<PAGE>   1
                         SELECTED CONSOLIDATED FINANCIAL
                          AND OTHER DATA OF THE COMPANY

     The selected consolidated financial and other data of the Company set forth
below is 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. Prior to October 24, 1995, the Company had no
significant assets, liabilities or operations, and accordingly, the data prior
to such time represents the financial condition and results of operations of
BFS.

<TABLE>
<CAPTION>
                                                                             At December 31,
                                                      ---------------------------------------------------------------
                                                       1999           1998          1997         1996         1995
                                                      ---------------------------------------------------------------
                                                                             (In thousands)
<S>                                                   <C>          <C>             <C>          <C>          <C>
SELECTED FINANCIAL CONDITION DATA:

Total assets ........................................ $1,253,653   $1,139,123      $974,680     $820,567     $640,752

Investment securities available for sale(1) .........     53,203       49,137        31,767        1,085        1,022

Investment securities held to maturity(1) ...........      2,304        7,302        20,630       19,170       16,906

Mortgage-backed securities available for sale(1) ....     15,540       21,029        19,125       23,593       23,873

Mortgage-backed securities held to maturity(1) ......     13,941       22,913        38,350       43,019       35,116

Mortgage loans held for sale ........................     16,174       17,008         9,817        3,970        8,931

Loans, net ..........................................  1,032,594      943,662       791,728      676,670      509,496

Allowance for loan losses ...........................     10,654        8,500         6,600        4,400        4,275

Deposit accounts ....................................    770,049      707,144       619,821      428,818      419,104

Borrowed funds ......................................    387,555      337,500       263,640      300,000      126,909

Stockholders' equity ................................     85,704       81,794        81,611       86,355       90,701
</TABLE>


<TABLE>
<CAPTION>
                                                                     For the Year Ended December 31,
                                                      ---------------------------------------------------------------
                                                       1999           1998          1997         1996         1995
                                                      ---------------------------------------------------------------
                                                                             (In thousands)
<S>                                                   <C>          <C>             <C>          <C>          <C>
SELECTED OPERATING DATA:

Interest income ..................................... $   80,736   $   74,775      $ 68,037     $ 52,678     $ 42,454

Interest expense ....................................     47,208       42,557        37,129       28,891       23,552

Net interest income .................................     33,528       32,218        30,908       23,787       18,902

Provision for loan losses ...........................      1,626        1,642         1,696        1,294        3,614

Net interest income after provision for loan losses .     31,902       30,576        29,212       22,493       15,288

Total non-interest income ...........................      6,911        6,128         4,806        3,567        2,672

Total non-interest expense ..........................     25,300       23,932        21,458       21,040       16,009

Income before income taxes ..........................     13,513       12,772        12,560        5,020        1,951

Income tax expense (benefit) ........................      4,945        5,151         5,505        2,083          815

Net income .......................................... $    8,568   $    7,621      $  7,055     $  2,937     $  1,136
</TABLE>


                                        4
<PAGE>   2


                               SELECTED FINANCIAL
                              RATIOS AND OTHER DATA

<TABLE>
<CAPTION>
                                                                         At or For the Year Ended December 31,
                                                          ---------------------------------------------------------------
                                                                1999         1998         1997        1996       1995
                                                          ---------------------------------------------------------------
<S>                                                              <C>         <C>         <C>         <C>         <C>
PERFORMANCE RATIOS:(2)
Return on average assets .................................       0.72%       0.72%       0.75%       0.40%       0.19%
Return on average stockholders' equity ...................      10.00        9.02        8.21        3.21        2.57
Dividend payout ratio ....................................      27.10       24.70       20.31       31.25          NM
Average stockholders' equity to average assets ...........       7.21        7.99        9.11       12.35        7.36
Stockholders' equity to total assets at end of period ....       6.84        7.18        8.37       10.52       14.16
Average interest rate spread(3) ..........................       2.59        2.69        2.94        2.79        2.98
Net interest margin(4) ...................................       2.97        3.17        3.42        3.34        3.28
Average interest-earning assets to average
   interest-bearing liabilities ..........................      109.0      111.60      111.53      113.40      107.40

ASSET QUALITY RATIOS:(2)
Non-performing loans as a percent of loans(5)(6) .........       0.07        0.09        0.17        0.22        1.00
Non-performing assets as a percent of total assets(6) ....       0.09        0.08        0.16        0.51        0.97
Allowance for loan losses as a percent of loans(5) .......       1.01        0.88        0.82        0.64        0.82
Allowance for loan losses as a percent of
   non-performing loans(6) ...............................   1,428.15    1,029.06      469.75      293.02       81.40

NUMBER OF FULL-SERVICE BANKING FACILITIES ................         10          10          10           8           8

NUMBER OF SHARES OUTSTANDING AT END OF PERIOD
   (IN THOUSANDS) ........................................      4,973       5,112       5,520       6,260       6,590

PER SHARE DATA:
Basic earnings per common share ..........................  $    1.78   $    1.50     $  1.28     $  0.48     $    NM
Diluted earnings per common share ........................       1.71        1.43        1.24        0.48          NM
Dividends per common share ...............................       0.46        0.37        0.26        0.15          NM
Book value per common share at end of period .............      17.88       16.84       15.72       14.75       14.78
Market value per common share at end of period ...........      15.88       17.63       21.88       14.75       11.75
</TABLE>


---------------
(1)  The balance does not include FHLB-Boston stock.

(2)  Asset Quality Ratios and Regulatory Capital Ratios are end of period
     ratios.

(3)  The average interest rate spread represents the difference between the
     weighted average yield on average interest-earning assets and the weighted
     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 mortgage loans held for sale, excluding the
     allowance for loan losses.

(6)  Non-performing assets consist of non-performing loans and real estate owned
     ("REO"). 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 collectability of interest or principal. It
     is the Bank's policy to cease accruing interest on all such loans.

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

                                        5

<PAGE>   3

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

     The following discussion may contain certain forward-looking statements
which are based on management's current expectations regarding economic,
legislative, and regulatory issues that may impact the Company's earnings in
future periods. Factors that could cause future results to vary materially from
current management expectations include, but are not limited to, general
economic conditions, changes in interest rates, deposit flows, real estate
values, and competition; changes in accounting principles, policies, or
guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory and technological factors affecting the
Company's operations, pricing, products and services. In particular, these
issues may impact management's estimates used in evaluating market risk and
interest rate risk in its GAP and NPV tables, loan loss provisions,
classification of assets, accounting estimates and other estimates used
throughout this discussion.

GENERAL

     BostonFed Bancorp, Inc. (the "Company") was incorporated in Delaware on
July 11, 1995. On October 24, 1995, it became the holding company for Boston
Federal Savings Bank ("BFS") when it issued 6,589,617 shares of common stock,
utilizing a portion of the proceeds to acquire all of the outstanding stock of
BFS which simultaneously completed its conversion from a mutual savings bank to
a stock form of ownership. On February 7, 1997, the Company acquired Broadway
National Bank ("BNB"), using the purchase method of accounting, at a cost of
approximately $22 million. On December 6, 1999, the Company acquired Diversified
Ventures, Inc., d/b/a Forward Financial Company ("Forward Financial") and
Ellsmere Insurance Agency, Inc. ("Ellsmere") using the purchase method of
accounting at a cost of approximately $38 million. Forward Financial operates as
a subsidiary of BFS while Ellsmere has limited operations as a subsidiary of
BNB.

     The Company's business has been conducted primarily through its ownership
of BFS and BNB (collectively, the "Banks"). BFS operates its administrative/bank
branch office located in Burlington, Massachusetts and its seven other bank
branch offices located in Arlington, Bedford, Billerica, Boston, Lexington,
Peabody and Wellesley, all of which are located in the greater Boston
metropolitan area. BFS' subsidiary, Forward Financial, maintains its
headquarters in Northboro, Massachusetts and operates in approximately twenty
states across the United States. BNB operates two banking offices in Chelsea and
Revere, both of which are also in the greater Boston metropolitan area. The
Company's primary business is attracting retail deposits from the general public
and investing those deposits and other borrowed funds in loans, mortgage-backed
securities, U.S. Government and federal agency securities and other securities.
The Company originates mortgage loans for its investment portfolio and for sale,
generally retaining the servicing rights of loans sold. 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, repurchase agreements and proceeds
from the sale of loans.

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

     As a result of the acquisition of BNB, the Company became a bank holding
company subject to regulation by the Federal Reserve Bank ("FRB") and for the
first three years following the initial public offering was also subject to the
regulations of the Office of Thrift Supervision ("OTS"). BFS is regulated by the
OTS and BNB is regulated by the Office of the Comptroller of the Currency
("OCC"). Since the acquisition of BNB was

8
--------------------------------------------------------------------------------
<PAGE>   4

consummated at the close of business on February 7, 1997 and the acquisitions of
Forward Financial and Ellsmere were consummated at the close of business on
December 6, 1999, the financial statements of the Company and the following
discussion regarding the Company's financial condition and results of operations
at and for the years ended December 31, 1999, 1998 and 1997, include information
and data related to BNB only from February 8, 1997 to December 31, 1999 and
information and data related to Forward Financial and Ellsmere only from
December 7, 1999 to December 31, 1999.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary sources of funds are deposits, (including brokered
deposits), principal and interest payments on loans, loan sales, investments,
mortgage-backed and related securities, FHLB advances and repurchase agreements.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Company has maintained
the required minimum levels of liquid assets at BFS as defined by OTS
regulations. This requirement, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of BFS's deposits and short-term borrowings. BFS's currently required liquidity
ratio is 4%. At both December 31, 1999 and 1998, BFS's liquidity ratio was 6.9%.
Management has maintained liquidity close to the minimum requirement so that it
may invest any excess liquidity in higher yielding interest-earning assets or
use such funds to repay higher cost FHLB advances or repurchase agreements. The
OCC does not have specific guidance for liquidity ratios for BNB, but does
require banks to maintain reasonable and prudent liquidity levels. Management
believes such levels have been maintained since the acquisition date.

     The Company'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. At December 31, 1999, cash,
short-term investments and investment securities available for sale totaled
$87.9 million or 7.0% of total assets. Additional investments were available
which qualified for BFS's regulatory liquidity requirements.

     The Company has other sources of liquidity if a need for additional funds
arise, including FHLB advances and wholesale brokered deposits and repurchase
agreements (collateralized borrowings). At December 31, 1999, the Company had
$384.5 million in advances outstanding from the FHLB and had, with existing
collateral, an additional $39.1 million in overall borrowing capacity from the
FHLB. Borrowing capacity can be increased upon the delivery of mortgage notes on
non owner-occupied 1-4 family loans, multi-family and commercial loans.
Additional collateral was available at BNB. The Company generally avoids paying
the highest deposit rates in its market and accordingly utilizes alternative
sources of funds such as FHLB advances, repurchase agreements and wholesale
brokered deposits to supplement cash flow needs.

     At December 31, 1999, the Company had commitments to originate loans and
unused outstanding lines of credit totaling $159.4 million. The Company
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificate accounts, which are scheduled to
mature in less than one year from December 31, 1999, totaled $244.1 million. The
Company expects that a substantial majority of the maturing certificate accounts
will be retained by the Company at maturity.

     At the time of conversion, BFS was required to establish a liquidation
account in an amount equal to its retained earnings as of June 30, 1995. The
liquidation account will be reduced to the extent that eligible account holders
reduce their qualifying deposits. In the unlikely event of a complete
liquidation of BFS, each eligible account holder will be entitled to receive a
distribution from the liquidation account. BFS 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, 1999 was
approximately $8.1 million.

     Prior to the Company's acquisition of BNB, the Company, as a savings and
loan holding company, was not required to maintain a minimum level of capital
for regulatory purposes. As a result of the Company's acquisition of BNB and its
resultant status as a bank holding company, the Company is required to maintain
a ratio of capital to assets, on a consolidated basis, which is substantially
equal to that required to be maintained by the Banks. At December 31, 1999, the
consolidated capital to assets ratio of the Company was 6.8%, which exceeded the
minimum regulatory capital requirements for the Company. As of December 31,
1999, BFS exceeded all of its regulatory capital requirements with tangible,
core, risk-based tier 1, and risk-based total capital ratios of 5.4%, 5.4%, 8.8%
and 10.0%, respectively, compared to the minimum regulatory requirements of
2.0%, 4.0%, 4.0% and 8.0%, respectively. BNB also exceeded the minimum
regulatory capital requirements with leverage capital, risk-based tier 1 capital
and risk-based total capital ratios of 6.3%, 12.6% and 13.6%, respectively,
compared to the minimum regulatory requirements of 4.0%, 4.0% and 8.0%,
respectively.

                                                                               9
--------------------------------------------------------------------------------
<PAGE>   5

     As a condition for approving the acquisition of Forward Financial, the
Federal Reserve Bank required the Company and BFS to remain "well-capitalized"
as defined in the regulations, for the period of one year following the date of
the acquisition. The Company and BFS have to date complied with this
requirement.

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.

MARKET RISK AND MANAGEMENT OF INTEREST RATE RISK

     The principal market risk 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
manage the risk consistent with Board of Directors' approved guidelines. Through
such management, the Company seeks to reduce the vulnerability of its operations
to changes in interest rates. The Company monitors its interest rate risk as
such risk relates to its operating strategies. The Company's Board of Directors
has established a Management Asset/Liability Committee that is responsible for
reviewing the Company's asset/liability policies and interest rate risk
position. The Committee meets frequently and reports trends and interest rate
risk position to the Board of Directors on a quarterly basis. The extent of the
movement of interest rates is an uncertainty that could have a negative impact
on the earnings of the Company.

     In recent years, the Company has utilized the following strategies to
manage interest rate risk: (1) emphasizing the origination and retention of
adjustable-rate 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 short-term investment securities or mortgage-backed securities with
adjustable interest rates; and (4) attempting to reduce the overall interest
rate sensitivity of liabilities by emphasizing longer-term deposits such as
wholesale brokered deposits and utilizing FHLB advances to replace short-term,
rate sensitive, retail deposits.

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

     The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "GAP Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The Gap Table
sets forth an approximation of the projected repricing of assets and liabilities
at December 31, 1999, 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 14.5% and 9.9%, respectively.
Annual prepayment rates for adjustable-rate and fixed-rate mortgage-backed
securities are assumed

10
--------------------------------------------------------------------------------
<PAGE>   6

to be 19.2% and 13.8%, respectively. Money market deposit accounts are assumed
to be immediately rate-sensitive, while passbook accounts and negotiable order
of withdrawal ("NOW") accounts are assumed to have decay rates of 12% annually.
These assumptions may or may not be indicative of actual prepayment and
withdrawals experienced by the Company. The table does not necessarily indicate
the impact of general interest rate movements on the Company's net interest
income because the actual repricing dates of various assets and liabilities is
subject to customer discretion and competitive and other pressures and,
therefore, actual experience may vary from that indicated.

     The following table shows the gap position of the Company at December 31,
1999 and 1998:

<TABLE>
<CAPTION>
                                                     3       MORE THAN    MORE THAN   MORE THAN   MORE THAN     MORE
                                                  MONTHS     3 MONTHS     7 MONTHS    1 YEAR TO  3 YEARS TO     THAN         TOTAL
                                                  OR LESS   TO 6 MONTHS   TO 1 YEAR    3 YEARS     5 YEARS     5 YEARS      AMOUNT
                                                  -------   -----------   ---------    -------     -------     -------      ------
<S>                                              <C>        <C>          <C>          <C>         <C>         <C>        <C>
INTEREST-EARNING ASSETS                                                       (DOLLARS IN THOUSANDS)
Short-term investments ......................... $  2,641   $       0    $     174    $      0    $      0    $      0   $    2,815
Investment securities ..........................   37,988       2,000        2,926       2,488       6,767       3,338       55,507
Fixed Rate Loans(1) ............................   14,351      13,884       27,029      97,688      80,106     119,880      352,938
Adjustable Rate Loans(1) .......................  177,055      42,795       97,715     247,163     134,346       6,664      705,738
Mortgage-backed securities .....................   10,663       2,272        2,186       7,222       4,103       3,035       29,481
Stock in FHLB-Boston ...........................   20,311           0            0           0           0           0       20,311
                                                 --------   ---------    ---------    --------    --------    --------   ----------
   Total Interest-earning assets ...............  263,009      60,951      130,030     354,561     225,322     132,917    1,166,790
                                                 --------   ---------    ---------    --------    --------    --------   ----------
INTEREST-BEARING LIABILITIES

Money market deposit accounts ..................   56,970           0            0           0           0           0       56,970

Savings accounts ...............................    4,371       4,371        8,741      34,965      34,965      58,275      145,688

NOW accounts ...................................    3,436       3,436        6,873      27,492      27,492      45,416      114,145

Certificate accounts ...........................   70,535      75,386      105,404     110,574      37,489           0      399,388

FHLB Advances and other borrowings .............   64,055      80,000       77,500      89,000      57,000      20,000      387,555
                                                 --------   ---------    ---------    --------    --------    --------   ----------
      Total interest-bearing liabilities .......  199,367     163,193      198,518     262,031     156,946     123,691    1,103,746
                                                 --------   ---------    ---------    --------    --------    --------   ----------

Interest-earning assets less interest-bearing
      liabilities .............................. $ 63,642   $(102,242)   $ (68,488)   $ 92,530    $ 68,376    $  9,226   $   63,044
                                                 --------   ---------    ---------    --------    --------    --------   ----------


Cumulative interest rate sensitivity gap
      December 31, 1999 ........................ $ 63,642   $ (38,600)   $(107,088)   $(14,558)   $ 53,818    $ 63,044   $   63,044
                                                 ========   =========    =========    ========    ========    ========   ==========
Cumulative interest rate gap as a percentage
      of total assets at December 31, 1999 .....     5.08%      (3.08)%      (8.54)%     (1.16)%      4.29%       5.03%

Cumulative interest rate gap as a percentage
      of total interest-earning assets
      at December 31, 1999 .....................     5.45%      (3.31)%      (9.18)%     (1.25)%      4.61%       5.40%

Cumulative interest-earning assets as a
      percentage of cumulative interest-bearing
      liabilities at December 31, 1999 .........   131.92%      89.35%       80.91%      98.23%     105.49%     105.71%


Cumulative interest rate sensitivity gap
      December 31, 1998 ........................ $ 90,195   $  96,735    $  74,980    $ 75,113    $139,219    $120,920   $  120,920
                                                 ========   =========    =========    ========    ========    ========   ==========

Cumulative interest rate gap as a percentage
      of total assets at December 31, 1998 .....     7.92%       8.49%        6.58%       6.59%      12.22%      10.62%

Cumulative interest rate gap as a percentage
      of total interest-earning assets
      at December 31, 1998 .....................     8.17%       8.76%        6.79%       6.80%      12.60%      10.95%

Cumulative interest-earning assets as a
      percentage of cumulative interest-bearing
      liabilities at December 31, 1998 .........   168.85%     145.57%      119.06%     109.93%     116.09%     112.29%
</TABLE>

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


                                                                              11
--------------------------------------------------------------------------------
<PAGE>   7



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

     The Company's interest rate sensitivity is also monitored by management
through the use of a model which internally generates estimates of the change in
net portfolio value ("NPV") over a range of interest rate change scenarios. NPV
is the present value of expected cash flows from assets, liabilities, and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario. The Company's Board of Directors has established certain NPV
maximum percentage change limits by interest rate shock. These approved limits
are included in the following table. The Company is operating within the maximum
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 BFS, 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, 1999 and 1998, as calculated by the Company.

<TABLE>
<CAPTION>
                                                             Net Portfolio Value as of December 31, 1999
                                                      ----------------------------------------------------------
       Interest Rates In Basis Points                   $            $            %           Board        NPV
                (Rate Shock)                          Amount       Change       Change       Limits %      Ratio
-------------------------------------------------     ------       ------       ------       --------      -----
                                                                      (Dollar in Thousands)
<S>                                                  <C>          <C>            <C>           <C>          <C>
                   300 ..........................     97,090      (26,932)       (21.7)        (30.0)        7.7
                   200 ..........................    107,541      (16,481)       (13.3)        (20.0)        8.6
                   100 ..........................    116,545       (7,477)        (6.0)        (10.0)        9.3
                   Static .......................    124,022                                                 9.9
                   (100) ........................    128,917        4,895          3.9         (10.0)       10.3
                   (200) ........................    132,560        8,538          6.9         (20.0)       10.6
                   (300) ........................    132,848        8,826          7.1         (30.0)       10.6
</TABLE>

<TABLE>
<CAPTION>
                                                             Net Portfolio Value as of December 31, 1998
                                                      ----------------------------------------------------------
            Rates In Basis Points                       $            $            %           Board        NPV
                (Rate Shock)                          Amount       Change       Change       Limits %      Ratio
-------------------------------------------------     ------       ------       ------       --------      -----
                                                                      (Dollar in Thousands)
<S>                                                  <C>          <C>            <C>           <C>          <C>
                   300 ..........................    103,788      (20,956)       (16.8)        (25.0)        9.1
                   200 ..........................    113,611      (11,133)        (8.9)        (20.0)       10.0
                   100 ..........................    120,618       (4,126)        (3.3)        (10.0)       10.6
                   Static .......................    124,744                                                11.0
                   (100) ........................    126,627        1,883          1.5         (10.0)       11.1
                   (200) ........................    126,108        1,364          1.1         (20.0)       11.1
                   (300) ........................    123,260       (1,484)        (1.2)        (25.0)       10.8
</TABLE>


12
--------------------------------------------------------------------------------
<PAGE>   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 1999, 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 either sold as whole loans or, prior
to sale, converted to mortgage-backed securities. In conjunction with this
mortgage banking activity, the Company uses forward contracts in order to reduce
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, based on the Company's assessment of the general direction of
interest rates and the levels of mortgage origination activity. Forward
Financial originates and sells, servicing released, substantially all of its
consumer loans to various 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.

ANALYSIS OF NET INTEREST INCOME

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

     The following table sets forth certain information relating to the Company
for the years ended December 31, 1999, 1998 and 1997. 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
--------------------------------------------------------------------------------
<PAGE>   9

<TABLE>
<CAPTION>
                                          AT                                 FOR THE YEARS ENDED DECEMBER 31,
                                                     -------------------------------------------------------------------------------
                                   DECEMBER 31, 1999            1999                        1998                       1997
                                   ----------------- --------------------------  --------------------------  -----------------------
                                                                       AVERAGE                      AVERAGE                  AVERAGE
                                             YIELD/  AVERAGE            YIELD/    AVERAGE            YIELD/  AVERAGE          YIELD/
                                   BALANCE   COST    BALANCE   INTEREST  COST     BALANCE INTEREST   COST    BALANCE INTEREST  COST
                                   -------   ------  -------   -------- ------    ------- --------  -------  ------- -------- ------
                                                                          (DOLLARS IN THOUSANDS)
<S>                              <C>         <C>    <C>         <C>      <C>    <C>         <C>      <C>    <C>       <C>      <C>
ASSETS:
Interest-earning assets:
  Investment securities(1)...... $   78,633  6.41%  $   92,956  $ 5,486  5.90%  $   88,166  $ 5,400  6.12%  $ 82,701  $ 5,003  6.05%
  Loans, net and mortgage loans
    held for sale(2)............  1,048,768  7.32%   1,002,847   73,096  7.29%     876,344   66,040  7.54%   759,312   58,805  7.74%
  Mortgage-backed securities(3).     29,481  6.65%      34,241    2,154  6.29%      50,375    3,335  6.62%    62,265    4,229  6.79%
                                 ----------         ----------  -------         ----------  -------         --------  -------
    Total interest-earning
     assets.....................  1,156,882  7.24%   1,130,044   80,736  7.14%   1,014,885   74,775  7.37%   904,278   68,037  7.52%
                                             ----                ------  ----                ------  ----              ------  ----
Non-interest-earning assets.....     96,771             58,279                      42,683                    39,770
                                 ----------         ----------                  ----------                  --------
    Total assets................ $1,253,653         $1,188,323                  $1,057,568                  $944,048
                                 ==========         ==========                  ==========                  ========
LIABILITIES AND STOCKHOLDERS'
 EQUITY:
Interest-bearing Liabilities:
  Money market deposit accounts. $   56,970  2.82%  $   59,279    1,693  2.86%  $   62,739    1,838  2.93%  $ 61,800    1,822  2.95%
  Savings accounts..............    145,688  2.54%     142,399    3,534  2.48%     121,092    2,999  2.48%   116,247    2,826  2.43%
  NOW accounts..................    114,145  0.75%     110,684      884  0.80%     104,532    1,158  1.11%    96,590    1,071  1.11%
  Certificate accounts..........    399,388  5.53%     356,668   19,761  5.54%     312,810   18,101  5.79%   237,115   13,457  5.68%
                                 ----------         ----------  -------         ----------  -------         --------  -------
    Total.......................    716,191  3.94%     669,030   25,872  3.87%     601,173   24,096  4.01%   511,752   19,176  3.75%
  Borrowed Funds(4).............    387,555  5.87%     367,849   21,336  5.80%     308,191   18,461  5.99%   299,076   17,953  6.00%
                                 ----------         ----------  -------         ----------  -------         --------  -------
    Total interest-bearing
     liabilities................  1,103,746  4.62%   1,036,879   47,208  4.55%     909,364   42,557  4.68%   810,828   37,129  4.58%
                                             ----                ------  ----                ------  ----              ------  ----
  Non-interest-bearing
     liabilities................     64,203             65,762                      63,729                    47,264
                                 ----------         ----------                  ----------                  --------
    Total liabilities...........  1,167,949          1,102,641                     973,093                   858,092
                                 ----------         ----------                  ----------                  --------
  Stockholders' equity..........     85,704             85,682                      84,475                    85,956
                                 ----------         ----------                  ----------                  --------
    Total liabilities and
     stockholders' equity....... $1,253,653         $1,188,323                  $1,057,568                  $944,048
                                 ==========         ==========                  ==========                  ========
  Net interest income...........               NA               $33,528                     $32,218                   $30,908
                                             ====               =======                     =======                   =======
  Net interest rate spread(5)...             2.62%                       2.59%                       2.69%                     2.94%
                                             ====                        ====                        ====                      ====
  Net interest margin(6)........               NA                        2.97%                       3.17%                     3.42%
                                             ====                        ====                        ====                      ====
  Ratio of interest-earning
    assets to interest-bearing
    liabilities.................     104.81%            108.99%                     111.60%                   111.53%
                                 ==========         ==========                  ==========                  ========
</TABLE>

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

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

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

(4)  Interest paid on borrowed funds for the periods presented includes interest
     expense on FNMA deposits held in escrow accounts with the Company related
     to the Company's FNMA servicing, which, if such interest expense was
     excluded, would result in an average cost of borrowed funds of 5.78%,
     5.94%, and 5.98% for the years ended December 31, 1999, 1998 and 1997,
     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
--------------------------------------------------------------------------------
<PAGE>   10

RATE/VOLUME ANALYSIS

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

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31, 1999       YEAR ENDED DECEMBER 31, 1998
                                                           COMPARED TO                        COMPARED TO
                                                  YEAR ENDED DECEMBER 31, 1998       YEAR ENDED DECEMBER 31, 1997
                                                 -----------------------------      -----------------------------
                                                 INCREASE (DECREASE)                INCREASE (DECREASE)
                                                       DUE TO                             DUE TO
                                                  ------------------                -------------------
                                                 VOLUME       RATE         NET      VOLUME       RATE         NET
                                                 ------       ----         ---      ------       ----         ---
                                                                          (IN THOUSANDS)
<S>                                              <C>        <C>        <C>        <C>        <C>        <C>
INTEREST-EARNING ASSETS:
   Investment securities .....................   $   293    $  (207)   $    86    $   331    $    66    $   397
   Loans, net and mortgage loans held for sale     9,538     (2,482)     7,056      9,058     (1,823)     7,235
   Mortgage-backed securities ................    (1,068)      (113)    (1,181)      (807)       (87)      (894)
                                                --------    -------    -------    -------    -------    -------
      Total interest-earning assets ..........     8,763     (2,802)     5,961      8,582     (1,844)     6,738
                                                --------    -------    -------    -------    -------    -------
INTEREST-BEARING LIABILITIES:
   Money market deposit accounts .............      (101)       (44)      (145)        28        (12)        16
   Savings accounts ..........................       528          7        535        118         55        173
   NOW accounts ..............................        68       (342)      (274)        88         (1)        87
   Certificate accounts ......................     2,539       (879)     1,660      4,299        345      4,644
                                                --------    -------    -------    -------    -------    -------
      Total ..................................     3,034     (1,258)     1,776      4,533        387      4,920
   Borrowed funds ............................     3,574       (699)     2,875        547        (39)       508
                                                --------    -------    -------    -------    -------    -------
      Total interest-bearing liabilities .....     6,608     (1,957)     4,651      5,080        348      5,428
                                                --------    -------    -------    -------    -------    -------
Net change in net interest income ............   $ 2,155    $  (845)   $ 1,310    $ 3,502    $(2,192)   $ 1,310
                                                ========    =======    =======    =======    =======    =======
</TABLE>


                                                                              15
--------------------------------------------------------------------------------
<PAGE>   11

                                  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 include commercial real estate, multi-family, business loans and
restructured loans which are non-performing loans as well as other identified
loans. At December 31, 1999, non-performing loans totaled $746,000, impaired
loans totaled $235,000, consisting of two loans, and REO totaled $376,000,
consisting of two properties. It is the policy of the Company to cease accruing
interest on loans 90 days or more past due and charging off all accrued
interest. For the years ended December 31, 1999, 1998, and 1997, 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 ($2,000), $33,000, and $149,000, 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 $2,000,
$1,000, and $1,000, respectively.

<TABLE>
<CAPTION>
                                                                               AT DECEMBER 31,
                                                                    ----------------------------------
                                                                    1999           1998           1997
                                                                    ----           ----           ----
                                                                           (DOLLARS IN THOUSANDS)
<S>                                                                 <C>          <C>          <C>
NON-PERFORMING LOANS:
   Residential real estate:
      One- to four-family .......................................   $     721    $     784    $   941
   Commercial real estate .......................................          25           25        458
   Other Loans ..................................................          --           --          6
                                                                    ---------    ---------    -------
   Total ........................................................         746          809      1,405
Real estate owned, net(3) .......................................         376           47        195
                                                                    ---------    ---------    -------
   Total non-performing assets ..................................       1,122          856      1,600
Restructured loans ..............................................         210          213        369
                                                                    ---------    ---------    -------
Total risk elements .............................................   $   1,332    $   1,069    $ 1,969
                                                                    =========    =========    =======
Allowance for loan losses as a percent of loans(1) ..............        1.01%        0.88%      0.82%
                                                                    =========    =========    =======
Allowance for loan losses as a percent of non-performing loans(2)    1,428.15     1,029.06     469.75
Non-performing loans as a percent of loans(1)(2) ................         .07         0.09       0.17
Non-performing assets as a percent of total assets(4) ...........         .09         0.08       0.16
</TABLE>

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

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

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

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

16
--------------------------------------------------------------------------------
<PAGE>   12

     At December 31, 1999, loans that were characterized as impaired totaled
$235,000. 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, 1999, the average recorded value
of impaired loans was $335,000, $15,000 of interest income was recognized and
$17,000 of interest income would have been recognized under original terms. The
composition of impaired loans by type is shown below:

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                     ----------------------
                                                     1999              1998
                                                     ----              ----
                                                         (IN THOUSANDS)
<S>                                                  <C>               <C>
            IMPAIRED LOANS:
                      MULTI-FAMILY REAL ESTATE         --               245
                      COMMERCIAL REAL ESTATE          235               238
                                                     ----              ----
                           TOTAL IMPAIRED LOANS      $235              $483
                                                     ====              ====
</TABLE>

     The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in its loan
portfolio and the national and regional economy. The allowance for loan losses
is maintained at an amount management considers adequate to cover estimated
losses in loans which are deemed probable and estimable based on information
currently known to management. Management's analysis of the adequacy of the
allowance is based upon consideration of a number of factors, including current
economic conditions, actual loss experience and industry trends. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to make additional provisions for estimated loan losses
based upon judgments different from those of management. Amounts provided for
the years 1999, 1998 and 1997 were $1.6 million, $1.6 million and $1.7 million,
respectively. During the year ended December 31, 1999, there were recoveries of
$414,000 credited to, and charge-offs of $56,000 taken against this allowance.
As of December 31, 1999, the Company's allowance for loan losses was 1.01% of
total loans compared to 0.88% as of December 31, 1998. Management believes this
increased coverage ratio is prudent due to the balance increase in the combined
total of construction and land, commercial real estate, home equity and
improvement, multi-family and business loans. These combined total balances
increased from $149.2 million at December 31, 1998 to $236.6 million at December
31, 1999, an increase of 59%. These loans aggregated to 22.1% and 15.4% of the
total loans at December 31, 1999 and 1998, respectively. The Company had
non-performing loans of $746,000 and $809,000 at December 31, 1999 and December
31, 1998, respectively. The Company will continue to monitor and modify its
allowance for loan losses as conditions dictate. While management believes the
Company's allowance for loan losses is sufficient to cover losses inherent in
its loan portfolio at this time, no assurances can be given that the Company's
level of allowance for loan losses will be sufficient to cover future loan
losses incurred by the Company or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of allowance for loan losses.

                                                                              17
--------------------------------------------------------------------------------
<PAGE>   13

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

<TABLE>
<CAPTION>
                                                                          AT OR FOR THE YEAR ENDED
                                                                                 DECEMBER 31,
                                                              -----------------------------------------------
                                                              1999        1998       1997      1996      1995
                                                              ----        ----       ----      ----      ----
                                                                               (IN THOUSANDS)
<S>                                                       <C>          <C>         <C>       <C>       <C>
Balance at beginning of period ........................   $  8,500     $ 6,600     $4,400    $4,275    $3,700
Allowance for loan losses at acquisition date
      (BNB in 1997 and Forward Financial in 1999) .....        170          --        620        --        --
Provision for loan losses .............................      1,626       1,642      1,696     1,294     3,614
Charge-offs:
   One-to four-family .................................         19          51        370       387       550
   Multi-family .......................................          1           2         84       263       483
   Commercial .........................................          0          75         45       664     2,297
Other .................................................         36         131         16       198       194
                                                          --------     -------     ------    ------    ------
   Total ..............................................         56         259        515     1,512     3,524
Recoveries ............................................        414         517        399       343       485
                                                          --------     -------     ------    ------    ------

Balance at end of
      period ..........................................   $ 10,654     $ 8,500     $6,600    $4,400    $4,275
                                                          ========     =======     ======    ======    ======

Ratio of net charge-offs/(net recoveries) during
      the period to average loans outstanding
      during the period ...............................      (0.04)%     (0.03)%     0.02%     0.19%     0.60%
                                                          ========     =======     ======    ======    ======
</TABLE>

     The Company has developed an internal asset classification system which
classifies assets depending on risk of loss characteristics. The most severe
classification before a charge-off is required is "sub-standard." At December
31, 1999, 1998 and 1997, the Company classified (excluding REO) $3.6 million,
$4.2 million and $5.8 million of sub-standard assets, respectively. Included in
these amounts were $746,000, $809,000, and $1.4 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.

COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS AS OF AND FOR THE YEARS
ENDED DECEMBER 31, 1999 AND 1998.

CHANGES IN FINANCIAL CONDITION

     The Company's assets increased $114.5 million to a balance of $1.254
billion at December 31, 1999, compared to $1.139 billion at December 31, 1998,
an increase of 10.1%. Asset growth was primarily in loans, net, of $88.9
million, bank-owned life insurance of $20.6 million and goodwill of $16.7
million, partially offset by decreases in investment securities held to maturity
of $5.0 million, mortgage-backed securities available for sale of $5.5 million
and mortgage-backed securities held to maturity of $9.0 million. The growth in
loans, net was primarily due to increased originations of adjustable-rate and
ten to fifteen year fixed-rate one- to four-family mortgage loans combined with
increased lending for construction and land, commercial real estate, equity, and
business loans. Loans, net, increased from a balance of $943.7 million at
December 31, 1998 to a balance of $1,032.6 million at December 31, 1999.
Volatility in market interest rates and a generally rising interest rate
environment throughout 1999 increased customer demand for adjustable-rate loans
and decreased demand for longer term, fixed-rate loan products most of which the
Company sells in the secondary market. Shorter-term loans, generally under 15
years, were originated for portfolio. The Company also sold certain
adjustable-rate loans. Mortgage-backed securities decreased by $14.5 million, or
32.9%, from a balance of $43.9 million at December 31, 1998 to a balance of
$29.5 million at December 31, 1999. Mortgage loans held for sale totaled $16.2
million at December 31, 1999, compared to $17.0 million at December 31, 1998.
Deposit accounts increased by $62.9 million from a balance of $707.1 million at
December 31, 1998 to a balance of $770.0 million at December 31, 1999.

18
--------------------------------------------------------------------------------
<PAGE>   14

This increase is mainly attributable to growth in a premium-rate statement
savings account, BFS' rollout of a new 9-month retail certificate of deposit
acquisition program and growth in longer-term certificates of deposit, including
wholesale brokered certificates of deposit. FHLB advances and other borrowings
increased $50.1 million to a balance of $387.6 million at December 31, 1999,
compared to $337.5 million at December 31, 1998 as additional funds were needed
to support balance sheet growth. Total stockholders' equity was $85.7 million at
December 31, 1999 or $17.88 per share, compared to $81.8 million or $16.84 per
share at December 31, 1998. Stockholders' equity increased during the year ended
December 31, 1999 due to the combined effects of net income and the amortization
of the Stock-based Incentive Plans and Employee Stock Ownership Plan ("ESOP"),
offset by the completion of the fifth and commencement of the sixth 5% stock
repurchase programs, dividends paid, and the change in market valuation, net of
taxes, of the available-for sale securities portfolio. The stockholders' equity
to total assets ratio of the Company was 6.8% at December 31, 1999 and 7.2% at
December 31, 1998.

RESULTS OF OPERATIONS

General

     Net income for the year ended December 31, 1999 was $8.6 million, or $1.78
basic earnings per share and $1.71 diluted earnings per share, compared to $7.6
million, or $1.50 basic earnings per share and $1.43 diluted earnings per share
for the comparable period in 1998. The return on average stockholder's equity
improved to 10.00% during the year ended December 31, 1999, compared to 9.02%
for the year ended December 31, 1998. Return on average assets remained at 0.72%
for the years ended December 31, 1999 and 1998. Increased earnings were
primarily attributable to higher net interest income, due to increased balances
of interest earning assets, and earnings from bank-owned life insurance,
partially offset by lower interest margins. The net interest margin in 1999
decreased to 2.97% from 3.17% during 1998. Federal Reserve induced increases in
short-term interest rates during 1999 created a flat yield curve that caused
industry-wide margin compression. The Company's margin declined as substantial
volumes of adjustable-rate loans either refinanced into lower interest
adjustable-rate mortgages or refinanced to fixed-rate loans, the vast majority
of which were sold in the secondary market. Management is attempting to mitigate
the margin compression by continuing to expand the portfolio of commercial real
estate, construction and land, equity, consumer and business loans.

Interest Income

     Total interest income for the year ended December 31, 1999 increased by
$6.0 million to $80.7 million compared to $74.8 million for the year ended
December 31, 1998. Interest on loans increased by $7.0 million, or 9.6%, to
$73.1 million, during 1999 compared to $66.0 million during 1998. The increase
in interest income in 1999 was attributable to increased average balances of
interest earning assets, primarily due to an increase in the average balance of
loans, from $876.3 million for 1998 to $1,002.8 million for 1999. The increased
average loan, net, balances generated an additional $9.5 million of interest
earned while lower yields decreased interest earned on loans, net, by $2.5
million. The lower yields were generally the result of falling interest rates
during 1998 and early 1999 that created an opportunity for borrowers to
refinance their mortgages at lower rates. The loan portfolio average loan yield
decreased to 7.29% for 1999 compared to an average yield of 7.54% for 1998.
Interest income on investment securities and overnight federal funds sold
increased by $86,000 to $5.5 million for the year ended December 31, 1999,
compared to $5.4 million for the year ended December 31, 1998. The primary
reason for the increase is due to higher average balances of investment
securities averaging $93.0 million during the year ended December 31, 1999,
compared to average balances of $88.2 million for the prior year, offset by the
effects of an average of 22 basis point decrease in yields. Interest income on
mortgage-backed securities decreased by $1.2 million for the year ended December
31, 1999 due primarily to a decrease in average balances compared to the prior
year. Average mortgage-backed securities balances decreased by $16.1 million
from an average of $50.4 million during 1998 to an average of $34.2 million
during 1999. The majority of the mortgage-backed securities held in 1999 were
adjustable GNMA securities. The yields on mortgage-backed securities decreased
from an average yield of 6.62% in 1998 to 6.29% in 1999, resulting in a decrease
in interest earned on such securities in 1999 of $113,000, compared to 1998.

                                                                              19
--------------------------------------------------------------------------------
<PAGE>   15

Interest Expense

     Interest expense increased by $4.7 million, or 11.0%, for the year ended
December 31, 1999 to $47.2 million compared to $42.6 million for the year ended
December 31, 1998. The increase in interest expense for the year ended December
31, 1999 was due primarily to higher interest expense on borrowed funds and
certificate accounts. Borrowed funds consisted primarily of FHLB advances that
were used generally to fund loan portfolio growth. Higher average balances of
$367.8 million of borrowed funds for the year ended December 31, 1999, compared
to average balances of $308.2 million for the prior year, resulted in a $2.9
million increase in interest expense. The average cost of borrowed funds
declined by 19 basis points, from 5.99% for the year ended December 31, 1998 to
an average of 5.80% for the current year. Interest expense on deposit accounts
increased by $1.8 million for the year ended December 31, 1999 due primarily to
the effects of higher average balances of $669.0 million for the year ended
December 31, 1999 compared to average deposit balances of $601.2 million for the
prior year. The increased average balances were primarily attributable to the
net acquisition of $53.7 million of wholesale brokered certificate of deposit
accounts, which contributed to the increased average balance of $356.7 million
for the year ended December 31, 1999, compared to an average balance of $312.8
million for the prior year. The higher average balances in certificate accounts
resulted in an increase in interest expense of $2.5 million for the year ended
December 31, 1999 compared to the prior year. The average cost of deposit
accounts decreased from 4.01% for the year ended December 31, 1998 to an average
cost of 3.87% for the current year.

Provision for Loan Losses

     The provision for loan losses amounted to $1.6 million for the years ended
December 31, 1999 and 1998. The provision 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 decreased to $746,000, or 0.07% of loans at
December 31, 1999 from $809,000, or 0.08% at December 31, 1998. The Company
recorded net recoveries of $358,000 during the year ended December 31, 1999,
compared to net recoveries of $258,000 during 1998. The allowance for loan
losses as a percentage of total loans was 1.01% at December 31, 1999 compared to
0.88% at December 31, 1998. As a percentage of total non-performing loans, the
allowance for loan losses was 1,428% at December 31, 1999, compared to 1,029% a
year earlier. See also "Asset Quality" included elsewhere herein.

Non-Interest income

     Total non-interest income increased to $6.9 million for the year ended
December 31, 1999 from $6.1 million for the year ended December 31, 1998. The
primary contributing factor was income from bank owned life insurance ("BOLI").
The policy generated $556,000 of income through an increase in the cash
surrender value. Gain on sale of loans was $3.0 million for the year ended
December 31, 1999 compared to $3.2 million for the prior year. The decrease
would have been greater had it not been for the approximately $572,000 of gains
on sale of loans recorded by Forward Financial. Gain on sale of loans is the
primary source of revenue of Forward Financial. The continuation of a strong
housing market and economy contributed to the strong volume for financing of
home purchases during 1999. There were no OMSR (originated mortgage servicing
rights) adjustments necessary during 1999 as normal amortization was sufficient
to account for loan servicing balance run-off. During 1998, the high volume of
refinancing of mortgages, however, necessitated an adjustment of $481,000 to
reflect the impairment to the OMSR. At December 31, 1999, the OMSR balance was
$5.1 million compared to $3.8 million at December 31, 1998. Loans serviced for
others increased to $784.6 million at December 31, 1999 from a balance of $648.3
million at December 31, 1998. Deposit service fees were $1.7 million for the two
years ended December 31, 1999 and 1998.

20
--------------------------------------------------------------------------------
<PAGE>   16

Non-Interest Expense

     Total non-interest expense for the year ended December 31, 1999 was $25.3
million, compared to $23.9 million for 1998. The primary reason for the increase
was due to higher compensation and benefits expense, which increased to $15.0
million for the year ended December 31, 1999 from $13.7 million for the prior
year. Compensation and benefits expenses were higher primarily due to increased
staff levels for the establishment of the Company's corporate and business
lending department, the inclusion of Forward Financial's compensation and
benefits from the acquisition date to year-end, and normal year-over-year salary
increases. Data processing expense was $1.6 million for the year ended December
31, 1999, compared to $1.3 million for the prior year. The increase was
primarily attributable to the service bureau computer conversion costs at BNB
and expenses related to the Year 2000 issue. Other non-interest expense declined
to $4.5 million for the year ended December 31, 1999 from $5.0 million for the
prior year. The year ended December 31, 1998 included consulting and legal costs
incurred to assist in establishing the Company's tax saving strategies that
included the formation of real estate investment trusts and securities
subsidiaries.

Income Taxes

     Income tax expense was $4.9 million for the year ended December 31, 1999
(resulting in an effective tax rate of 36.6%), compared to a tax expense of $5.2
million for the year ended December 31, 1998 (resulting in an effective tax rate
of 40.3%). The decrease in income tax expense and rate was due to the effects of
BOLI and a lower non-deductible Employee Stock Ownership Plan ("ESOP") expense.

Year 2000

     Year 2000 computer software compliance issues affected the Company and many
other financial institutions and companies throughout the world. The primary
concern was that computer programs would not recognize the proper date which
could then generate erroneous data or cause systems to fail, thereby creating an
adverse impact on the Company's business and possibly its operating results.

     The Company started its Year 2000 initiative in early 1997. It adhered to
the suggested procedures established by the Federal Financial Institutions
Examination Council (the "FFIEC") guidelines of awareness, assessment,
renovation, validation and implementation. Software systems and hardware
components were tested and contingency plans were developed. Human and financial
resources were made available to complete the remediation efforts.

     Due to the extensive planning and testing during the past three years, the
Company was able to begin the Year 2000 without any interruption in its
operations, whatsoever.

     Included in other non-interest expenses during 1999 were charges incurred
in connection with the modification or replacement of software and hardware in
order for the company's computer systems to properly recognize the Year 2000.
The expenses incurred totaled approximately $175,000 for the year ended December
31, 1999 and $425,000 over the course of the project.

                                                                              21
--------------------------------------------------------------------------------
<PAGE>   17

COMPARISON OF OPERATING RESULTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998
AND 1997.

General

     Net income for the year ended December 31, 1998 was $7.6 million, or $1.50
basic earnings per share and $1.43 diluted earnings per share, compared to $7.1
million, or $1.28 basic earnings per share and $1.24 diluted earnings per share
for the comparable period in 1997. The return on average stockholder's equity
improved to 9.02% during the year ended December 31, 1998, compared to 8.21% for
the year ended December 31, 1997. Return on average assets declined by three
basis points, from 0.75% for the year ended December 31, 1997 to 0.72% for the
current year. Increased earnings were primarily attributable to higher net
interest income, due to increased balances of interest earning assets, although
with lower interest margins, improved gains on the sale of loans, offset by a
reduction in real estate operations income. The net interest margin in 1998
decreased to 3.17% from 3.42% during 1997. Generally falling longer term
interest rates during 1998 created a flat yield curve that caused industry-wide
margin compression. The Company's margin suffered as substantial volumes of
adjustable-rate loans either refinanced into lower interest adjustable-rate
mortgages or refinanced to fixed-rate loans, the vast majority of which were
sold in the secondary market. Management is attempting to mitigate the margin
compression by de-emphasizing one- to four-family residential lending and
expanding the portfolio of commercial real estate, construction and land,
consumer and business loans.

Interest Income

     Total interest income for the year ended December 31, 1998 increased by
$6.7 million to $74.8 million compared to $68.0 million for the year ended
December 31, 1997. Interest on loans increased by $7.2 million, or 12.2%, to
$66.0 million, during 1998 compared to $58.8 million during 1997. The increase
in interest income in 1998 was attributable to increased average balances of
interest earning assets, primarily due to an increase in the average balance of
loans, from $759.3 million for 1997 to $876.3 million for 1998. The increased
average loan, net, balances generated an additional $9.1 million of interest
earned while lower yields decreased interest earned on loans, net, by $1.8
million. The lower yields were generally the result of falling interest rates
during 1998 that created an opportunity for borrowers to refinance their
mortgages at lower rates. The loan portfolio average loan yield decreased to
7.54% for 1998 compared to an average yield of 7.74% for 1997. Interest income
on investment securities and overnight federal funds sold increased by $397,000
to $5.4 million for the year ended December 31, 1998, compared to $5.0 million
for the year ended December 31, 1997. The primary reason for the increase is due
to higher average balances of investment securities averaging $88.2 million
during the year ended December 31, 1998, compared to average balances of $82.7
million for the prior year. Interest income on mortgage-backed securities
decreased by $894,000 for the year ended December 31, 1998 due primarily to a
decrease in average balances compared to the prior year. Average balances
decreased by $11.9 million from an average of $62.3 million during 1997 to an
average of $50.4 million during 1998. The majority of the mortgage-backed
securities held in 1998 were adjustable GNMA securities. The yields on
mortgage-backed securities decreased from an average yield of 6.79% in 1997 to
6.62% in 1998, resulting in a decrease in interest earned on such securities in
1998 of $87,000, compared to 1997.

Interest Expense

     Interest expense increased by $5.4 million, or 14.6%, for the year ended
December 31, 1998 to $42.6 million compared to $37.1 million for the year ended
December 31, 1997. The increase in interest expense for the year ended December
31, 1998 was due primarily to higher interest expense on deposits. Interest
expense on deposit accounts increased by $4.9 million for the year ended
December 31, 1998 due primarily to the effects of higher average balances of
$601.2 million for the year ended December 31, 1998 compared to average deposit
balances of $511.8 million for the prior year. The increased average balances
were primarily attributable to the acquisition of certificate accounts, which
increased from an average balance of $237.1 for the year ended December 31,
1997, to an average balance of $312.8 million for the current year. The higher
average balances in certificate accounts resulted in an increase in interest
expense of $4.3 million for the year ended December 31, 1998 compared to the
prior year. The average cost of

22
--------------------------------------------------------------------------------
<PAGE>   18

deposit accounts increased from 3.75% for the year ended December 31, 1997 to an
average cost of 4.01% for the current year. The acquisition of $90.8 million in
the 15-month certificate of deposit program was the major contributing factor in
increasing the cost of savings. Borrowed funds consisted primarily of FHLB
advances that were used primarily to fund loan portfolio growth. Higher average
balances of $308.2 million of borrowed funds for the year ended December 31,
1998, compared to average balances of $299.1 million for the prior year,
resulted in a $547,000 increase in interest expense. The average cost of
borrowed funds declined by one basis point, from 6.00% for the year ended
December 31, 1997 to an average of 5.99% for the current year.

Provision for Loan Losses

     The provision for loan losses amounted to $1.6 million for the year ended
December 31, 1998 compared to $1.7 million for the prior year. The provision 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 decreased to
$809,000, or 0.08% of loans at December 31, 1998 from $1.4 million, or 0.16% at
December 31, 1997. The Company recorded net recoveries of $258,000 during the
year ended December 31, 1998, compared to net charge-offs of $116,000, or 0.02%
of average loans outstanding during 1997. The allowance for loan losses as a
percentage of total loans was 0.88% at December 31, 1998 compared to 0.82% at
December 31, 1997. As a percentage of total non-performing loans, the allowance
for loan losses was 1,029% at December 31, 1998, compared to 469.8% a year
earlier.

Non-Interest income

     Total non-interest income increased to $6.1 million for the year ended
December 31, 1998 from $4.8 million for the year ended December 31, 1997. The
primary contributing factor was increased gains on the sale of loans. The $3.2
million gain on sale of loans during 1998 exceeded the $1.1 million for the
prior year, primarily due to the increased volume of loans sold resulting from
the high volumes of refinancing to long-term fixed rate mortgages, which the
Company generally sells in the secondary market. The continuation of a strong
housing market and economy also contributed to increased volume for financing of
home purchases during 1998. The high volume of refinancing of mortgages,
however, necessitated an adjustment of $481,000 to reflect the impairment to the
originated mortgage servicing rights, ("OMSR") during the year ended December
31, 1998. The adjustment for the impairment of the OMSR, combined with a
decrease in the balance of loans serviced that were sold before OMSR was
recorded, contributed to the decrease in loan processing and servicing fees
which totaled $477,000 for the year ended December 31, 1998, compared to $1.2
million for the prior year. Deposit service fees were $1.7 million for the two
years ended December 31, 1998 and 1997.

Non-Interest Expense

     Total non-interest expense for the year ended December 31, 1998 was $23.9
million, compared to $21.5 million for 1997. The primary components of this
increase were higher data processing expenses, lower real estate operations
income and higher other non-interest expenses. Data processing expense was $1.3
million for the year ended December 31, 1998, compared to $968,000 for the prior
year. The prior year total was lower than normal due to the receipt from the
Company's data processor, of approximately $200,000 as reimbursement of expenses
the Company had incurred in assisting the data processor in developing a new
software program. Additionally, the Company incurred approximately $100,000 of
costs related to the Year 2000 issue. For the year ended December 31, 1998, real
estate operations earned $71,000, compared to earnings of $1.2 million for the
prior year. The prior year total included approximately $891,000 from the sale
of a land sub-division, sold by a subsidiary of BFS, during the first quarter of
1997. Other non-interest expense increased to $5.0 million for the year ended
December 31, 1998 from $4.1 million for the prior year due to the inclusion of
BNB's miscellaneous expenses for the full year and consulting and legal costs
incurred to assist in establishing the Company's tax saving strategies that
included the formation of real estate investment trusts and securities
subsidiaries.

                                                                              23
--------------------------------------------------------------------------------
<PAGE>   19

Income Taxes

     Income tax expense was $5.2 million for the year ended December 31, 1998
(resulting in an effective tax rate of 40.3%), compared to a tax expense of $5.5
million for the year ended December 31, 1997 (resulting in an effective tax rate
of 43.8%). The decrease in income tax expense and rate was due to the
implementation of the tax saving strategies.

Impact of New Accounting Standards

     In June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Under this statement, an entity that elects to
apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. In June 1999, the FASB issued SFAS No. 137 Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, which defers the effective date of SFAS No. 133. SFAS No. 133
is now effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The adoption of this settlement is not expected to have a material
impact on the Company's financial position.

24
--------------------------------------------------------------------------------
<PAGE>   20
                          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 as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BostonFed Bancorp,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.


/s/ KPMG LLP

Boston, Massachusetts
January 20, 2000


                                       25
<PAGE>   21
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets
           (Dollars in thousands, except share and per share amounts)

                           December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                         ASSETS                                                     1999              1998
                                                                                                  -----------        ----------

<S>                                                                                               <C>                <C>
Cash and due from banks (note 1)                                                                  $    31,881            19,133
Overnight federal funds sold                                                                            2,541            17,795
Certificates of deposit                                                                                   274               273
                                                                                                  -----------        ----------
                    Total cash and cash equivalents                                                    34,696            37,201

Investment securities available for sale (amortized cost of $55,051 at 1999 and
    $48,837 at 1998) (note 3)                                                                          53,203            49,137
Investment securities held to maturity (fair value of $2,275 at 1999 and $7,371 at 1998)
    (notes 4 and 10)                                                                                    2,304             7,302
Mortgage-backed securities available for sale (amortized cost of $15,881 at 1999 and
    $20,935 at 1998) (notes 3 and 10)                                                                  15,540            21,029
Mortgage-backed securities held to maturity (fair value of $14,030 at 1999 and
    $23,333 at 1998) (notes 4 and 10)                                                                  13,941            22,913
Mortgage loans held for sale                                                                           16,174            17,008
Loans, net of allowance for loan losses of $10,654 at 1999 and $8,500 at 1998                       1,032,594           943,662
    (notes 5 and 6)
Accrued interest receivable (note 7)                                                                    6,267             5,549
Stock in FHLB of Boston, at cost (note 10)                                                             20,311            17,802
Premises and equipment, net (note 8)                                                                    8,212             6,614
Bank owned life insurance                                                                              20,556                --
Goodwill, net of amortization                                                                          19,519             2,772
Deferred income tax asset, net (note 11)                                                                2,411             1,812
Prepaid expenses and other assets                                                                       7,925             6,322
                                                                                                  -----------        ----------

                    Total assets                                                                  $ 1,253,653         1,139,123
                                                                                                  ===========        ==========

                          LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
    Deposit accounts (note 9)                                                                     $   770,049           707,144
    Federal Home Loan Bank advances and other borrowings (note 10)                                    387,555           337,500
    Advance payments by borrowers for taxes and insurance                                               3,298             3,405
    Accrued expenses and other liabilities                                                              7,047             9,280
                                                                                                  -----------        ----------

                    Total liabilities                                                               1,167,949         1,057,329
                                                                                                  -----------        ----------

Commitments and contingencies (notes 3, 4, 5, 8, 13 and 14)

Stockholders' equity (notes 2 and 13):
    Preferred stock, $.01 per value; 1,000,000 shares authorized; none issued                              --                --
    Common stock, $0.01 par value; 17,000,000 shares authorized; 6,589,617 shares
       issued at 1999 and 1998.                                                                            66                66
    Additional paid-in capital                                                                         67,198            66,417
    Retained earnings                                                                                  50,481            44,256
    Accumulated other comprehensive (loss) income                                                      (1,485)              312
    Treasury stock, at cost (1,616,536 and 1,477,176 shares at 1999 and 1998, respectively)           (28,532)          (26,128)
    Unallocated ESOP shares                                                                            (1,663)           (2,418)
    Unearned 1996 stock-based incentive plan                                                             (361)             (711)
                                                                                                  -----------        ----------

                    Total stockholders' equity                                                         85,704            81,794
                                                                                                  -----------        ----------

                    Total liabilities and stockholders' equity                                    $ 1,253,653         1,139,123
                                                                                                  ===========        ==========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       26
<PAGE>   22
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                        Consolidated Statements of Income
                    (In thousands, except per share amounts)

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                               1999           1998           1997
                                                                             --------        -------        -------
<S>                                                                          <C>             <C>            <C>
Interest income:
    Loans (note 5)                                                           $ 73,096         66,040         58,805
    Mortgage-backed securities                                                  2,154          3,335          4,229
    Investment securities                                                       5,312          5,258          4,736
    Federal funds sold                                                            174            142            267
                                                                             --------        -------        -------

                   Total interest income                                       80,736         74,775         68,037
                                                                             --------        -------        -------

Interest expense:
    Deposit accounts (note 9)                                                  25,872         24,096         19,176
    Borrowed funds (note 10)                                                   21,336         18,461         17,953
                                                                             --------        -------        -------

                   Total interest expense                                      47,208         42,557         37,129
                                                                             --------        -------        -------

Net interest income                                                            33,528         32,218         30,908
Provision for loan losses (note 6)                                              1,626          1,642          1,696
                                                                             --------        -------        -------

                   Net interest income after provision for loan losses         31,902         30,576         29,212
                                                                             --------        -------        -------

Non-interest income:
    Deposit service fees                                                        1,742          1,658          1,710
    Loan processing and servicing fees (note 5)                                   583            477          1,241
    Gain on sale of loans                                                       3,017          3,173          1,114
    Income from bank owned life insurance (note 12)                               556             --             --
    Gain (loss) on sale of investments (note 3)                                   (28)            19            (18)
    Other                                                                       1,041            801            759
                                                                             --------        -------        -------

                   Total non-interest income                                    6,911          6,128          4,806
                                                                             --------        -------        -------

Non-interest expense:
    Compensation and benefits (note 12)                                        14,955         13,728         13,543
    Occupancy and equipment                                                     3,284          3,187          3,087
    Data processing                                                             1,589          1,286            968
    Advertising expense                                                           691            523            682
    Deposit insurance premiums                                                    368            327            293
    Real estate operations                                                        (71)           (71)        (1,230)
    Other                                                                       4,484          4,952          4,115
                                                                             --------        -------        -------

                   Total non-interest expense                                  25,300         23,932         21,458
                                                                             --------        -------        -------

Income before income taxes                                                     13,513         12,772         12,560
Income tax expense (note 11)                                                    4,945          5,151          5,505
                                                                             --------        -------        -------

                   Net income                                                $  8,568          7,621          7,055
                                                                             ========        =======        =======

Basic earnings per share                                                     $   1.78           1.50           1.28
                                                                             ========        =======        =======

Diluted earnings per share                                                   $   1.71           1.43           1.24
                                                                             ========        =======        =======

Weighted average shares outstanding - basic                                     4,825          5,078          5,505
                                                                             ========        =======        =======

Weighted average shares outstanding - diluted                                   4,997          5,328          5,690
                                                                             ========        =======        =======
</TABLE>

See accompanying notes to consolidated financial statements.


                                       27
<PAGE>   23
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           Consolidated Statements of Changes in Stockholders' Equity
                    (In thousands, except per share amounts)

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>

                                                                                          ACCUMULATED
                                                                                            OTHER
                                           SHARES OF             ADDITIONAL              COMPREHENSIVE                UNALLOCATED
                                            COMMON    COMMON      PAID-IN     RETAINED      (LOSS)        TREASURY       ESOP
                                            STOCK      STOCK      CAPITAL     EARNINGS      INCOME         STOCK        SHARES
                                            -----     ------     ----------   --------   --------------   --------    -----------
<S>                                         <C>       <C>        <C>          <C>        <C>              <C>         <C>
Balance at December 31, 1996                6,590       $66       64,461        33,131        (322)        (4,739)       (3,929)

    Common stock repurchased
       (740 shares at an average
       price of $18.12 per share)              --        --           --            --          --        (13,407)           --

    Cash dividends declared and paid
       ($.26 per share)                        --        --           --        (1,541)         --             --            --

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

    Appreciation in fair value of
       shares charged to expense
       for compensation plans                  --        --          821            --          --             --            --

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

    Comprehensive income:
       Changes in net unrealized gain
          (loss) in investments                --        --           --            --         564             --            --
       available for sale, net


    Net income                                 --        --           --         7,055          --             --            --

              Comprehensive income
                                            -----       ---       ------       -------        ----        -------        ------

Balance at December 31, 1997                6,590       $66       65,282        38,645         242        (18,146)       (3,174)
</TABLE>


<TABLE>
<CAPTION>
                                           UNEARNED
                                            STOCK-
                                            BASED
                                           INCENTIVE         TOTAL
                                             PLAN       STOCKHOLDERS'
                                            ("SIP")         EQUITY
                                           ---------    -------------
<S>                                        <C>          <C>
Balance at December 31, 1996                 (2,313)        86,355

    Common stock repurchased
       (740 shares at an average
       price of $18.12 per share)                --        (13,407)

    Cash dividends declared and paid
       ($.26 per share)                          --         (1,541)

    Reduction in unallocated ESOP
       shares charged to expense                 --            755

    Appreciation in fair value of
       shares charged to expense
       for compensation plans                    --            821

    Earned portion of SIP shares
       charged to expense                     1,009          1,009

    Comprehensive income:
       Changes in net unrealized gain
          (loss) in investments                  --            564
       available for sale, net


    Net income                                   --          7,055
                                                           -------
              Comprehensive income                           7,619
                                             ------        -------

Balance at December 31, 1997                 (1,304)        81,611
</TABLE>


                                                                     (CONTINUED)

                                       28
<PAGE>   24
\                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

      Consolidated Statements of Changes in Stockholders' Equity, Continued
                    (In thousands, except per share amounts)

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>

                                                                                          ACCUMULATED
                                                                                            OTHER
                                          SHARES OF              ADDITIONAL              COMPREHENSIVE                 UNALLOCATED
                                           COMMON     COMMON      PAID-IN     RETAINED      (LOSS)        TREASURY        ESOP
                                            STOCK      STOCK      CAPITAL     EARNINGS      INCOME         STOCK         SHARES
                                            -----     ------     ----------   --------   --------------   --------    -----------
<S>                                        <C>       <C>        <C>           <C>          <C>            <C>           <C>
    Common stock repurchased
       (409 shares at an average
       price of $19.56 per share)             --       $--           --            --            --         (7,998)          --

    Stock options exercised
       (.9 shares at an average
       price of $16.67 per share,
       net of tax benefit)                    --        --           --            --            --             16            --

    Cash dividends declared and
       paid ($.37 per share)                  --        --           --        (2,010)           --             --            --

    Reduction in unallocated ESOP
       shares charged to expense              --        --           --            --            --             --           756

    Appreciation in fair value of
       shares charged to expense
       for compensation plans                 --        --        1,135            --            --             --            --

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

    Comprehensive income:
       Changes in net unrealized
          gain (loss) in investments
          available for sale, net             --        --           --            --            70             --            --

    Net income                                --        --           --         7,621            --             --            --

       Comprehensive income
                                           -----       ---       ------       -------        ------        -------        ------

Balance at December 31, 1998               6,590       $66       66,417        44,256           312        (26,128)       (2,418)
</TABLE>


<TABLE>
<CAPTION>
                                         UNEARNED
                                           STOCK-
                                           BASED
                                         INCENTIVE        TOTAL
                                           PLAN        STOCKHOLDERS'
                                          ("SIP")        EQUITY
                                         ---------     -------------
<S>                                      <C>           <C>
    Common stock repurchased
       (409 shares at an average
       price of $19.56 per share)             --         (7,998)

    Stock options exercised
       (.9 shares at an average
       price of $16.67 per share,
       net of tax benefit)                    --             16

    Cash dividends declared and
       paid ($.37 per share)                  --         (2,010)

    Reduction in unallocated ESOP
       shares charged to expense              --            756

    Appreciation in fair value of
       shares charged to expense
       for compensation plans                 --          1,135

    Earned portion of SIP shares
       charged to expense                    593            593

    Comprehensive income:
       Changes in net unrealized
          gain (loss) in investments
          available for sale, net             --             70

    Net income                                --          7,621
                                                        -------
       Comprehensive income                               7,691
                                          ------        -------

Balance at December 31, 1998                (711)        81,794
</TABLE>


                                                                     (Continued)

                                       29
<PAGE>   25
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

      Consolidated Statements of Changes in Stockholders' Equity, Continued
                    (In thousands, except per share amounts)

                  Years ended December 31, 1999, 1998 and 1997


<TABLE>
<CAPTION>
                                                                                         ACCUMULATED
                                                                                            OTHER
                                          SHARES OF              ADDITIONAL              COMPREHENSIVE                UNALLOCATED
                                           COMMON     COMMON      PAID-IN     RETAINED       (LOSS)       TREASURY       ESOP
                                            STOCK     STOCK       CAPITAL     EARNINGS       INCOME        STOCK         SHARES
                                            -----     ------     ----------   --------   --------------   --------    -----------
<S>                                         <C>       <C>        <C>          <C>        <C>              <C>         <C>
   Common stock repurchased
      (144 shares at an average
      price of $17.31 per share)             --       $--            --             --                      (2,492)           --

   Stock options exercised
      (5 shares at an average
      price of $12.44 per share,
      net of tax benefit)                    --        --           (19)            --            --             88            --


   Cash dividends declared and
      paid ($.46 per share)                  --        --            --         (2,343)           --             --            --


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


   Appreciation in fair value of
      shares charged to expense
      for compensation plans                 --        --           800             --            --             --            --


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


   Comprehensive income:
      Changes in net unrealized
         gain (loss) in investments
         available for sale, net             --        --            --             --        (1,797)            --            --


   Net income                                --        --            --          8,568            --             --            --


      Comprehensive income
                                          -----       ---       -------        -------        ------        -------        ------

Balance at December 31, 1999              6,590       $66        67,198         50,481        (1,485)       (28,532)       (1,663)
                                          =====       ===       =======        =======        ======        =======        ======
</TABLE>

<TABLE>
<CAPTION>
                                          UNEARNED
                                           STOCK-
                                            BASED
                                          INCENTIVE         TOTAL
                                           PLAN          STOCKHOLDERS'
                                           ("SIP")         EQUITY
                                          ---------      -------------
<S>                                       <C>            <C>
   Common stock repurchased
      (144 shares at an average
      price of $17.31 per share)                --         (2,492)

   Stock options exercised
      (5 shares at an average
      price of $12.44 per share,
      net of tax benefit)                       --             69


   Cash dividends declared and
      paid ($.46 per share)                     --         (2,343)


   Reduction in unallocated ESOP
      shares charged to expense                 --            755


   Appreciation in fair value of
      shares charged to expense
      for compensation plans                    --            800


   Earned portion of SIP shares
      charged to expense                       350            350


   Comprehensive income:
      Changes in net unrealized
         gain (loss) in investments
         available for sale, net                --         (1,797)


   Net income                                   --          8,568

                                                          -------
      Comprehensive income                                  6,771
                                            ------        -------

Balance at December 31, 1999                  (361)        85,704
                                            ======        =======
</TABLE>



See accompanying notes to consolidated financial statements.


                                       30
<PAGE>   26
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows
                             (Dollars in thousands)

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                   1999            1998            1997
                                                                                ---------        --------        --------
<S>                                                                             <C>              <C>             <C>
Net cash flows from operating activities:
    Net income                                                                  $   8,568           7,621           7,055
    Adjustments to reconcile net income to net cash provided by
      operating activities:
        Depreciation, amortization and accretion, net                               1,465           1,343             963
        Earned SIP shares                                                             350             593           1,009
        Reduction in unallocated ESOP shares                                          755             756             755
        Appreciation in fair value of shares charged to expense for
          compensation plans                                                          800           1,135             821
        Income from bank-owned life insurance                                        (556)             --              --
        Provision for loan losses                                                   1,626           1,642           1,696
        Recovery (provision) for valuation allowance for real estate
          owned                                                                        --              17            (350)
        Loans originated for sale                                                (301,464)       (357,405)       (117,413)
        Proceeds from sale of loans                                               305,315         353,387         112,680
        Net loss (gain) on sale of investment securities                               28             (19)             18
        Gain on sale of real estate held for sale or development, net                  --              --            (854)
        Deferred income tax expense (benefit)                                         185             208            (483)
        (Gain) loss on sale of real estate acquired through foreclosure               (15)            (60)            189
        Gain on sale of loans                                                      (3,017)         (3,173)         (1,114)
        Increase in accrued interest receivable                                      (718)           (386)           (240)
        (Increase) decrease in prepaid expenses and other assets                      (92)         (1,520)          3,066
        (Decrease) increase in accrued expenses and other liabilities              (3,190)          2,818             795
                                                                                ---------        --------        --------

               Net cash provided by operating activities                           10,040           6,957           8,593
                                                                                ---------        --------        --------

Cash flows from investing activities:
    Net cash (paid for) received from acquired institution                        (28,609)             --          11,908
    Proceeds from sales of investment securities available for sale                    --           5,000          14,008
    Proceeds from sale of mortgage-backed securities available for sale             4,034              --           1,084
    Proceeds from maturities of investment securities available for sale           20,375              --           4,000
    Proceeds from maturities of investment securities held to maturity              5,500          14,850           9,100
    Purchase of investment securities available for sale                          (27,329)        (32,217)        (13,013)
    Purchase of investment securities held to maturity                               (500)         (1,500)         (5,900)
    Purchase of mortgage-backed securities available for sale                      (5,005)        (10,856)             --
    Principal repayments of investments securities available-for-sale                 657          10,000              --
    Principal repayments on mortgage-backed securities held to maturity             8,993          15,432           4,641
    Principal repayments on mortgage-backed securities available for sale           5,899           8,843           3,807
    Increase in portfolio loans, net                                              (79,700)       (153,576)        (51,194)
    Purchase of FHLB stock                                                         (2,509)         (1,189)           (249)
    Purchases of premises and equipment                                            (2,314)           (887)           (956)
    Proceeds from sale of real estate held for sale or development                     --              --           2,058
    Proceeds from sale of real estate owned                                            61             191           3,167
    Additional investment in real estate owned                                        (98)             --              --
    Purchase of bank owned life insurance                                         (20,000)             --              --
                                                                                ---------        --------        --------

               Net cash used in investing activities                             (120,545)       (145,909)        (17,539)
                                                                                ---------        --------        --------
</TABLE>


                                                                     (Continued)
                                       31
<PAGE>   27
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                Consolidated Statements of Cash Flows, Continued
                             (Dollars in thousands)

                  Years ended December 31, 1999, 1998 and 1997



<TABLE>
<CAPTION>
                                                                                         1999            1998            1997
                                                                                      ---------        --------        --------
<S>                                                                                   <C>             <C>             <C>
Cash flows from financing activities:
    Increase in deposits accounts                                                     $  62,905          87,323          65,981
    Proceeds from securities sold under agreement to repurchase                              --              --           7,140
    Repayments of securities sold under agreement to repurchase                              --          (7,140)         (3,500)
    Proceeds from Federal Home Loan Bank advances                                       356,581         546,073         276,200
    Repayments of Federal Home Loan Bank advances                                      (309,581)       (465,073)       (316,200)
    Proceeds from other borrowings                                                        3,055              --              --
    (Decrease) increase in advanced payments by borrowers for
       taxes and insurance                                                                 (194)            272             685
    Cash dividends paid                                                                  (2,343)         (2,010)         (1,541)
    Common stock repurchased                                                             (2,492)         (7,998)        (13,407)
    Stock options exercised                                                                  69              16              --
                                                                                      ---------        --------        --------

                   Net cash provided by financing activities                            108,000         151,463          15,358
                                                                                      ---------        --------        --------

Net (decrease) increase  in cash and cash equivalents                                    (2,505)         12,511           6,412

Cash and cash equivalents at beginning of year                                           37,201          24,690          18,278
                                                                                      ---------        --------        --------

Cash and cash equivalents at end of year                                              $  34,696          37,201          24,690
                                                                                      =========        ========        ========

Supplemental disclosure of cash flow information: Payments during the year for:
       Interest                                                                       $  46,460          42,017          36,746
                                                                                      =========        ========        ========

       Taxes                                                                          $   7,283           3,306           4,688
                                                                                      =========        ========        ========

Supplemental schedule of noncash investing activities:
    Transfers of mortgage loans to real estate owned                                  $      83              --             533
                                                                                      =========        ========        ========
</TABLE>


See accompanying notes to consolidated financial statements.

                                       32
<PAGE>   28
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999



(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)

       BostonFed Bancorp Inc. (the "Company") is a Bank holding company which is
       headquartered in Burlington, Massachusetts and provides a variety of loan
       and deposit 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 and consumer finance offices located
       in the greater Boston metropolitan area, municipalities of Arlington,
       Bedford, Billerica, Boston, Burlington, Chelsea, Lexington, Peabody,
       Revere and Wellesley.

       The Company is subject to competition from other financial institutions
       including commercial banks, other savings banks, credit unions, mortgage
       banking companies and other financial service providers. The Company is
       subject to the regulations of, and periodic examination by the Federal
       Reserve Bank ("FRB"). Boston Federal Savings Bank ("BFS") is subject to
       the regulations of, and periodic examination by, the Office of Thrift
       Supervision ("OTS"). Broadway National Bank ("BNB"), a national chartered
       commercial bank, is subject to the regulations of, and periodic
       examination by the Office of the Comptroller of the Currency ("OCC"). The
       Federal Deposit Insurance Corporation ("FDIC") insures the deposits of
       BFS through the Saving Association Insurance Fund ("SAIF") and insures
       the deposits of BNB through the Bank Insurance Fund ("BIF").

       The Company acquired BNB effective the close of business February 7,
       1997, which was accounted for using the purchase method of accounting.
       The Company acquired Diversified Ventures, Inc. d/b/a Forward Financial
       Company ("Forward Financial") and Ellsmere Insurance Agency, Inc.
       ("Ellsmere") effective December 7, 1999, for $38.3 million in cash. The
       acquisition was accounted for using the purchase method. Forward
       originates loans primarily direct with customers purchasing or
       refinancing manufactured homes, recreational vehicles, boats and leased
       equipment and subsequently sells substantially all such loans. Forward is
       a subsidiary of BFS and Ellsmere is a subsidiary of BNB.

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

       (a)    PRINCIPLES OF CONSOLIDATION

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

                                       33
<PAGE>   29
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


              Boston Federal Savings Bank includes its wholly-owned
              subsidiaries, including Forward Financial Company. Broadway
              National Bank includes its wholly-owned subsidiaries, including
              Ellsmere Insurance Agency, Inc. B.F. Funding is a business
              corporation formed at the direction of the Company under the laws
              of the Commonwealth of Massachusetts on August 25, 1995. B.F.
              Funding was established to lend funds to a Company sponsored
              employee stock ownership plan trust for the purchase of stock at
              the initial public offering. All significant intercompany accounts
              and transactions have been eliminated in consolidation. Certain
              amounts previously reported have been reclassified to conform to
              the current year's presentation.

       (b)    CASH AND DUE FROM BANKS

              BFS and BNB are required to maintain cash and reserve balances
              with the Federal Reserve Bank. Such reserve is calculated based
              upon deposit levels and amounted to $5,979 and $1,631 at BFS and
              BNB, respectively, at December 31, 1999.

       (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 the
              interest method adjusted for prepayments. If a decline in fair
              value below the amortized cost basis of an investment or
              mortgage-backed security is judged to be other than temporary, the
              cost basis of the investment is written down to fair value as a
              new cost basis and the amount of the write-down is included as a
              charge against 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 ten 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 generates fixed-rate loans which
              are designated for portfolio at the time of origination.


                                       34
<PAGE>   30
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


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

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

              The Company sells mortgage loans for cash proceeds approximately
              equal to the principal amount of loans sold, but with yields to
              investors which reflect current market rates. Gain or loss is
              recognized 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 repayments exceed estimated
              prepayments, the balance of the mortgage servicing asset is
              adjusted by a charge to earnings. Any impairment in the fair value
              of those mortgage servicing assets is recognized by a charge to
              earnings through a valuation allowance. The risk characteristics
              of the underlying loans used to measure impairment include
              interest rate and loan origination date.

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

       (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
              management determines that the collectibility of the loan
              principal is unlikely. Recoveries on loans previously charged off
              are credited to the allowance.


                                       35
<PAGE>   31
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


              Impaired loans are 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. Management
              considers the payment status, net worth and earnings potential of
              the borrower, and the value and cash flow of the collateral as
              factors to determine if a loan will be paid in accordance with its
              contractual terms. Management does not set any minimum delay of
              payments as a factor in reviewing for impaired classification.
              Impaired loans are charged off when management believes that the
              collectibility of the loan's principal is remote. Classification
              of a loan as in-substance foreclosure is made only when a lender
              is in substantive possession of the collateral.

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

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

       (f)    GOODWILL

              Goodwill is amortized on a straight-line basis over fifteen years.
              Goodwill is reviewed for possible impairment when events or
              changed circumstances may affect the underlying basis of the
              asset.

       (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). Amortization of leasehold
              improvements is provided over the life of the related leases by
              use of the straight-line method. Rental income on leased
              facilities is included as a reduction of occupancy and equipment
              expense.

                                       36
<PAGE>   32
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


       (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 realizability 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.

       (i)    PENSION

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

       (j)    EMPLOYEE BENEFITS

              The Company continues to follow APB Opinion No. 25, Accounting for
              Stock Issued to Employees. See footnote 12 for the expanded
              disclosures required by SFAS 123 regarding pro forma net income
              and earnings per share.

       (k)    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:

<TABLE>
<CAPTION>
                                                                                   1999        1998        1997
                                                                                 -------     -------     -------

<S>                                                                                <C>         <C>         <C>
                    Basic shares                                                   4,825       5,078       5,505
                    Dilutive impact of stock options                                 172         250         185
                                                                                 -------     -------     -------

                    Diluted shares                                                 4,997       5,328       5,690
                                                                                 =======     =======     =======
</TABLE>

                                       37
<PAGE>   33
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


       (l)    COMPREHENSIVE INCOME

              Comprehensive income is defined as all changes to equity except
              investments by and distributions to shareholders. Net income is a
              component of comprehensive income, with all other components
              referred to in the aggregate as other comprehensive income. The
              following table shows the components of other comprehensive income
              for the years ended December 31:

<TABLE>
<CAPTION>
                                                                                     1999       1998       1997
                                                                                     ----       ----       ----

<S>                                                                             <C>             <C>        <C>
                    Net income                                                  $    8,568      7,621      7,055
                    Other comprehensive income, net of tax:
                        Unrealized gains (losses) on securities:
                           Unrealized holding (losses) gains arising during
                              the period, net of tax of ($692) for 1999             (1,815)        73        557
                           Reclassification adjustment for losses (gains)
                              included in net income, net of tax
                              of $10 for 1999                                           18         (3)         7
                                                                                   -------    -------    -------

                                                                                    (1,797)        70        564
                                                                                   -------    -------    -------

                                      Comprehensive income                      $    6,771      7,691      7,619
                                                                                   =======    =======    =======
</TABLE>

       (m)    RECENT ACCOUNTING PRONOUNCEMENTS

              In June 1998, the FASB issued SFAS No. 133, Accounting for
              Derivative Instruments and Hedging Activities. This statement
              establishes accounting and reporting standards for derivative
              instruments, including certain derivative instruments embedded in
              other contracts, (collectively referred to as derivatives) and for
              hedging activities. It requires that an entity recognize all
              derivatives as either assets or liabilities in the balance sheet
              and measure those instruments at fair value. Under this statement,
              an entity that elects to apply hedge accounting is required to
              establish at the inception of the hedge the method it will use for
              assessing the effectiveness of the hedging derivative and the
              measurement approach for determining the ineffective aspect of the
              hedge. In June 1999, the FASB issued SFAS No. 137 "Accounting for
              Derivative Instruments and Hedging Activities - Deferral of the
              Effective Date of FASB Statement No. 133, which defers the
              effective date of SFAS No. 133. SFAS No. 133 will be effective for
              all fiscal quarters of fiscal years beginning after June 15, 2000.
              The adoption of this statement is not expected to have a material
              impact on the Company's financial position.

                                       38
<PAGE>   34
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


(2)    STOCKHOLDERS' EQUITY

       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 $8.1 million (unaudited) at December 31,
       1999.

       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, 1999, there were no shares of preferred stock
       issued.

       BFS and BNB are subject to various regulatory capital requirements
       administered by the federal banking agencies. Failure to meet minimum
       capital requirements can initiate certain mandatory and possibly
       additional discretionary actions by regulators 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, BFS and BNB must meet specific capital guidelines that involve
       quantitative measures of BFS's and BNB's assets, liabilities, and certain
       off-balance sheet items as calculated under regulatory accounting
       practices. BFS's and BNB's capital amounts and classification are also
       subject to qualitative judgments by the regulators about components, risk
       weightings, and other factors.

       Quantitative measures established by regulation to ensure capital
       adequacy require BFS and BNB 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, 1999, that BFS and
       BNB meets all capital adequacy requirements to which it is subject.

       As of December 2, 1999, the most recent notification from the OTS
       categorized BFS as "well capitalized" by regulatory definition. As of
       December 4, 1998, the most recent notification from the OCC categorized
       BNB as "well capitalized." Under "capital adequacy" guidelines and the
       regulatory framework to be categorized as "well capitalized" BFS and BNB
       must maintain minimum risk-weighted capital, core capital, leverage, and
       tangible ratios as set forth in the table. As of December 31, 1999, BFS
       and BNB are categorized as "well capitalized" based on their ratios of
       risk-weighted core and tangible capital. 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


                                                                     (Continued)

                                       39
<PAGE>   35
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


       Tangible Assets), (3) Risk-based Tier I Capital (Tier I Capital to Risk
       Weighted Assets), (4) Tangible Capital (Tier I Capital to Tangible
       Assets), and (5) Leverage Capital (Tier I Capital to Average Assets).
       BFS's and BNB's actual capital amounts and ratios are presented in the
       table below. As a condition for approving the acquisition of Forward
       Financial, the Federal Reserve Board required the Company and BFS to
       remain "well capitalized" as defined in the regulations for a period of
       one year following the date of the acquisition. To date, the Company and
       BFS have complied with this requirement.

<TABLE>
<CAPTION>
                                                                                                  TO BE WELL
                                                                            FOR CAPITAL        CAPITALIZED UNDER
                                                                             ADEQUACY             REGULATORY
                                                       ACTUAL                PURPOSES             DEFINITIONS
                                                 -----------------       ----------------      ----------------
                                                  AMOUNT     RATIO       AMOUNT     RATIO      AMOUNT     RATIO
                                                 -------     -----       ------     -----      ------     -----
                                                                   (DOLLARS IN THOUSANDS)
<S>                                             <C>          <C>       <C>          <C>      <C>          <C>
              As of December 31, 1999:
                 Risk-based Total Capital:
                    BFS                         $   67,862   10.0%     $   54,064   8.0%     $   67,581   10.0%
                    BNB                              9,436   13.6           5,537   8.0           6,921   10.0
                 Core Capital:
                    BFS                             59,396    5.4          43,906   4.0          54,882    5.0
                 Risk-based Tier I Capital:
                    BFS                             59,396    8.8          27,032   4.0          40,548    6.0
                    BNB                              8,694   12.6           2,769   4.0           4,153    6.0
                 Tangible Capital:
                    BFS                             59,396    5.4          21,953   2.0          54,882    5.0
                 Leverage Capital:
                    BNB                              8,694    6.3           5,521   4.0           6,901    5.0
</TABLE>

<TABLE>
<CAPTION>
                                                                                                  TO BE WELL
                                                                            FOR CAPITAL        CAPITALIZED UNDER
                                                                             ADEQUACY             REGULATORY
                                                       ACTUAL                PURPOSES             DEFINITIONS
                                                 -----------------       ----------------      ----------------
                                                  AMOUNT     RATIO       AMOUNT     RATIO      AMOUNT     RATIO
                                                 -------     -----       ------     -----      ------     -----
                                                                   (DOLLARS IN THOUSANDS)
<S>                                             <C>          <C>       <C>          <C>      <C>          <C>
              As of December 31, 1998:
                 Risk-based Total Capital:
                    BFS                             57,944   10.2          45,538   8.0          56,923   10.0
                    BNB                             10,131   15.3           5,291   8.0           6,614   10.0
                 Core Capital:
                    BFS                             50,820    5.1          39,533   4.0          49,417    5.0
                 Risk-based Tier I Capital:
                    BFS                             50,820    8.9          22,769   4.0          34,154    6.0
                    BNB                              9,492   14.4           2,645   4.0           3,968    6.0
                 Tangible Capital:
                    BFS                             50,820    5.1          19,767   2.0          49,417    5.0
                 Leverage Capital:
                    BNB                              9,492    7.4           5,167   4.0           6,459    5.0
</TABLE>


                                                                     (Continued)

                                       40
<PAGE>   36
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


       At December 31, 1999 and 1998, the consolidated capital to assets ratio
       was 6.8% and 7.2%, respectively, which exceeded the minimum capital
       requirements for the Company. During 1999, the Company's Board of
       Directors approved a program to repurchase up to 254,996, or
       approximately 5%, of its outstanding common shares. The Company plans to
       hold the repurchased shares as treasury stock to be used for general
       company purposes. During the year ended December 31, 1999, 131,843 shares
       were repurchased under this program.


(3)    INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE (IN
       THOUSANDS)

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

<TABLE>
<CAPTION>
                                                                                DECEMBER 31, 1999
                                                                  ---------------------------------------------
                                                                  AMORTIZED    UNREALIZED    UNREALIZED   FAIR
                                                                    COST          GAINS        LOSSES     VALUE
                                                                  ---------    ----------    ----------   -----
<S>                                                               <C>          <C>           <C>          <C>
              Investment securities:
                 U.S. Government, federal agency
                    and other obligations:
                        Maturing within 1 year                    $   4,993           5            (1)     4,997
                        Maturing after 1 year but within
                           5 years                                   12,434           5          (252)    12,187
                        Maturing after 5 years but within
                           10 years                                   5,914         --           (174)     5,740
                        Maturing after 10 years                      10,836          29          (148)    10,717
                                                                  ---------       -----        ------   --------
                                                                     34,177          39          (575)    33,641
                                                                  ---------       -----        ------   --------

                 Mutual funds                                     19,089           --          (936)    18,153
                 Marketable equity securities                         1,785         --           (376)     1,409
                                                                  ---------       -----        ------   --------
                                                                     20,874         --         (1,312)    19,562
                                                                  ---------       -----        ------   --------

                               Total investment securities        $  55,051          39        (1,887)    53,203
                                                                  =========       =====        ======   ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                DECEMBER 31, 1999
                                                                  ---------------------------------------------
                                                                  AMORTIZED    UNREALIZED    UNREALIZED   FAIR
                                                                    COST          GAINS        LOSSES     VALUE
                                                                  ---------    ----------    ----------   -----
<S>                                                               <C>          <C>           <C>          <C>
              Mortgage-backed securities:
                 Maturing after 1 year but within
                    5 years                                       $   3,250         --            (65)     3,185
                 Maturing after 5 years but
                    within 10 years                                   1,985         --             (4)     1,981
                 Maturing after 10 years                             10,646         --           (272)    10,374
                                                                  ---------       -----        ------   --------

                               Total mortgage-backed
                                   securities                     $  15,881                      (341)    15,540
                                                                  =========       =====        ======   ========
</TABLE>


                                                                     (Continued)

                                       41
<PAGE>   37
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999



<TABLE>
<CAPTION>
                                                                                DECEMBER 31, 1998
                                                                  ---------------------------------------------
                                                                  AMORTIZED    UNREALIZED    UNREALIZED   FAIR
                                                                    COST          GAINS        LOSSES     VALUE
                                                                  ---------    ----------    ----------   -----
<S>                                                               <C>          <C>           <C>          <C>

              Investment securities:
                 U.S. Government, federal agency
                    and other obligations:
                        Maturing within 1 year                    $  13,013          51            --     13,064
                        Maturing after 1 year but within
                           5 years                                   15,975         329           (12)    16,292
                                                                  ---------       -----        ------   --------
                                                                     28,988         380           (12)    29,356
                                                                  ---------       -----        -------  --------

                 Mutual funds                                        18,064           6           (65)    18,005
                 Marketable equity securities                         1,785          42           (51)     1,776
                                                                  ---------       -----        ------   --------
                                                                     19,849          48          (116)    19,781
                                                                  ---------       -----        ------   --------

                               Total investment securities        $  48,837         428          (128)    49,137
                                                                  =========       =====        ======   ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                DECEMBER 31, 1998
                                                                  ---------------------------------------------
                                                                  AMORTIZED    UNREALIZED    UNREALIZED   FAIR
                                                                    COST          GAINS        LOSSES     VALUE
                                                                  ---------    ----------    ----------   -----
<S>                                                               <C>          <C>           <C>          <C>
              Mortgage-backed securities:
                 Maturing after 5 years but
                    within 10 years                               $   4,996           6           --       5,002
                 Maturing after 10 years                             15,939         255          (167)    16,027
                                                                  ---------       -----        ------   --------

                               Total mortgage-backed
                                   securities                     $  20,935         261          (167)    21,029
                                                                  =========       =====        ======   ========
</TABLE>

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

       U.S. agency notes with an amortized cost and a fair value of $1,000 at
       December 31, 1999 were pledged to provide collateral for customers and
       the Company's employee tax withholdings that are to be remitted to the
       federal government in excess of the $100 of withholdings insured by the
       FDIC.

       Included in U.S. government, federal agency and other obligations are
       investments that can be called prior to final maturity with an amortized
       cost of $11,445 and a fair value of $11,064 at December 31, 1999.

                                       42
<PAGE>   38
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


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

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                                 ----------------------------------------------
                                                                         1999                      1998
                                                                 --------------------       -------------------
                                                                  AMORTIZED     FAIR        AMORTIZED     FAIR
                                                                    COST        VALUE         COST        VALUE
                                                                 ----------     -----       ---------     -----

<S>                                                              <C>            <C>         <C>           <C>
              FHLMC                                              $   5,559       5,484         4,996       5,002
              GNMA                                                     --          --          5,916       5,982
              FNMA                                                   3,004       3,004            --          --
              Privately issued collateralized
                 mortgage obligations                                7,318       7,052        10,023      10,045
                                                                 ---------   ---------      --------    --------

                                                                 $  15,881      15,540        20,935      21,029
                                                                 =========   =========      ========    ========
</TABLE>

       Proceeds from the sale of investment securities and mortgage-backed
       securities available for sale amounted to $4,034, $5,000 and $15,092 in
       1999, 1998 and 1997, respectively. Realized losses on investment
       securities and mortgage-backed securities available for sale were $33 and
       $18 in 1999 and 1997, respectively. Realized gains amounted to $5 and $19
       in 1999 and 1998, respectively.


(4)    INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD TO MATURITY (IN THOUSANDS)

       The amortized cost and fair values of investment and mortgage-backed
       securities held to maturity are shown below by contractual maturity.
<TABLE>
<CAPTION>
                                                                                DECEMBER 31, 1999
                                                                 ----------------------------------------------
                                                                  AMORTIZED    UNREALIZED    UNREALIZED   FAIR
                                                                    COST          GAINS        LOSSES     VALUE
                                                                 ----------    ----------    ----------   -----
<S>                                                              <C>           <C>           <C>          <C>
              Investment securities:
                 U.S. government, federal
                    agency and other obligations:
                        Maturing within one year                  $     4          21             --         25
                        Maturing after 1 year but
                           within 5 years                            2,300         --            (50)     2,250
                                                                  --------        ----         ------   -------

                               Total investment securities        $  2,304          21           (50)     2,275
                                                                  ========        ====         =====    =======

              Mortgage-backed securities:
                 Maturing after 1 year but within 5 years         $    839           1           (7)        833
                 Maturing after 5 years but within 10 years          1,810          47           (1)      1,856
                 Maturing after 10 years                            11,292          54           (5)     11,341
                                                                  --------        ----        -----    --------

                               Total mortgage-backed
                                   securities                     $ 13,941         102          (13)     14,030
                                                                  ========        ====        =====    ========
</TABLE>


                                                                     (Continued)

                                       43
<PAGE>   39
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


<TABLE>
<CAPTION>
                                                                                DECEMBER 31, 1998
                                                                 ----------------------------------------------
                                                                  AMORTIZED    UNREALIZED    UNREALIZED   FAIR
                                                                    COST          GAINS        LOSSES     VALUE
                                                                 ----------    ----------     ---------   -----
<S>                                                               <C>          <C>            <C>         <C>
              Investment securities:
                 U.S. government, federal
                    agency and other obligations:
                        Maturing within one year                  $   1,250           1         --         1,251
                        Maturing after 1 year but
                           within 5 years                             5,027          63         --         5,090
                        Maturing after 5 years but
                           within 10 years                            1,025           5         --         1,030
                                                                  ---------       -----       -----       ------

                               Total investment securities        $   7,302          69         --         7,371
                                                                  =========       =====       =====       ======

              Mortgage-backed securities:
                 Maturing after 1 year but within 5 years             1,205          23         --         1,228
                 Maturing after 5 years but within 10 years           2,309         118         --        2,427
                 Maturing after 10 years                             19,399         279         --        19,678
                                                                  ---------       -----       -----       ------

                               Total mortgage-backed
                                   securities                     $  22,913         420         --        23,333
                                                                  =========       =====       =====       ======
</TABLE>

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

       At December 31, 1999, a U.S. agency note with an amortized cost of $500
       and a fair value of $476 was pledged to secure certain of BFS's recourse
       liabilities relating to loans sold as described in note 5.

       At December 31, 1999, investment securities with an amortized cost of
       $500 and a fair value of $481 were pledged to provide collateral for
       customers and the Company's employee tax withholdings that are to be
       remitted to the federal government in excess of the $100 of withholdings
       insured by the FDIC.

       Included in U.S. government, federal agency and other obligations are
       investments that can be called prior to final maturity with an amortized
       cost of $2,000 and a fair value of $1,950 at December 31, 1999.

                                       44
<PAGE>   40
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


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

<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                         --------------------------------------------------
                                                                     1999                         1998
                                                         ----------------------     -----------------------
                                                         AMORTIZED      FAIR        AMORTIZED       FAIR
                                                           COST         VALUE         COST          VALUE
                                                         ---------    ---------     ---------      --------

<S>                                                      <C>          <C>           <C>            <C>
              FHLMC, FNMA and GNMA                        $13,941        14,030        17,755        18,124
              Privately issued collateralized
                 mortgage obligation                          --            --          5,158         5,209
                                                           ------     ---------     ---------      --------

                                                          $13,941        14,030        22,913        23,333
                                                           ======     =========     =========      ========
</TABLE>


(5)    LOANS (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 loans
       processed by Forward Financial, the vast majority of the loans granted by
       the Company are secured by real estate collateral. Through BFS'
       subsidiary, Forward Financial, the Company originates loans, primarily
       direct with the consumer, on manufactured housing, recreational vehicles,
       boats and leased equipment in approximately 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 the real estate economic sector in
       the borrowers' geographic areas and the general economy.


                                                                     (Continued)

                                       45
<PAGE>   41
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


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

<TABLE>
<CAPTION>
                                                    1999               1998
                                                  -----------        --------
<S>                                               <C>                <C>
Mortgage loans:
   Residential 1-4 family                         $   830,565         812,564
   Multi-family                                        22,017          22,889
   Construction and land                               77,079          41,608
   Commercial real estate                              75,999          48,951
                                                  -----------        --------

                                                    1,005,660         926,012
                                                  -----------        --------
Consumer and other loans:
   Home equity and improvement                         43,721          32,119
   Secured by deposits                                    682             934
   Consumer                                             3,549           4,637
   Business                                            17,815           3,618
                                                  -----------        --------

                                                       65,767          41,308
                                                  -----------        --------
              Total loans, gross                    1,071,427         967,320
                                                  -----------        --------

Less:
   Allowance for loan losses (note 6)                 (10,654)         (8,500)
   Construction loans in process                      (30,372)        (17,133)
   Net unearned discount on loans purchased                (7)             (5)
   Deferred loan origination costs                      2,200           1,980
                                                  -----------        --------

              Loans, net                          $ 1,032,594         943,662
                                                  ===========        ========
</TABLE>

       The Company services mortgage loans for investors which are not included
       in the accompanying consolidated balance sheets totaling approximately
       $784,597 and $648,279 at December 31, 1999 and 1998, respectively. Of
       these loans serviced for others, $383 and $473 at December 31, 1999 and
       1998, respectively, had been sold with recourse by the Company. In
       addition, at December 31, 1999 and 1998, respectively, the Company had
       retained the secondary layer of recourse risk on $3,190 and $4,737 of
       serviced loans, with such risk limited to $221 and $221 after the first
       layer is exhausted. There were no losses incurred on loans subject to
       recourse during 1999 and 1998. The loss incurred on loans subject to
       recourse amounted to $44 for the year ended December 31, 1997.

                                                                     (Continued)

                                       46
<PAGE>   42
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


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

<TABLE>
<CAPTION>
                                             1999           1998          1997
                                            -------        ------        ------

<S>                                         <C>            <C>           <C>
Balance, beginning of year                  $ 3,571         1,534           988

Capitalized mortgage servicing rights         2,813         3,149           836
Amortization                                 (1,304)       (1,112)         (290)
                                            -------        ------        ------

Balance, end of year                        $ 5,080         3,571         1,534
                                            =======        ======        ======
</TABLE>

       The Company has determined that the fair value of mortgage servicing
       rights at December 31, 1999 approximates their carrying amount. There was
       an adjustment of $481 recorded to reflect impairment value of mortgage
       servicing rights during 1998. A valuation allowance for the mortgage
       servicing rights was not established, as the mortgage servicing rights
       were adjusted through additional amortization.

       Regulatory limits for loans to one borrower are limited to 15% of capital
       and general valuation reserves. These regulatory limits for BFS and BNB,
       at December 31, 1999, are $10.4 million and $1.4 million, respectively.
       BFS and BNB did not have any borrower relationships which exceeded the
       limit at December 31, 1999.

       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:

<TABLE>
<CAPTION>
                                  1999          1998
                                 -----        ------
<S>                              <C>           <C>
Balance, beginning of year       $ 785         1,209

   Originations                    145           145
   Payments                       (152)         (581)
   Other changes                     7            12
                                 -----        ------

Balance, end of year             $ 785           785
                                 =====        ======
</TABLE>

       At December 31, 1999 and 1998, total impaired loans were $235 and $483,
       respectively. In the opinion of management, no impaired loans required a
       specific valuation allowance at December 31, 1999 and 1998. The average
       recorded value of impaired loans was $335 during 1999 and $488 during
       1998. The Company follows the same policy for recognition of income on
       impaired loans as it does for nonaccrual loans. At December 31, 1999 and
       1998, there were no commitments to lend additional funds to those
       borrowers whose loans were classified as impaired.

                                                                     (Continued)

                                       47
<PAGE>   43
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


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

<TABLE>
<CAPTION>
                                                          1999     1998     1997
                                                          ----     ----     ----
<S>                                                       <C>      <C>      <C>
Income in accordance with original terms                   $17       47       52
Income recognized                                           15       46       51
                                                           ---      ---      ---

             Foregone interest income during year          $ 2        1        1
                                                           ===      ===      ===
</TABLE>


       Non-accrual loans at December 31, 1999 and 1998 were $746 and $809,
       respectively.

       The following table summarizes information regarding the reduction or
       (increase) in interest income on non-accrual loans as of December 31:

<TABLE>
<CAPTION>
                                                               1999       1998      1997
                                                               ----       ----      ----
<S>                                                            <C>        <C>       <C>
Income in accordance with original terms                       $ 62         68       208
Income recognized                                                64         35        59
                                                               ----       ----      ----

        Foregone (net earned) interest income during year      $ (2)        33       149
                                                               ====       ====      ====
</TABLE>


(6)    ALLOWANCE FOR LOAN LOSSES (IN THOUSANDS)

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

<TABLE>
<CAPTION>
                                                            1999            1998           1997
                                                            ----            ----           ----
<S>                                                       <C>            <C>            <C>
Balance, beginning of year                                $  8,500          6,600          4,400

   Allowance for loan losses from acquired companies           170           --              620
   Provision charged to income                               1,626          1,642          1,696
   Recoveries                                                  414            517            399
   Charge-offs                                                 (56)          (259)          (515)
                                                          --------       --------       --------

Balance, end of year                                      $ 10,654          8,500          6,600
                                                          ========       ========       ========
</TABLE>


                                                                     (Continued)

                                       48
<PAGE>   44
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


(7)    ACCRUED INTEREST RECEIVABLE (IN THOUSANDS)

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

<TABLE>
<CAPTION>
                                                            1999           1998
                                                            ----           ----
<S>                                                        <C>            <C>
Investment and mortgage-backed securities                  $  739            886
Loans                                                       5,528          4,663
                                                           ------         ------

                                                           $6,267          5,549
                                                           ======         ======
</TABLE>


(8)    PREMISES AND EQUIPMENT (IN THOUSANDS)

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

<TABLE>
<CAPTION>
                                                          1999           1998
                                                          ----           ----
<S>                                                     <C>            <C>
Land                                                    $  2,503          2,083
Buildings                                                  5,464          4,074
Furniture, fixtures and equipment                          8,337          6,876
Leasehold improvements                                     1,395          1,402
                                                        --------       --------
                                                          17,699         14,435
Less accumulated depreciation and amortization            (9,487)        (7,821)
                                                        --------       --------

                                                        $  8,212          6,614
                                                        ========       ========
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
<S>                                                            <C>
   2000                                                        $      1,458
   2001                                                               1,458
   2002                                                               1,458
   2003                                                               1,342
   2004 and thereafter                                                5,825
                                                               ------------

                                                               $     11,541
                                                               ============
</TABLE>

       Rent expense was $1,418 in 1999, $1,257 in 1998 and $1,178 in 1997.


                                                                     (Continued)

                                       49
<PAGE>   45
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
<S>                                                            <C>
   2000                                                        $        182
   2001                                                                 124
   2002                                                                  73
   2003                                                                  66
   2004 and thereafter                                                   44
                                                               ------------

                                                               $        489
                                                               ============
</TABLE>

       Rental income was $172, $165 and $160 in 1999, 1998 and 1997,
       respectively.


(9)    DEPOSIT ACCOUNTS (DOLLARS IN THOUSANDS)

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

<TABLE>
<CAPTION>
                                                          1999            1998
                                                          ----            ----
<S>                                                     <C>             <C>
NOW                                                     $114,145         114,934
Regular and statement savings                            145,688         130,843
Money market                                              56,970          61,756
Demand deposits and official checks                       53,858          60,952
                                                        --------        --------

             Total non-certificate accounts              370,661         368,485
                                                        --------        --------

Certificate accounts:
   3 to 6 months                                          22,975          26,066
   9 months                                               16,800            --
   1 to 3 year                                           278,393         262,103
   Greater than 3 years                                   37,551           4,442
   IRA/Keogh                                              43,669          46,048
                                                        --------        --------

             Total certificate accounts                  399,388         338,659
                                                        --------        --------

                                                        $770,049         707,144
                                                        ========        ========

Expected maturity of certificate accounts:
   Within one year                                      $244,061         198,124
   One to two years                                      103,413         125,285
   Two to three years                                     14,280           9,415
   Over three years                                       37,634           5,835
                                                        --------        --------

                                                        $399,388         338,659
                                                        ========        ========
</TABLE>


                                                                     (Continued)

                                       50
<PAGE>   46
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


       Aggregate amount of certificate accounts of $100 or more were $38,601 and
       $29,006 at December 31, 1999 and 1998, 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:

<TABLE>
<CAPTION>
                                             1999           1998           1997
                                             ----           ----           ----
<S>                                        <C>            <C>            <C>
NOW                                        $   884          1,158          1,071
Regular and statement savings                3,534          2,999          2,826
Money market                                 1,693          1,838          1,822
Certificate accounts                        19,761         18,101         13,457
                                           -------        -------        -------

                                           $25,872         24,096         19,176
                                           =======        =======        =======
</TABLE>

       The Company has $136,394 of brokered deposits with a weighted average
       rate of 6.58% at December 31, 1999. Brokered deposits of $67,644,
       $27,957, $7,306, $9,395 and $24,092 mature in 2000, 2001, 2002, 2003 and
       thereafter, respectively. There were $82,722 of brokered deposits
       outstanding at December 31, 1998.


(10)   FEDERAL HOME LOAN BANK ("FHLB") OF BOSTON ADVANCES AND OTHER BORROWINGS
       (DOLLARS IN THOUSANDS)

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

<TABLE>
<CAPTION>
                                    1999                         1998
                            ---------------------       ----------------------
                                         WEIGHTED                     WEIGHTED
                                          AVERAGE                      AVERAGE
                             AMOUNT        RATE          AMOUNT         RATE

<S>                         <C>          <C>            <C>           <C>
1999                        $   --          -- %        $114,000        5.56%
2000                         218,500       5.74          113,500        5.85
2001                          46,000       5.63           49,000        5.59
2002                          43,000       6.02            1,000        6.55
2003                          40,000       5.57           40,000        5.57
2004                          17,000       6.59             --           --
Beyond 2004                   20,000       5.99           20,000        5.99
                            --------       ----         --------        ----

                            $384,500       5.80%        $337,500        5.69%
                            ========       ====         ========        ====
</TABLE>


                                                                     (Continued)

                                       51
<PAGE>   47
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


       The advances are secured by FHLB of Boston stock and a blanket lien on
       certain qualified collateral. The amount of advances is principally
       limited to 90% of the market value of U.S. Government and federal agency
       obligations and 75% of the carrying value of first mortgage loans on
       owner-occupied residential property. Applying these ratios, and other
       ratios on other qualifying collateral, the Company's overall borrowing
       capacity was approximately $423,620 and $474,168 at December 31, 1999 and
       1998, respectively.

       Other borrowings total $3,055 and consist of a line of credit from a
       financial institution which is utilized for general corporate purposes.

       As a member of the FHLB of Boston, the Company is required to maintain a
       minimum investment in the capital stock of the Federal Home Loan Bank of
       Boston, at cost, in an amount not less than 1% of its outstanding home
       loans or 1/20 of its outstanding notes payable to the Federal Home Loan
       Bank of Boston, whichever is greater, as calculated at December 31 of
       each year. The investment exceeds the required level by $436 and $927 at
       December 31, 1999 and 1998, respectively. Any excess may be redeemed by
       the Company or called by FHLB of Boston at par.

       Interest expense on FHLB advances was $21,207 in 1999, $18,219 in 1998
       and $17,226 in 1997.


(11)   INCOME TAXES (DOLLARS IN THOUSANDS)

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

<TABLE>
<CAPTION>
                                                       1999     1998      1997
                                                       ----     ----      ----
<S>                                                   <C>      <C>       <C>
Current income tax expense:
   Federal income tax                                 $4,620    4,654     4,581
   State income tax                                      140      287     1,407
                                                      ------   ------    ------

             Total current expense                     4,760    4,941     5,988
                                                      ------   ------    ------

Deferred income tax expense (benefit):
   Federal deferred income tax                           137      313      (371)
   State income tax                                       48      107       (29)
   Change in valuation allowance                        --       (210)      (83)
                                                      ------   ------    ------

             Total deferred expense (benefit)            185      210      (483)
                                                      ------   ------    ------

             Total income tax expense                 $4,945    5,151     5,505
                                                      ======   ======    ======
</TABLE>


                                                                     (Continued)

                                       52
<PAGE>   48
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


       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:

<TABLE>
<CAPTION>
                                                                1999       1998
                                                                ----       ----
<S>                                                            <C>        <C>
Deferred tax assets:
   Allowance for loan losses                                   $4,575      3,676
   Deferred compensation                                          596        856
   Unrealized loss on securities available for sale               702       --
   Other                                                           78         90
                                                               ------     ------

             Gross deferred assets                              5,951      4,622
                                                               ------     ------

Deferred liabilities:
   Premium on loans sold                                        2,138      1,527
   Deferred loan fees                                             879        806
   Unrealized gain on securities available for sale              --           82
   Premises and equipment                                         523        358
   Other                                                         --           37
                                                               ------     ------

             Gross deferred liabilities                         3,540      2,810
                                                               ------     ------

             Net deferred tax asset                            $2,411      1,812
                                                               ======     ======
</TABLE>

       At December 31, 1999, the net deferred tax asset is supported by
       recoverable income taxes. For the year ended December 31, 1999, the
       Company generated approximately $13,000 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. However, the
       base year reserve of approximately $13,300 remains subject to recapture
       in the event that the Company pays dividends in excess of its earnings
       and profits or redeems its stock.


                                                                     (Continued)
                                       53
<PAGE>   49
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


       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:

<TABLE>
<CAPTION>
                                                   1999        1998        1997
                                                   ----        ----        ----
<S>                                              <C>         <C>         <C>
Computed expected expense at statutory rate      $ 4,615       4,343       4,396
Items affecting federal income tax rate:
   State income tax, net of federal income tax
      benefit                                        124         261         896
   Change in valuation allowance                    --          (210)        (83)
   Allocated ESOP share appreciation                 185         273         212
   Bank-owned life insurance                        (189)       --          --
   Other                                             210         484          84
                                                 -------     -------     -------

Effective income tax expense                     $ 4,945       5,151       5,505
                                                 =======     =======     =======

Effective income tax rate                           36.6%       40.3%       43.8%
                                                 =======     =======     =======
</TABLE>


(12)   EMPLOYEE BENEFITS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

       (a)    EMPLOYEE STOCK OWNERSHIP PLAN

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

              During October 1995, the Company issued a total of 529,000 shares
              to the ESOP at a total purchase price of $5,290. The purchase was
              made from the proceeds of a $5,290 loan from B.F. Funding
              Corporation, a wholly-owned subsidiary of the Company, bearing
              interest at the prime rate. Repayment of the loan is secured by
              contributions BFS is obliged to make under a contribution
              agreement with the ESOP. BFS made contributions to the ESOP
              totaling $755 in 1999, 1998 and 1997 to enable the ESOP to make
              principal payments on the loan. The amount contributed was charged
              to compensation and benefits expense. The Company recognized $550
              in 1999, $803 in 1998 and $604 in 1997 in compensation and benefit
              expense and an increase in additional paid-in capital related to
              the appreciation in the fair value of allocated ESOP shares. The
              balance of the loan will be repaid over a period of approximately
              three years, principally with funds from BFS's future
              contributions to ESOP, subject to IRS limitations.


                                                                     (Continued)
                                       54
<PAGE>   50
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


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

              At December 31, 1999 and 1998, shares held in suspense to be
              released annually as the loan is paid down amounted to 166,279 and
              241,829, respectively. The fair value of unallocated ESOP shares
              was $2,640 and $4,263 at December 31, 1999 and 1998, 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

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

              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 and 8,584
              shares were awarded on October 15, 1996. During 1999, 52,381
              shares were distributed. Awards outstanding vest in five annual
              installments generally commencing one year from the date of the
              award. As of December 31, 1999, 12,500 shares remain unawarded
              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 $350, $593 and
              $1,009 related to the earned shares in compensation and benefit
              expense in 1999, 1998 and 1997, respectively.

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


                                                                     (Continued)

                                       55
<PAGE>   51
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


       (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, of which 25,000 options remain unawarded. 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
              68,600 remain unawarded. During 1999, the Company granted
              employees options to purchase 61,000 shares of common stock
              between $14.56 and $18.50 per share. During 1998, the Company
              granted employees options to purchase 40,500 shares of common
              stock at between $18.13 and $24.81 per share.

              A summary of option activity follows:

<TABLE>
<CAPTION>
                                        1999                        1998
                                --------------------         --------------------
                                            WEIGHTED                     WEIGHTED
                                  NUMBER     AVERAGE          NUMBER      AVERAGE
                                    OF      EXERCISE            OF       EXERCISE
                                  SHARES      PRICE           SHARES       PRICE
                                  ------      -----           ------       -----
<S>                             <C>         <C>              <C>         <C>
Balance, beginning
    of year                      772,961     $14.12           733,361     $13.63
       Granted                    61,000      15.53            40,500      22.77
       Forfeited                 (19,500)     18.82              --         --
       Exercised                  (5,000)     12.44              (900)     16.43
                                --------                     --------

Balance, end of year             809,461     $14.12           772,961     $14.12
                                ========     ======          ========     ======

Options exercisable              418,784     $13.61           273,992     $13.40
                                ========     ======          ========     ======
</TABLE>


                                                                     (Continued)

                                       56
<PAGE>   52
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


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

<TABLE>
<CAPTION>
                         OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
            ----------------------------------------      ---------------------------
                               WEIGHTED
            OUTSTANDING        AVERAGE      WEIGHTED      EXERCISABLE        WEIGHTED
               AS OF          REMAINING      AVERAGE         AS OF            AVERAGE
            DECEMBER 31,     CONTRACTUAL    EXERCISE      DECEMBER 31,       EXERCISE
               1999             LIFE          PRICE          1999              PRICE
                 ----            ----          -----          ----              -----
<S>                          <C>           <C>            <C>               <C>
              565,000            6.3       $   12.44        337,000         $   12.44
               25,000            6.8           13.44         15,000             13.44
                7,500            6.9           14.82          4,500             14.82
              100,461            7.5           18.82         40,184             18.82
               10,000            7.9           19.75          4,000             19.75
               15,000            8.2           22.22          6,000             22.22
               15,000            8.3           24.81          6,000             24.81
                5,000            8.4           23.38          2,000             23.38
                5,500            9.0           18.13          1,100             18.13
               15,000            9.2           18.50          3,000             18.50
               46,000           10.0           14.56           --                 --
              -------                                       -------

              809,461            6.9       $   14.12        418,784         $   13.61
              =======           ====       =========        =======         =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                          1999             1998
                                                          ----             ----
<S>                                                    <C>                 <C>
Net income as reported                                 $   8,568           7,621
Pro forma net income                                       7,766           6,847
Basic earnings per share as reported                        1.78            1.50
Diluted earnings per share as reported                      1.71            1.43
Pro forma basic earnings per share                          1.61            1.35
Pro forma diluted earnings per share                        1.55            1.29
</TABLE>

       The per share weighted average fair value of stock options granted during
       1999 was $3.76 per share determined using the Flexible Binomial option
       pricing model with the following weighted average assumptions: 1999 1998

<TABLE>
<S>                                                        <C>               <C>
Expected dividend yield                                     3.00%             2.50%
Risk-free interest rate                                     5.66%             5.23%
Expected volatility                                        28.99%            24.88%
Expected life (years)                                       4.0               4.6
</TABLE>


                                                                     (Continued)

                                       57
<PAGE>   53
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


       (d)    PENSION PLAN

              All eligible officers and employees are included in a
              noncontributory defined benefit pension plan provided by BFS and
              BNB as participating employers 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 is not possible. Contributions are based on individual
              employer experience. According to Pentegra's Administrators, as of
              June 30, 1999, the date of the latest actuarial valuation, the
              market value of Pentegra's net assets exceeded the actuarial
              present value of vested benefits in the aggregate. There was no
              pension expense recorded for 1999, 1998 and 1997, except for an
              administration fee of approximately $5 per year.

       (e)    DEFERRED THRIFT INCENTIVE PLAN

              BFS and BNB have employee tax deferred thrift incentive plans (the
              "401K plans") under which employee contributions to the plans are
              matched pursuant to the provisions of the respective plans. All
              employees who meet specified age and length of service
              requirements are eligible to participate in the 401K plans. The
              amounts matched by BFS and BNB are included in compensation and
              employee benefits expense. The amounts matched were $153 in 1999
              and $143 for 1998.

       (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. Expenses associated with SERP totaled $194 in 1999.

       (g)    SHORT TERM INCENTIVE PLAN

              The Company established a short-term incentive plan during 1997.
              Generally, all BFS (effective in 1997) and BNB (effective in 1998)
              employees are eligible to participate in the incentive plan, and
              awards are granted based on the achievement of certain performance
              measures. Compensation expense related to this award amounted to
              $1,151 and $721 during 1999 and 1998, respectively.

       (h)    BANK-OWNED LIFE INSURANCE

              Bank owned life insurance 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.


                                                                     (Continued)
                                       58
<PAGE>   54
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


       (i)    EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS

              The Company and BFS entered into employment agreements with its
              President and Chief Executive Officer, and two Executive Vice
              Presidents. The employment agreements generally provide for the
              continued payment of specified compensation and benefits for three
              years and provide payments for the remaining term of the agreement
              after the officers are terminated, unless the termination is for
              "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, BFS and BNB
              entered into change in control agreements with certain other
              executives which provide for the payment, under certain
              circumstances, to the officer upon the officer's termination after
              a change of control, as defined in their change of control
              agreements.

       (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 or its two
              banks. Generally, employees are eligible to participate in the
              Plan if they have completed at least one year of service with the
              Company and are not eligible to receive benefits under the
              executive officer employment agreements. The Plan provides for the
              payment, under certain circumstances, of lump-sum amounts upon
              termination following a change of control, as defined in the Plan.


(13)   LITIGATION

       Broadway National Bank was named a defendant in the Superior Court for
       Suffolk County, Massachusetts, civil action No. SUCV 99-018F served on
       April 12, 1999 in a matter captioned "Glyptal, Inc. v. John Hetherton,
       Jr., Fleet Bank, NA and Broadway National Bank of Chelsea." The suit
       alleges that an officer of the Plaintiff, Glyptal, embezzled funds from
       Plaintiff, by making unauthorized transfers from Plaintiff's corporate
       accounts and subsequently deposited checks drawn on such account into an
       account at Broadway National Bank. Plaintiff alleges that Broadway
       National Bank knew or should have known of the alleged fraudulent actions
       of Plaintiff's officer, and that Broadway National Bank owed a duty to
       Plaintiff to investigate the transactions and protect Plaintiff from the
       alleged fraudulent actions. The Plaintiff is seeking damages for the
       alleged breach of duty by the defendants. Broadway National Bank intends
       to deny the allegations that it owed or breached any duty to Plaintiff or
       that it is liable for any losses incurred by Plaintiff. Broadway National
       Bank intends to vigorously defend the action and believes the action is
       not likely to result in any material loss or adverse effect on the
       financial condition of the Company.

       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.


                                                                     (Continued)
                                       59
<PAGE>   55
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


(14)   FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (IN THOUSANDS)

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

       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 loans held for sale to various
       private institutional investors on a best efforts basis. 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 typically exchanges through FNMA or FHLMC its current production
       of loans for mortgage-backed securities which are then delivered to a
       securities firm at a future date at prices or yields specified by the
       contracts. Risks may arise from the possible inability of the Company to
       originate loans to fulfill the contracts, in which case the Company may
       purchase securities in the open market to deliver against the contracts.


                                                                     (Continued)

                                       60
<PAGE>   56
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


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

<TABLE>
<CAPTION>
                                                                       1999        1998
                                                                       ----        ----
<S>                                                                  <C>          <C>
Commitments to originate mortgage loans                              $74,668      97,658
Commitments to originate business loans                                6,319        --
Unused lines of credit:
   Home equity                                                        68,019      56,166
   Business loans                                                      8,840       3,454
   Credit card                                                         1,507       1,453
Standby letters of credit                                              1,112         765
Optional commitments to sell loans and commitments to sell loans
   or swap loans for mortgage-backed securities                       23,478      44,942
</TABLE>


(15)   FAIR VALUES OF FINANCIAL INSTRUMENTS (IN THOUSANDS)

       Fair value estimates are based on existing on- and off-balance-sheet
       financial instruments without attempting to estimate the value of
       anticipated future business and the value of assets and liabilities that
       are not considered financial instruments. Other significant assets and
       liabilities that are not considered financial assets or liabilities
       include real estate acquired by foreclosure, the deferred income tax
       asset, office properties and equipment, and core deposit and other
       intangibles. In addition, the tax ramifications related to the
       realization of the unrealized gains and losses can have a significant
       effect on fair value estimates and have not been considered in any of the
       estimates. Accordingly, the aggregate fair value amounts presented do not
       represent the underlying value of the Company. Fair value estimates are
       made at a specific point in time, based on relevant market information
       and information about the financial instrument. These estimates do not
       reflect any premium or discount that could result from offering for sale
       at one time the Company's entire holdings of a particular financial
       instrument. Because no market exists for some of the Company's financial
       instruments, fair value estimates are based on judgments regarding future
       expected loss experience, cash flows, current economic conditions, risk
       characteristics and other factors. These estimates are subjective in
       nature and involve uncertainties and matters of significant judgment and
       therefore cannot be determined with precision. Changes in assumptions and
       changes in the loan, debt and interest rate markets could significantly
       affect the estimates.

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

       (a)    CASH AND CASH EQUIVALENTS

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


                                                                     (Continued)

                                       61
<PAGE>   57
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


       (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

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

       (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.


                                                                     (Continued)

                                       62
<PAGE>   58
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


       (i)    SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

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

       (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.

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

<TABLE>
<CAPTION>
                                                                1999                           1998
                                                     -------------------------       -----------------------
                                                      CARRYING         FAIR          CARRYING         FAIR
                                                       AMOUNT          VALUE          AMOUNT          VALUE
                                                       ------          -----          ------          -----
<S>                                                  <C>             <C>             <C>             <C>
Financial assets:
   Cash and cash equivalents                         $   34,696         34,696         37,201         37,201
   Investment securities available for sale              53,203         53,203         49,137         49,137
   Investment securities held to maturity                 2,304          2,275          7,302          7,371
   Mortgage-backed securities available for sale         15,540         15,540         21,029         21,029
   Mortgage-backed securities held to maturity           13,941         14,030         22,913         23,333
   Loans, net and mortgage loans held for sale        1,048,768      1,035,526        960,670        968,762
   Accrued interest receivable                            6,267          6,267          5,549          5,549
   Stock in FHLB of Boston                               20,311         20,311         17,802         17,802

Financial liabilities:
   Deposit accounts                                     770,049        770,686        707,144        711,063
   FHLB advances and other borrowings                   387,555        384,631        337,500        341,415
   Advance payments by borrowers for taxes
      and insurance                                       3,298          3,298          3,405          3,405
</TABLE>


                                                                     (Continued)

                                       63
<PAGE>   59
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


(16)   BUSINESS SEGMENTS (DOLLARS IN THOUSANDS)

       The Company's wholly-owned bank subsidiaries, BFS and BNB (collectively
       "the Banks"), have been identified as reportable operating segments in
       accordance with the provisions of SFAS No. 131, Disclosures About
       Segments of an Enterprise and Related Information. BF Funding a
       wholly-owned subsidiary of the Company and various subsidiaries of the
       Banks, did not meet the quantitative thresholds for determining
       reportable segments. The Banks provide general banking services to their
       customers, including deposit accounts, residential, commercial, consumer
       and business loans. Each Bank also invests in mortgage-backed securities
       and other financial instruments. In addition to its own operations, the
       Company provides managerial expertise and other professional services.
       The results of the Company and BF Funding comprise the "Other" category.

       The Company evaluates performance and allocates resources based on the
       Banks' net income, net interest margin, return on average assets and
       return on average equity. The Banks follow generally accepted accounting
       principles as described in the summary of significant accounting
       policies. The Company and Banks have intercompany expense and tax
       allocation agreements. These inter-company expenditures are allocated at
       cost. Asset sales between the Banks were accounted for at current market
       prices at the time of sale and approximated cost.

       Each Bank is managed separately with its own president, who reports
       directly to the respective Boards of Directors of each Bank and the Chief
       Executive Officer of the Company and its Board of Directors.

       The following table sets forth certain information about and the
       reconciliation of reported net income for each of the reportable
       segments. The table includes information of BNB from the close of
       business of February 7, 1997, the date of its acquisition by the Company,
       through December 31, 1999.

<TABLE>
<CAPTION>
                                                                         TOTAL
                                                                       REPORTABLE                             CONSOLIDATED
                                                   BFS         BNB      SEGMENTS     OTHER    ELIMINATIONS       TOTALS
                                                   ---         ---      --------     -----    ------------       ------
<S>                                            <C>           <C>       <C>           <C>      <C>             <C>
At or for the year ended December 31, 1999:

           Interest income                     $    71,583     8,679       80,262       971        (497)          80,736
           Interest expense                         45,478     2,192       47,670        35        (497)          47,208
           Provision for loan losses                 1,506       120        1,626       --          --             1,626
           Non-interest income                       6,183       923        7,106       (23)       (172)           6,911
           Non-interest expense                     20,505     4,442       24,947       525        (172)          25,300
           Income tax expense                        3,729     1,046        4,775       170         --             4,945
                                               -----------   -------    ---------    ------     -------        ---------
           Net income                          $     6,548     1,802        8,350       218         --             8,568
                                               ===========   =======    =========    ======     =======        =========

           Total assets                        $ 1,112,607   139,287    1,251,894    90,574     (88,815)       1,253,653
                                               ===========   =======    =========    ======     =======        =========


       Net interest margin                           2.62%     5.30%          n.m       n.m          n.m           2.97%
       Return on average assets                       .63%     1.32%          n.m       n.m          n.m            .72%
       Return on average equity                     11.27%    14.72%          n.m       n.m          n.m          10.00%
</TABLE>


                                                                     (Continued)

                                       64
<PAGE>   60
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


At or for the year ended December 31, 1998:

<TABLE>
<S>                                             <C>            <C>            <C>           <C>           <C>            <C>
    Interest income                             $  65,411          8,429         73,840         1,452          (517)        74,775
    Interest expense                               41,069          1,912         42,981            93          (517)        42,557
    Provision for loan losses                       1,542            100          1,642          --            --            1,642
    Non-interest income                             5,579            704          6,283            10          (165)         6,128
    Non-interest expense                           19,393          4,234         23,627           470          (165)        23,932
    Income tax expense                              3,611          1,169          4,780           371          --            5,151
                                                ---------      ---------      ---------     ---------     ---------      ---------
    Net income                                  $   5,375          1,718          7,093           528          --            7,621
                                                =========      =========      =========     =========     =========      =========

    Total assets                                $ 988,747        137,209      1,125,956        87,464       (74,297)     1,139,123
                                                =========      =========      =========     =========     =========      =========

Net interest margin                                  2.66%          5.14%           n.m           n.m           n.m           3.17%
Return on average assets                             0.59%          1.36%           n.m           n.m           n.m           0.72%
Return on average equity                            10.30%         13.90            n.m           n.m           n.m           9.02%

At or for the year ended December 31, 1997:

    Interest income                             $  59,282          7,436         66,718         2,017          (696)        68,037
    Interest expense                               35,531          1,623         37,154           671          (696)        37,129
    Provision for loan losses                       1,651             45          1,696          --            --            1,696
    Non-interest income                             4,296            645          4,941            45          (180)         4,806
    Non-interest expense                           17,662          3,546         21,208           430          (180)        21,458
    Income tax expense                              4,104          1,049          5,153           352          --
                                                ---------      ---------      ---------     ---------     ---------      ---------
                                                                                                                             5,505
    Net income                                  $   4,630          1,818          6,448           607          --
                                                =========      =========      =========     =========     =========      =========
                                                                                                                             7,055

    Total assets                                $ 832,133        123,165        955,298        92,559       (73,177)       974,680
                                                =========      =========      =========     =========     =========      =========

Net interest margin                                  2.92%          5.12%          n.m.          n.m.          n.m.           3.42%
Return on average assets                             0.65%          1.06%          n.m.          n.m.          n.m.           0.75%
Return on average equity                            10.00%          7.43%          n.m.          n.m.          n.m.           8.21%
</TABLE>

       n.m. = not meaningful


                                                                     (Continued)

                                       65
<PAGE>   61
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


(17)   ACQUISITION

       On December 7, 1999 the Company acquired Diversified Ventures, Inc,
       d/b/a/ Forward Financial ("Forward") in a 100% cash transaction. Forward
       is located in Northborough, MA. As part of the transaction, the Company
       acquired Ellsmere Insurance Agency, Inc., a Massachusetts licensed
       insurance agency with limited operations. The purchase price was $38.3
       million and was accounted for using the purchase method of accounting.
       The results of operations include the effect of the purchase from the
       date of acquisition to year-end. In connection with the acquisition the
       value of the assets acquired and liabilities assumed were as follows:

<TABLE>
<CAPTION>
                                                                    DECEMBER 7, 1999
                                                                    ----------------
                                                                     (in thousands)
<S>                                                                 <C>
Assets acquired:
   Cash                                                                  $ 9,687
   Loans                                                                  11,345
   Accounts receivable                                                     1,100
   Premises and equipment                                                    309
   Other real estate owned                                                   194
   Other assets                                                              256
                                                                         -------

        Total assets acquired                                             22,891
                                                                         -------

Liabilities assumed:
   Accrued expenses and other liabilities                                  1,627
                                                                         -------

        Total liabilities assumed                                          1,627
                                                                         -------

   Assets in excess of liabilities                                        21,264
   Cash paid to Forward owner                                             38,296
                                                                         -------

        Goodwill                                                         $17,032
                                                                         =======
</TABLE>

       The following condensed consolidated pro-forma results of the Company
       were prepared as if the acquisition had taken place on January 1, 1998.
       The pro-forma results are not necessarily indicative of the actual
       results of operations had the Company's acquisition of Forward actually
       occurred on January 1 of the respective year.

<TABLE>
<CAPTION>
                                                             (unaudited)
                                                       YEAR ENDED DECEMBER 31,
                                                       -----------------------
                                                       1999               1998
                                                       ----               ----
                                                            (in thousands)
<S>                                                  <C>                <C>
Net interest and dividend income                     $ 95,318           $ 88,865
Net income                                              6,988              6,030
Basic earnings per share                                 1.45               1.19
Diluted earnings per share                               1.40               1.13
</TABLE>


                                                                     (Continued)

                                       66
<PAGE>   62
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


(18)   PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (IN THOUSANDS)

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

<TABLE>
<CAPTION>
                                ASSETS                            1999      1998
                                                                  ----      ----
<S>                                                             <C>       <C>
Cash and interest bearing deposit in subsidiary bank            $    27     6,716
Certificates of deposit                                              71        74
                                                                -------   -------

              Total cash and cash equivalents                        98     6,790
                                                                -------   -------

Mortgage-backed securities available for sale (amortized cost
   of $10,913 at 1998)                                             --      10,983
Investment securities available for sale (amortized cost of
   $2,035 at 1999 and 1998)                                       1,649     2,032
Investment in subsidiaries, at equity                            87,090    64,423
Accrued interest receivable                                        --          63
Other assets                                                         13        15
                                                                -------   -------

              Total assets                                      $88,850    84,306
                                                                =======   =======

                 LIABILITIES AND STOCKHOLDERS' EQUITY

Borrowings                                                      $ 3,055      --
Accrued expenses and other liabilities                               91     2,512
                                                                -------   -------

              Total liabilities                                   3,146     2,512
                                                                -------   -------

Total stockholders' equity                                       85,704    81,794
                                                                -------   -------

              Total liabilities and stockholders' equity        $88,850    84,306
                                                                =======   =======
</TABLE>


                                                                     (Continued)

                                       67
<PAGE>   63
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


<TABLE>
<CAPTION>
                STATEMENTS OF INCOME                  1999     1998     1997
                                                      ----     ----     ----
<S>                                                  <C>      <C>      <C>
Interest income                                      $  750    1,186    1,684
Interest expense                                         34       93      671
                                                     ------   ------   ------

                Net interest income                     716    1,093    1,013

Non-interest income                                      43       13       45
Non-interest expense                                    561      469      428
                                                     ------   ------   ------

                Income before income taxes              198      637      630

Income tax expense                                       90      261      226
                                                     ------   ------   ------

                Income before equity in net income
                    of subsidiaries                     108      376      404

Equity in net income of subsidiaries                  8,460    7,245    6,651
                                                     ------   ------   ------

                Net income                           $8,568    7,621    7,055
                                                     ======   ======   ======
</TABLE>

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


<TABLE>
<CAPTION>
                STATEMENTS OF CASH FLOWS                 1999       1998       1997
                                                         ----       ----       ----
<S>                                                    <C>        <C>        <C>
Net cash flows from operating activities:
  Net income                                           $ 8,568      7,621      7,055
  Adjustments to reconcile net income to net cash
     (used in) provided by operating activities:
        Equity in undistributed earnings of
           subsidiaries                                 (8,460)    (7,245)    (6,651)
        Amortization and accretion, net                     88         81         17
        Appreciation in fair value of shares charged
           to expense for compensation plans               800      1,135        821
        Earned SIP shares                                  350        593      1,009
        Reduction in unallocated ESOP shares               755        756        755
        Loss on sale of investment securities               28       --         --
        Decrease in accrued interest receivable             63         41         21
        Decrease (increase) in other assets                  2      1,283     (1,098)
        (Decrease) increase in accrued expenses
           and other liabilities                        (2,421)     2,505        175
                                                       -------    -------    -------
                Net cash (used in) provided by
                    operating activities                  (227)     6,770      2,104
                                                       -------    -------    -------
</TABLE>


                                                                     (Continued)

                                       68
<PAGE>   64
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999


<TABLE>
<CAPTION>
            STATEMENTS OF CASH FLOWS, CONTINUED                         1999        1998        1997
                                                                        ----        ----        ----
<S>                                                                  <C>         <C>         <C>
Cash flow from investing activities:
    Purchase of BNB                                                  $   --          --       (22,000)
    Proceeds from sale of mortgage-backed
       securities available for sale                                    7,354        --         1,084
    Principal repayments on mortgage-backed
       securities available for sale                                    3,444       8,012       3,807
    Purchase of investment securities available
       for sale                                                          --        (2,035)       --
    Change in investment in subsidiaries                              (15,552)      4,340      22,276
                                                                     --------    --------    --------
                  Net cash used in investing
                      activities                                       (4,754)     10,317       5,167
                                                                     --------    --------    --------

Cash flow from financing activities:
    Proceeds from securities sold under
       agreement to purchase                                             --          --         7,140
    Repayments of securities sold under
       agreement to purchase                                             --        (7,140)     (3,500)
    Proceeds from other borrowed money                                  3,055        --          --
    Common stock repurchases                                           (2,492)     (7,998)    (13,407)
    Cash dividends paid                                                (2,343)     (2,005)     (1,541)
    Stock options exercised                                                69          16
                                                                     --------    --------    --------
                  Net cash provided (used) from
                      financing activities                             (1,711)    (17,127)    (11,308)
                                                                     --------    --------    --------

                  Net decrease in cash and cash
                      equivalents                                      (6,692)        (40)     (4,037)

Cash and cash equivalents at beginning of year                          6,790       6,830      10,867
                                                                     --------    --------    --------

Cash and cash equivalents at end of year                             $     98       6,790       6,830
                                                                     ========    ========    ========

Supplemental cash flow information:
   Cash paid during the year for:
       Interest                                                      $     23          93         662
       Income taxes                                                     2,444         296         268
</TABLE>


                                                                     (Continued)

                                       69
<PAGE>   65
                    BOSTONFED BANCORP. INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                December 31, 1999



(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:

<TABLE>
<CAPTION>
                                                 1999 QUARTERS                                  1998 QUARTERS
                                 ------------------------------------------      ------------------------------------------
                                 FOURTH       THIRD       SECOND      FIRST       FOURTH      THIRD       SECOND      FIRST
                                 ------       -----       ------      -----       ------      -----       ------      -----
<S>                              <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Interest and dividend income     $20,938      20,435      19,832      19,531      19,227      19,054      18,293      18,201

Interest expense                  12,386      11,964      11,495      11,363      11,101      11,057      10,402       9,997
                                 -------     -------     -------     -------     -------     -------     -------     -------

Net interest income                8,552       8,471       8,337       8,168       8,126       7,997       7,891       8,204
                                 -------     -------     -------     -------     -------     -------     -------     -------

Provision for loan losses            376         390         430         430         455         442         342         403

Non-interest income                1,975       1,692       1,730       1,547       1,632       1,506       1,586       1,404

Non-interest expense               6,738       6,257       6,295       6,043       5,997       5,862       6,093       5,980
                                 -------     -------     -------     -------     -------     -------     -------     -------

Income  before income taxes        3,413       3,516       3,342       3,242       3,306       3,199       3,042       3,225

Income tax expense                 1,138       1,254       1,315       1,238       1,295       1,281       1,239       1,336
                                 -------     -------     -------     -------     -------     -------     -------     -------

Net income                       $ 2,275       2,262       2,027       2,004       2,011       1,918       1,803       1,889
                                 =======     =======     =======     =======     =======     =======     =======     =======

Basic earnings per share         $  0.47        0.47        0.42        0.41        0.41        0.38        0.35        0.37
                                 =======     =======     =======     =======     =======     =======     =======     =======

Diluted earnings per share       $  0.46        0.45        0.40        0.40        0.39        0.36        0.33        0.35
                                 =======     =======     =======     =======     =======     =======     =======     =======
</TABLE>


                                       70
<PAGE>   66
ANNUAL MEETING

     The annual meeting of stockholders will be held on Wednesday, April 26,
2000, at 2:00 p.m. The meeting will take place at the Renaissance Bedford
Hotel, 44 Middlesex Turnpike, Bedford, 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 Globe and
as "BstnfdBcp" in the Wall Street Journal.

COMMON STOCK INFORMATION

     Initial Public Offering Price $10.00 per share.

COMMON STOCK PRICE AND DIVIDENDS PAID (UNAUDITED)

<TABLE>
                                 1998                               1999
By Quarter          1       2      3          4         1        2        3        4
Stock Price        -------------------------------  -------------------------------------
-----------------------------------------------------------------------------------------
<S>                 <C>  <C>      <C>      <C>      <C>       <C>      <C>      <C>
  High............. 23%  $25 1/8  $24      $18 7/8  $19       $18 3/4  $18 1/2  $17 5/8
  Low.............. 20    22 3/8   15 3/4   13 1/2   17 5/16   16 1/6   15       13 13/15
Dividend Paid...... 07    10       10       10       10        12       12       12
</TABLE>

     As of December 31, 1999, the Company had 4,973,081 shares outstanding and
approximately 600 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 to the Securities and Exchange
Commission on Form 10-K may be obtained without charge upon written request to
BostonFed Bancorp, Inc., Investor Relations, 17 New England Executive Park,
Burlington, MA 01803.




TRANSFER AGENT

EquiServe                               EquiServe
Mail Stop: 45-02-62                     Mail Stop: 45-02-62
P.O. Box 8040                           150 Royall Street
Boston, MA 02266-8040                   Canton, MA 02266-8040
Shareholder Inquiries: (781) 575-3170

INDEPENDENT AUDITOR

KPMG LLP
99 High Street
Boston, MA 02110

REGULATORY COUNSEL                      LOCAL COUNSEL

Muldoon, Murphy & Faucette              Goodwin, Procter, & Hoar LLP
5101 Wisconsin Avenue NW                Exchange Place
Washington, DC 20016                    Boston, MA 02109


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