acquired
the seven (7) Boston area branch offices of Encore Bank.
The Lexington Office was merged into the Companys existing
Lexington Office. The acquisition was accounted for as a
purchase and accordingly was included in the results of
operations from the date of acquisition. The following table
summarizes the estimated fair value of the assets acquired and
liabilities assumed at the date of acquisition. The Company
expects that some adjustments of the estimated fair values
assigned to the assets acquired and liabilities assumed may be
recorded in 2004, although such adjustments are not expected to
be significant. It is expected that the deposit premium paid
will be deductible for income tax purposes.

|                     |                                        |                                                    |       |         |         | 
|-------------------- | -------------------------------------- | -------------------------------------------------- | ----- | ------- | ------- | 
|Assets Acquired:     |                                        |                                                    |       |        
|                     | Cash                                   |                                                    | $     | 251     |        
|                     | Premises and equipment                 |                                                    |       | 7,327   |        
|                     | Core deposit intangible                |                                                    |       | 5,000   |        
|                     | Other assets                           |                                                    |       | 47      |        
|                     |                                        | Total assets acquired                              |       |         | 12,625  | 
|Liabilities Assumed: |                                        |                                                    |       |        
|                     | Deposit Accounts                       |                                                    |       | 321,948 |        
|                     | Discount on certificates of deposit    |                                                    |       | 2,500   |        
|                     | Accrued expenses and other liabilities |                                                    |       | 442     |        
|                     |                                        | Total liabilities assumed (net of assets acquired) |       |         | 312,265 | 
|                     |                                        | Cash received from Encore Bank                     |       |         | 310,297 | 
|Goodwill             |                                        |                                                    | 1,968 |        

In February 1997, the Company acquired Broadway
National Bank and operated it as a subsidiary of the Company,
consolidating its results with the Company and its other
subsidiaries. Effective December 31, 2003, Broadway
National Bank was merged into Boston Federal Savings Bank. The
merger was executed in order to improve efficiencies. The
effects of this merger are not material to the Companys
consolidated financial statements.

F-34



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(18) Parent Company Only Condensed
Financial Statements (Dollars In Thousands)

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

|                                                                                                                      |                                            |      |         |         |  |  |         |         | 
|--------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---- | ------- | ------- |  |  | ------- | ------- | 
|                                                                                                                      |                                            | 2003 |         | 2002   
|                                                                                                                      |                                            |      |         |        
|ASSETS                                                                                                               
|Cash and interest-bearing deposit in subsidiary
    bank                                                              |                                            | $    | 6,004   |         |  |  | 7,029   |        
|Certificates of deposit                                                                                               |                                            |      | 77      |         |  |  | 77      |        
|                                                                                                                      |                                            |      |         |         |  |  |         |        
|                                                                                                                      | Total cash and cash equivalents            |      |         | 6,081   |  |  |         | 7,106   | 
|Investment securities available for sale
    (amortized cost of $2,883 and $6,168 at 2003 and 2002,
    respectively) |                                            |      | 3,969   |         |  |  | 6,450   |        
|Investment in subsidiaries, at equity                                                                                 |                                            |      | 117,050 |         |  |  | 112,447 |        
|Other assets                                                                                                          |                                            |      | 3,184   |         |  |  | 1,383   |        
|                                                                                                                      |                                            |      |         |         |  |  |         |        
|                                                                                                                      | Total assets                               |      | $       | 130,284 |  |  |         | 127,386 | 
|                                                                                                                      |                                            |      |         |         |  |  |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                             
|Borrowings                                                                                                            |                                            | $    |        |         |  |  |        |        
|Subordinated debentures supporting corporation
    obligated mandatorily redeemable capital securities                |                                            |      | 32,990  |         |  |  | 32,990  |        
|Accrued expenses and other liabilities                                                                                |                                            |      | 2,645   |         |  |  | 1,423   |        
|                                                                                                                      |                                            |      |         |         |  |  |         |        
|                                                                                                                      | Total liabilities                          |      |         | 35,635  |  |  |         | 34,413  | 
|                                                                                                                      |                                            |      |         |         |  |  |         |        
|                                                                                                                      | Total stockholders equity                 |      |         | 94,649  |  |  |         | 92,973  | 
|                                                                                                                      |                                            |      |         |         |  |  |         |        
|                                                                                                                      | Total liabilities and stockholders equity |      | $       | 130,284 |  |  |         | 127,386 | 
|                                                                                                                      |                                            |      |         |         |  |  |         |        

|                     |                                                  |                          |   |        |        |      |  |        |        |   |  |        |        |  
|-------------------- | ------------------------------------------------ | ------------------------ | - | ------ | ------ | ---- |  | ------ | ------ | - |  | ------ | ------ | -
|                     |                                                  | 2003                     |   | 2002   |        | 2001
|                     |                                                  |                          |   |        |        |     
|Statements of Income |                                                  |                          |   |        |        |      |  |        |        |   |  |       
|                     | Interest income                                  |                          | $ | 465    |        |      |  | 597    |        |   |  | 1,080  |       
|                     | Interest expense                                 |                          |   | 3,631  |        |      |  | 3,631  |        |   |  | 3,631  |       
|                     |                                                  |                          |   |        |        |      |  |        |        |   |  |       
|                     |                                                  | Net interest margin      |   |        | (3,166 | )    |  |        | (3,034 | ) |  |        | (2,551 | )
|                     | Non-interest income                              |                          |   | 412    |        |      |  | 385    |        |   |  | 444    |       
|                     | Non-interest expense                             |                          |   | 823    |        |      |  | 929    |        |   |  | 776    |       
|                     |                                                  |                          |   |        |        |      |  |        |        |   |  |       
|                     |                                                  | Loss before income taxes |   |        | (3,577 | )    |  |        | (3,578 | ) |  |        | (2,883 | )
|                     | Income tax benefit                               |                          |   | (1,207 | )      |      |  | (1,214 | )      |   |  | (978   | )     
|                     |                                                  |                          |   |        |        |      |  |        |        |   |  |       
|                     | Loss before equity in net income of subsidiaries |                          |   | (2,370 | )      |      |  | (2,364 | )      |   |  | (1,905 | )     
|                     | Equity in net income of subsidiaries             |                          |   | 5,669  |        |      |  | 4,752  |        |   |  | 11,561 |       
|                     |                                                  |                          |   |        |        |      |  |        |        |   |  |       
|                     |                                                  | Net income               |   | $      | 3,299  |      |  |        | 2,388  |   |  |        | 9,656  |  
|                     |                                                  |                          |   |        |        |      |  |        |        |   |  |       

The Parent Companys statements of changes
in stockholders equity and comprehensive income are
identical to the consolidated statements of changes in
stockholders equity and comprehensive income and therefore
are not presented here.

F-35



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                         |                                           |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |        |        |         |      |  
|------------------------ | ----------------------------------------- | ----------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ---------------------------------------------------- | ------ | ------ | ------ | ----- | ------ | ------ | ----- | ------ | ------ | ------- | ---- | -
|                         |                                           | 2003                                                                                            |                                                                                    | 2002                                                 |        | 2001  
|                         |                                           |                                                                                                 |                                                                                    |                                                      |        |       
|Statements of Cash Flows |                                           |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |       
|                         | Net cash flows from operating activities: |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |        |       
|                         |                                           | Net income                                                                                      |                                                                                    | $                                                    | 3,299  |        |        |       | 2,388  |        |       |        | 9,656  |        
|                         |                                           | Adjustments to reconcile net income to net cash
    (used in) provided by operating activities: |                                                                                    |                                                      |        |        |        |       |        |        |       |        |        |        
|                         |                                           |                                                                                                 | Equity in undistributed earnings of subsidiaries                                   |                                                      |        | (4,387 | )      |       |        | (299   | )     |        |        | (11,561 | )   
|                         |                                           |                                                                                                 | (Accretion) and amortization, net                                                  |                                                      |        | (31    | )      |       |        | 2      |       |        |        | (2      | )   
|                         |                                           |                                                                                                 | Appreciation in fair value of shares charged to
    expense for compensation plans |                                                      |        | 988    |        |       |        | 969    |       |        |        | 684     |     
|                         |                                           |                                                                                                 | Earned SIP shares                                                                  |                                                      |        | 14     |        |       |        | 43     |       |        |        | 79      |     
|                         |                                           |                                                                                                 | Reduction in unallocated ESOP shares                                               |                                                      |        |       |        |       |        | 529    |       |        |        | 529     |     
|                         |                                           |                                                                                                 | Gain on sale of investment securities                                              |                                                      |        | (412   | )      |       |        | (385   | )     |        |        | (444    | )   
|                         |                                           |                                                                                                 | (Increase) decrease in other assets                                                |                                                      |        | (2,115 | )      |       |        | 37     |       |        |        | (137    | )   
|                         |                                           |                                                                                                 | Increase in accrued expenses and other liabilities                                 |                                                      |        | 1,222  |        |       |        | 98     |       |        |        | 471     |     
|                         |                                           |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |       
|                         |                                           |                                                                                                 |                                                                                    | Net cash (provided) used in operating
    activities |        |        | (1,422 | )     |        |        | 3,382 |        |        |         | (725 | )
|                         |                                           |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |       
|                         | Cash flows from investing activities:     |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |        |       
|                         |                                           | Proceeds from sale of investment securities
    available for sale                              |                                                                                    |                                                      | 3,722  |        |        |       | 1,621  |        |       |        | 4,323  |        
|                         |                                           | Principal repayments of investment securities
    available for sale                            |                                                                                    |                                                      | 6      |        |        |       |       |        |       |        |       |        
|                         |                                           | Purchase of investment securities available for
    sale                                        |                                                                                    |                                                      |       |        |        |       | (3,130 | )      |       |        | (5,775 | )      
|                         |                                           | Change in investment in subsidiaries                                                            |                                                                                    |                                                      | (933   | )      |        |       | (944   | )      |       |        | 829    |        
|                         |                                           |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |       
|                         |                                           |                                                                                                 | Net cash provided (used) in investing
    activities                               |                                                      |        | 2,795  |        |       |        | (2,453 | )     |        |        | (623    | )   
|                         |                                           |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |       
|                         | Cash flows from financing activities:     |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |        |       
|                         |                                           | Common stock repurchases                                                                        |                                                                                    |                                                      | (1,057 | )      |        |       | (6,109 | )      |       |        | (6,907 | )      
|                         |                                           | Cash dividends paid                                                                             |                                                                                    |                                                      | (2,857 | )      |        |       | (2,848 | )      |       |        | (2,650 | )      
|                         |                                           | Stock options exercised                                                                         |                                                                                    |                                                      | 1,516  |        |        |       | 2,844  |        |       |        | 1,774  |        
|                         |                                           |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |       
|                         |                                           |                                                                                                 | Net cash used in financing activities                                              |                                                      |        | (2,398 | )      |       |        | (6,113 | )     |        |        | (7,783  | )   
|                         |                                           |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |       
|                         |                                           |                                                                                                 | Net decrease in cash and cash equivalents                                          |                                                      |        | (1,025 | )      |       |        | (5,184 | )     |        |        | (9,131  | )   
|                         |                                           | Cash and cash equivalents at beginning of year                                                  |                                                                                    |                                                      | 7,106  |        |        |       | 12,290 |        |       |        | 21,421 |        
|                         |                                           |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |       
|                         | Cash and cash equivalents at end of year  |                                                                                                 | $                                                                                  | 6,081                                                |        |        |        | 7,106 |        |        |       | 12,290 |       
|                         |                                           |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |       
|                         | Supplemental cash flow information:       |                                                                                                 |                                                                                    |                                                      |        |        |        |       |        |        |       |        |       
|                         |                                           | Cash paid during the year for:                                                                  |                                                                                    |                                                      |        |        |        |       |        |        |       |        |        |        
|                         |                                           |                                                                                                 | Interest                                                                           |                                                      |        | 3,631  |        |       |        | 3,604  |       |        |        | 3,632   |     
|                         |                                           |                                                                                                 | Income taxes                                                                       |                                                      |        | (184   | )      |       |        | (1,285 | )     |        |        | (1,235  | )   

F-36



---



##### 



BOSTONFED BANCORP, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|     |                                                                                                 
|---- | ------------------------------------------------------------------------------------------------
|(19) | Quarterly Results of Operations (Unaudited)
    (Dollars in Thousands, Except Per Share Amounts)

Summaries of consolidated operating results on a
quarterly basis for the years ended December 31 follow:

|                                  |  |               |        |               |  |        |        |       |  |        |        |       |  |        |        |       |  |  |        |  |  |  |        |   |  |  |        |  |  |  |        | 
|--------------------------------- |  | ------------- | ------ | ------------- |  | ------ | ------ | ----- |  | ------ | ------ | ----- |  | ------ | ------ | ----- |  |  | ------ |  |  |  | ------ | - |  |  | ------ |  |  |  | ------ | 
|                                  |  |               |        |              
|                                  |  | 2003 Quarters |        | 2002 Quarters
|                                  |  |               |        |              
|                                  |  | Fourth        |        | Third         |  | Second |        | First |  | Fourth |        | Third |  | Second |        | First
|                                  |  |               |        |               |  |        |        |       |  |        |        |       |  |        |        |      
|Interest income                   |  | $             | 19,490 |               |  |        | 18,354 |       |  |        | 18,552 |       |  |        | 19,254 |       |  |  | 20,552 |  |  |  | 21,805 |   |  |  | 21,863 |  |  |  | 21,383 | 
|Interest expense                  |  |               | 9,796  |               |  |        | 9,590  |       |  |        | 9,955  |       |  |        | 10,402 |       |  |  | 11,405 |  |  |  | 12,128 |   |  |  | 12,099 |  |  |  | 12,457 | 
|                                  |  |               |        |               |  |        |        |       |  |        |        |       |  |        |        |       |  |  |        |  |  |  |        |   |  |  |        |  |  |  |        | 
|Net interest income               |  |               | 9,694  |               |  |        | 8,764  |       |  |        | 8,597  |       |  |        | 8,852  |       |  |  | 9,147  |  |  |  | 9,677  |   |  |  | 9,764  |  |  |  | 8,926  | 
|                                  |  |               |        |               |  |        |        |       |  |        |        |       |  |        |        |       |  |  |        |  |  |  |        |   |  |  |        |  |  |  |        | 
|Provision for loan losses         |  |               | 450    |               |  |        | 450    |       |  |        | 2,000  |       |  |        | 450    |       |  |  | 500    |  |  |  | 350    |   |  |  | 250    |  |  |  | 250    | 
|Non-interest income               |  |               | 4,515  |               |  |        | 4,333  |       |  |        | 2,629  |       |  |        | 3,857  |       |  |  | 3,551  |  |  |  | 3,116  |   |  |  | 4,096  |  |  |  | 4,128  | 
|Non-interest expense              |  |               | 10,439 |               |  |        | 10,152 |       |  |        | 9,655  |       |  |        | 9,931  |       |  |  | 10,073 |  |  |  | 17,789 |   |  |  | 9,687  |  |  |  | 9,731  | 
|                                  |  |               |        |               |  |        |        |       |  |        |        |       |  |        |        |       |  |  |        |  |  |  |        |   |  |  |        |  |  |  |        | 
|Income (loss) before income taxes |  |               | 3,320  |               |  |        | 2,495  |       |  |        | (429   | )     |  |        | 2,328  |       |  |  | 2,125  |  |  |  | (5,346 | ) |  |  | 3,923  |  |  |  | 3,073  | 
|Income tax expense (benefit)      |  |               | 1,395  |               |  |        | 1,055  |       |  |        | (1,961 | )     |  |        | 3,926  |       |  |  | 812    |  |  |  | (1,816 | ) |  |  | 1,340  |  |  |  | 1,051  | 
|                                  |  |               |        |               |  |        |        |       |  |        |        |       |  |        |        |       |  |  |        |  |  |  |        |   |  |  |        |  |  |  |        | 
|Net income (loss)                 |  | $             | 1,925  |               |  |        | 1,440  |       |  |        | 1,532  |       |  |        | (1,598 | )     |  |  | 1,313  |  |  |  | (3,530 | ) |  |  | 2,583  |  |  |  | 2,022  | 
|                                  |  |               |        |               |  |        |        |       |  |        |        |       |  |        |        |       |  |  |        |  |  |  |        |   |  |  |        |  |  |  |        | 
|Basic earnings (loss) per share   |  | $             | 0.43   |               |  |        | 0.32   |       |  |        | 0.35   |       |  |        | (0.36  | )     |  |  | .30    |  |  |  | (.80   | ) |  |  | .58    |  |  |  | .46    | 
|Diluted earnings (loss) per share |  |               | 0.41   |               |  |        | 0.31   |       |  |        | 0.33   |       |  |        | (0.36  | )     |  |  | .28    |  |  |  | (.80   | ) |  |  | .55    |  |  |  | .43    | 

F-37



---



##### 



Annual Meeting

The annual meeting of stockholders will be held
on Wednesday, April 28, 2004, at 2:00 p.m. The meeting
will take place at the Burlington Marriott Hotel, 1 Mall
Road, Burlington, MA.

Stock Listing

BostonFed Bancorp, Inc. became a public company
on October 24, 1995. BostonFed Bancorp, Inc. Common Stock
is traded on the American Stock Exchange with the symbol
BFD. The stock is listed as Bostnfd in
the Boston Globeand as BstnfdBcp in the
Wall Street Journal.

Common Stock Information

Initial Public Offering Price $10.00 per share.

Closing Prices at December 31, 2003 and 2002
were $34.90 and $26.70, respectively.

Common Stock Price and Dividends Paid
(Unaudited)

|              |      |      |     |       |  |   |     |       |  |   |     |       |  |   |     |       |  |  |     |       |  |  |     |       |  |  |     |       |  |  |     |       | 
|------------- | ---- | ---- | --- | ----- |  | - | --- | ----- |  | - | --- | ----- |  | - | --- | ----- |  |  | --- | ----- |  |  | --- | ----- |  |  | --- | ----- |  |  | --- | ----- | 
|              |      |      |     |      
|              |      | 2003 |     | 2002 
|By Quarter    |      |      |     |      
|Stock Price   |      | 4    |     | 3     |  | 2 |     | 1     |  | 4 |     | 3     |  | 2 |     | 1    
|              |      |     
|              |      |     
|              | High |      | $   | 35.30 |  |   | $   | 32.75 |  |   | $   | 29.75 |  |   | $   | 27.40 |  |  | $   | 30.10 |  |  | $   | 35.20 |  |  | $   | 32.40 |  |  | $   | 25.63 | 
|              | Low  |      |     | 30.23 |  |   |     | 27.00 |  |   |     | 22.75 |  |   |     | 22.85 |  |  |     | 25.50 |  |  |     | 26.70 |  |  |     | 24.60 |  |  |     | 23.50 | 
|Dividend Paid |      |      | .16 |       |  |   | .16 |       |  |   | .16 |       |  |   | .16 |       |  |  | .16 |       |  |  | .16 |       |  |  | .16 |       |  |  | .15 |      

As of December 31, 2003, the Company had
4,491,796 shares outstanding and approximately 550
stockholders of record, not including persons of entities
holding stock in nominee or street name through brokers or banks.

10-K Report

A copy of the Companys annual report for
its fiscal year ended December 31, 2003 to the Securities and
Exchange Commission on Form 10-K (without exhibits) may be
obtained without charge upon written request to BostonFed
Bancorp, Inc., Investor Relations, 17 New England Executive
Park, Burlington, MA 01803 and is also available on the
Companys web site at www.Bostonfed.com.

Copies of the Companys Financial Code of
Ethics and the Whistleblower Policy may be obtained without
charge upon written request to the Secretary of BostonFed
Bancorp, Inc., 17 New England Executive Park, Burlington,
MA 01803 and are also available on the Companys web site
at www.Bostonfed.com.

|                                                                                                      |  |                                                                          
|----------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------
|Transfer Agent                                                                                        |  |                                                                          
|                                                                                                     
|Shareholder and Broker Correspondence:
    EquiServe
    P.O. Box 43010
    Providence, RI 02940-3010 |  | Courier:
    EquiServe
    Blue Hills Office Park
    Mail Stop: 45-02-62
|Shareholder Inquiries: 866-897-1807                                                                   |  | 105 Royall Street
    Canton, MA 02021                                   
|Independent Auditor                                                                                   |  |                                                                          
|                                                                                                     
|KPMG LLP
    99 High Street
    Boston, MA 02110                                                      |  |                                                                          
|                                                                                                     
|Regulatory Counsel                                                                                    |  | Local Counsel                                                            
|                                                                                                     
|Muldoon Murphy Faucette & Aguggia LLP
    5101 Wisconsin Avenue NW
    Washington, DC 20016           |  | Goodwin Procter LLP
    Exchange Place
    Boston, MA 02109              

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BostonFed Bancorp, Inc.

|                                                                                                                   |  |                                                      
|------------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------------------
|Corporate Headquarters17 New England Executive Park
    Burlington, MA 01803
    (781) 273-0300
    (800) 688-2372 |  | Investor RelationsAmy L. Timmerman
    (781) 221-6396

Board of Directors

David F. Holland

Chairman, President and Chief Executive Officer
of the Company and


Chairman and Chief Executive Officer of Boston
Federal Savings Bank


David P. Conley

Executive Vice President of the Company and


President of Boston Federal Savings Bank


Richard J. Caturano, CPA

President, Co-founder and Managing Partner of
Vitale, Caturano & Company, P.C.


Richard J. Fahey

Principal of Trammel Crow Company, Inc.


Patricia M. Flynn, Ph.D.

Trustee Professor of Economics and Management at
Bentley College


Kija Kim

President and Chief Executive Officer of


Harvard Design and Mapping Company, Inc.


Joanna T. Lau

Chief Executive Officer and Chairman of LAU
Technologies, Inc.


W. Russell Scott, Jr.

Former President and Chief Executive Officer of
First Financial Trust, NA


Catherine Friend White

President and Senior Portfolio Manager of FinArc,
LLC


Management

David F. Holland, President and Chief Executive
Officer

David P. Conley, Executive Vice President and
Assistant Secretary


John A. Simas, Executive Vice President, Chief
Financial Officer and Secretary


Janice M. Forster, Senior Vice President


Dennis J. Furey, Senior Vice President


Mark H. Kellett, Senior Vice President and
Treasurer


Stephen F. Kelly, Senior Vice President and
Controller


Dennis G. Kilduff, Senior Vice President


Barbara A. Martin, Senior Vice President


Shaun W. McGee, Senior Vice President and
President of Forward Financial Company


John D. Mullen, Senior Vice President and Senior
Vice President of Forward Financial Company


Marylea R. Oates, Senior Vice President


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Notes




F-40