<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

                   Annual report pursuant to Section 13 of the
                         Securities Exchange Act of 1934

                   For the fiscal year ended December 31, 1996

                          Commission File No.: 1-13936

                             BOSTONFED BANCORP, INC.
             (exact name of registrant as specified in its charter)

             DELAWARE                                       52-1940834
   (State or other jurisdiction                   (IRS Employer Identification)
 of incorporation or organization)


         17 New England Executive Park, Burlington, Massachusetts 01803
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (617) 273-0300
           Securities registered pursuant to Section 12(b) of the Act:
                     Common Stock par value $0.01 per share
                                (Title of class)
        Securities registered pursuant to Section 12(g) of the Act: None

                           The American Stock Exchange
                     (Name of exchange on which registered)

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

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

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant, i.e., persons other than directors and executive officers of the
registrant  is $83.2 million and is based upon the last sales price as quoted on
the American Stock Exchange for March 7, 1997.

     The  number of shares of Common  Stock  outstanding  as of March 7, 1997 is
5,962,502.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Annual Report to  Stockholders  for the year ended December
31, 1996 are incorporated by reference into Part II of this Form 10-K.

     Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K. 53296

<PAGE>   2

                                      INDEX

PART I                                                                     PAGE
                                                                           ----
   Item 1.     Business...................................................   1

   Item 2.     Properties.................................................  39

   Item 3.     Legal Proceedings..........................................  39

   Item 4.     Submission of Matters to a Vote Security Holders...........  40

PART II

   Item 5.     Market for Registrant's Common Equity and Related
               Stockholders Matters.......................................  40

   Item 6.     Selected Financial Data....................................  40

   Item 7.     Management's Discussion and Analysis of Financial
               Condition and Results of Operations........................  40

   Item 8.     Financial Statements and Supplementary Data ...............  40

   Item 9.     Changes in and Disagreements With Accountants on
                     Accounting and Financial Disclosure..................  40

PART III

   Item 10.    Directors and Executive Officers of the Registrant.........  41

   Item 11.    Executive Compensation.....................................  41

   Item 12.    Security Ownership of Certain Beneficial Owners
               and Management.............................................  41

   Item 13.    Certain Relationships and Related Transactions.............  41

PART IV

   Item 14.    Exhibits, Financial Statement Schedules and
                     Reports on Form 8-K..................................  41

SIGNATURES           .....................................................  43

<PAGE>   3

                                     PART I

Item 1.  Business.

General

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

     The Company's  business has been conducted  primarily through its ownership
of  the  Bank  which  operates  its  administrative  branch  office  located  in
Burlington,  Massachusetts  and  its  seven  other  branch  offices  located  in
Arlington,  Bedford, Billerica, Boston, Lexington, Peabody and Wellesley, all of
which are located in the greater Boston  metropolitan area. As the result of its
acquisition  on February 7, 1997, of Broadway  Capital Corp.  and its commercial
bank,  Broadway National Bank,  ("Broadway National Bank") the Company added two
banking  offices  (Chelsea and Revere) to its  franchise  in the greater  Boston
metropolitan  area. On February 7, 1997, the Company acquired  Broadway National
Bank, a nationally  chartered  commercial  bank. As a result of the acquisition,
the Company  became a multi-bank  holding  company  subject to regulation by the
Federal  Reserve Bank ("FRB").  Prior to its  acquisition  of Broadway  National
Bank, the Company was a savings and loan holding company regulated by the Office
of  Thrift  Supervision  ("OTS")  and,  as a  result,  was  not  subject  to any
significant  restrictions on the types of business  activities in which it could
engage.  As  a  bank  holding  company,   the  Company  is  subject  to  certain
restrictions and requirements  imposed by the FRB on the activities in which the
Company  may  engage  and the  assets  in which  the  Company  may  invest.  See
"Regulation and Supervision - Holding Company Regulation." Since the acquisition
was consummated after December 31, 1996, the financial statements of the Company
and the following  discussion  regarding the Company's  financial  condition and
results of operations at and for the years ended  December 31, 1996 and 1995, do
not include information and data related to Broadway National Bank.

     The  Company's  principal  business has been and continues to be attracting
retail  deposits  from the general  public in the areas  surrounding  its branch
offices  and  investing  those  deposits,  together  with funds  generated  from
operations and borrowings, primarily in one- to four-family residential mortgage
loans.  To a lesser  extent,  the  Company  invests  in  multi-family  mortgage,
commercial real estate,  construction  and land and consumer loans.  The Company
originates  loans for  investment  and loans for sale in the  secondary  market,
generally  retaining  the servicing  rights for loans sold.  Loan sales are made
from loans held in the Company's portfolio  designated as being held for sale or
originated  for sale  during the  period.  The  Company's  revenues  are derived
principally  from  interest  on its  mortgage  loans,  and to a  lesser  extent,
interest and dividends on its investment and  mortgage-backed  securities,  fees
and loan servicing income.  The Company's primary sources of funds are deposits,
principal and interest payments on loans and  mortgage-backed  securities,  FHLB
advances, repurchase agreements and proceeds from the sale of loans.

Market Area and Competition

     The Company has been,  and intends to continue to be, a  community-oriented
financial  institution  offering a variety of financial products and services to
meet the needs of the communities it serves.  The Company currently operates out
of its main  office  located in  Burlington  and its branch  offices  located in
Arlington,  Bedford, Billerica, Boston, Lexington, Peabody and Wellesley, all of
which are located in the

                                        1

<PAGE>   4

greater Boston metropolitan area. The Company's deposit gathering is
concentrated in the communities surrounding its offices while its lending base
extends throughout eastern Massachusetts and, to a lesser extent, other areas
of New England.

    The Company faces significant competition both in generating loans and in
attracting deposits. The Boston metropolitan area is a highly competitive
market. The Company's share of deposits and loan originations in eastern
Massachusetts amounts to less than one percent. The Company faces direct
competition from a significant number of financial institutions operating in
its market area, many with a state-wide or regional presence and, in some
cases, a national presence. Many of these financial institutions are
significantly larger and have greater financial resources than the Company. The
Company's competition for loans comes principally from commercial banks,
savings banks, mortgage banking companies, credit unions and insurance
companies. Its most direct competition for deposits has historically come from
savings and commercial banks. In addition, the Company faces increasing
competition for deposits from non-bank institutions such as brokerage firms and
insurance companies in such instruments as short-term money market funds,
corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions.

Lending Activities

    Loan Portfolio Composition. The Company's loan portfolio consists primarily
of first mortgage loans secured by one- to four-family residences. At December
31, 1996, the Company had total loans outstanding, including mortgage loans
held for sale, of $690.7 million, of which $607.8 million were one- to
four-family, residential mortgage loans, or 88.0% of the Company's total loans.
At such date, the remainder of the loan portfolio consisted of: $21.4 million
of multi-family residential loans, or 3.1% of total loans; $28.1 million of
commercial real estate loans, or 4.1% of total loans; $12.5 million of
construction and land loans, or 1.8% of total loans; and other loans, primarily
home equity lines of credit, of $20.9 million or 3.0% of total loans. The
Company had $4.0 million of mortgage loans held for sale at December 31, 1996
consisting of one- to four-family fixed-rate mortgage loans. At that same date,
77.9% of the Company's total mortgage loans had adjustable interest rates,
most of which are indexed to the one-year Constant Maturity Treasury ("CMT")
Index.

     The types of loans that the Company may originate are subject to federal
and state laws and regulations. Interest rates charged by the Company on loans
are affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies of
the federal government, including the Federal Reserve Board, and legislative tax
policies.

                                       2

<PAGE>   5

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

<TABLE>
<CAPTION>


                                                                    At December 31,
                                   ----------------------------------------------------------------------------------
                                              1996                       1995                        1994
                                   --------------------------  -------------------------  ---------------------------
                                                   Percent                     Percent                     Percent
                                      Amount       of Total       Amount      of Total       Amount       of Total
                                   ------------- ------------  ------------- -----------  ------------- -------------
                                                                                            (Dollars in thousands)
<S>                                    <C>          <C>            <C>          <C>           <C>            <C>
Mortgage Loans:
  Residential:
    One- to four-family(1).......      $607,792     88.00%         $447,033     85.44%        $427,716       84.77%
    Multi-family.................        21,381       3.10           27,986       5.35          29,212         5.79
  Commercial real estate.........        28,136       4.07           26,412       5.05          28,714         5.69
  Construction and land..........        12,532       1.81            3,435        .66           3,450         0.68
Other loans(2)...................        20,850       3.02           18,343       3.50          15,504         3.07
                                       --------     ------         --------     ------        --------       ------
      Total loans................       690,691     100.00%         523,209     100.00%         504,596      100.00%
                                                    ======                      ======                       ======
Less:
  Allowance for loan losses......       (4,400)                     (4,275)                    (3,700)
  Construction loans in
    process......................       (6,936)                       (805)                    (1,078)
  Net unearned discount on
    loans purchased..............         (163)                       (262)                      (525)
  Deferred loan origination
    (fees) costs.................         1,448                         560                         96
                                       --------                    --------                   --------
    Loans, net and mortgage
       loans held for sale.......      $680,640                    $518,427                   $499,389
                                       ========                    ========                   ========
</TABLE>

<TABLE>
<CAPTION>

                                                     At December 31,
                                   -----------------------------------------------------
                                              1993                       1992
                                   --------------------------  -------------------------
                                                   Percent                      Percent
                                      Amount       of Total        Amount      of Total
                                   ------------- ------------  ------------- -----------
<S>                                      <C>           <C>           <C>          <C>
Mortgage Loans:
  Residential:
    One- to four-family(1).......        $340,584       81.57%       $315,894      78.46%
    Multi-family.................          30,418        7.28          32,150       7.99
  Commercial real estate.........          24,548        5.88          30,734       7.63
  Construction and land..........           4,704        1.13           4,922       1.22
Other loans(2)...................          17,276        4.14          18,934       4.70
                                          -------      ------        --------     ------
      Total loans................         417,530      100.00%        402,634     100.00%
                                                       ======                     ======
Less:
  Allowance for loan losses......          (4,450)                     (4,381)
  Construction loans in
    process......................          (1,175)                       (149)
  Net unearned discount on
    loans purchased..............            (489)                       (742)
  Deferred loan origination
    (fees) costs.................             150                        (858)
                                         --------                    --------
    Loans, net and mortgage
       loans held for sale.......        $411,566                    $396,504
                                         ========                    ========

</TABLE>

----------
(1)  Includes mortgage loans held for sale of $4.0 million, $8.9 million,
     $316,000, $25.9 million and $29.7 million at December 31, 1996, 1995, 1994,
     1993 and 1992, respectively.

(2)  These loans primarily consist of home equity and improvement lines of
     credit secured by mostly second mortgages which amounted to $17.4 million
     $14.9 million, $12.8 million, $12.0 million and $13.9 million at December
     31,      1996, 1995, 1994, 1993 and 1992, respectively.

                                        3

<PAGE>   6

     Loan Maturity. The following table shows the remaining contractual maturity
of the Company's loans at December 31, 1996. There were $4.0 million of mortgage
loans held for sale at December 31, 1996.  The table does not include the effect
of future principal prepayments. Principal prepayments on total loans were $95.4
million,  $57.8 million and $44.3 million for the years ended December 31, 1996,
1995 and 1994, respectively.

<TABLE>
<CAPTION>

                                                                                   At December 31, 1996
                                                    ------------------------------------------------------------------------------
                                                       One- to
                                                        Four-         Multi-     Commercial    Construction      Other      Total
                                                       Family         Family     Real Estate     and Land        Loans      Loans
                                                    -------------  -----------  ------------- -------------  -----------  --------
                                                                                      (In thousands)
<S>                                                   <C>            <C>         <C>              <C>         <C>          <C>
Amounts due:
 One year or less.................................    $    697       $  1,534    $     61         $11,408     $    578     $14,278
                                                      --------       --------    --------         -------     --------     -------
 After one year:
    More than one year to three years.............       4,869             41       2,697           1,124          378       9,109
    More than three years to five years...........      12,509            183         117              --          323      13,132
    More than five years to 10 years..............      58,126          6,601      14,029              --       13,570      92,326
    More than 10 years to 20 years................      71,184          3,839       5,980              --        2,289      83,292
    More than 20 years............................     460,407          9,183       5,252              --        3,712     478,554
                                                       -------          -----      ------         -------       ------     -------

    Total due after one year......................     607,095         19,847      28,075           1,124       20,272     676,413
                                                       -------         ------      ------          ------       ------     -------

    Total amount due..............................    $607,792        $21,381     $28,136         $12,532      $20,850     690,691
                                                      ========        =======     =======         =======      =======
       Less:
           Allowance for loan losses..............                                                                          (4,400)
           Construction loans in process..........                                                                          (6,936)
           Net unearned discount on loans
               purchased..........................                                                                            (163)
           Deferred loan origination costs........                                                                           1,448
                                                                                                                          ---------
    Loans, net, and mortgage loans held for sale..                                                                        $680,640
    Mortgage loans held for sale..................                                                                          (3,970)
                                                                                                                         ----------

    Loans, net....................................                                                                        $676,670
                                                                                                                          ========
</TABLE>
                                        4
<PAGE>   7

     The  following  table sets forth at December 31, 1996 the dollar  amount of
loans  contractually  due after  December 31, 1997,  and whether such loans have
fixed interest rates or adjustable interest rates.


                                            Due After December 31, 1997
                                     --------------------------------------
                                       Fixed       Adjustable       Total
                                     -----------  -------------    --------
                                                  (In thousands)
Mortgage loans:

   Residential:
     One- to four-family............. $142,377       $464,718       $607,095
     Multi-family....................    1,574         18,273         19,847

   Commercial real estate............    1,891         26,184         28,075

   Construction and land.............       65          1,059          1,124

Other loans..........................    1,599         18,673         20,272
                                      --------       --------       --------
       Total loans .................. $147,506       $528,907       $676,413
                                      ========       ========       ========

     Origination,  Sale, Servicing and Purchase of Loans. The Company's mortgage
lending  activities are conducted  primarily by its commissioned loan personnel,
through  its eight  branch  offices,  and  through  wholesale  brokers and other
financial  institutions  approved by the Company.  All loans  originated  by the
Company,  either through internal sources or through  wholesale brokers or other
correspondent financial institutions are underwritten by the Company pursuant to
the   Company's   policies  and   procedures.   The  Company   originates   both
adjustable-rate   and  fixed-rate  mortgage  loans.  The  Company's  ability  to
originate loans is dependent upon the relative customer demand for fixed-rate or
adjustable-rate  loans,  which is affected by the  current and  expected  future
level of interest  rates.  While the Company has in the past, from time to time,
sold  adjustable-rate  one-to  four-family  loans,  it is currently  the general
policy  of the  Company  to sell  substantially  all of the one- to  four-family
fixed-rate  mortgage loans with maturities over ten years that it originates and
to retain  substantially all  adjustable-rate and loans with maturities of under
ten years, one- to four-family  mortgage loans which it originates.  The Company
retains the  servicing of loans sold in most cases.  At December  31, 1996,  the
Company serviced $540.4 million of loans for others. The Company recognizes,  at
the time of sale,  the cash gain or loss on the sale of the  loans  based on the
difference  between the net cash proceeds received and the carrying value of the
loans sold. See "- Lending  Activities - Loan  Servicing." At December 31, 1996,
the  Company  had $4.0  million of mortgage  loans held for sale  consisting  of
fixed-rate one- to four-family loans. The Company has, in the past, from time to
time, purchased loans or participations of loans,  primarily one- to four-family
mortgage  loans,  and had $9.0 million of purchased  loans at December 31, 1996.
With  the  exception  of  purchases  of  loans  from   correspondent   financial
institutions,  which are  underwritten  pursuant to the  Company's  policies and
closed in the name of the  correspondent  financial  institution but immediately
purchased  by the  Company  for its  mortgage  banking  activities,  the Company
currently does not purchase loans or participations in loans.

     The Company engages in certain hedging activities to facilitate the sale of
its originated and purchased  mortgage loans in an attempt to minimize  interest
rate  risk  from the time the loan  commitments  are made to the time  until the
loans are  securitized  or packaged  and sold.  The Company  currently  utilizes
forward loan sale  commitment  contracts  with FNMA,  FHLMC,  and other approved
investors as its method

                                        5

<PAGE>   8

of hedging loan sales in an attempt to protect the Company from  fluctuations in
market  interest  rates.  Generally,  the Company  will enter into  contracts to
deliver  loans or agency  mortgage-backed  securities  to purchasers at a future
date for a specified price while the Company simultaneously processes and closes
loans,  thereby protecting the price of currently  processed loans from interest
rate  fluctuations that may occur from the time the interest rate on the loan is
fixed to the time of sale.  As loans are  closed  and  funded,  they may also be
pooled to create  mortgage-backed  securities which will be delivered to fulfill
the forward  commitment  contracts.  For the year ended  December 31, 1996,  the
Company had $668,000 in net gains attributable to the sale of loans. These gains
were  primarily  the  result  of  implementation  of FASB 122,  "Accounting  for
Mortgage Servicing Rights."

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

                                               For the Year Ended December 31,
                                           ------------------------------------
                                              1996         1995        1994
                                           ---------    ---------    ---------
                                                      (In thousands)
Net loans:
Beginning balance........................    $509,496     $499,073     $411,566
    Loans originated:
       One- to four-family...............     362,534      146,303      246,272
       Multi-family......................       4,204          440        1,068
       Commercial real estate............       5,942          906        2,659
       Construction and land.............      11,638        5,728        3,375
       Other(1)..........................      16,124       11,356        8,632
                                            ---------    ---------    ---------
       Total loans originated............     400,442      164,733      262,006
    Loans purchased(2)...................      46,208        6,356        1,877
                                            ---------    ---------    ---------
           Total.........................     956,146      670,162      675,449
Less:
    Principal repayments and
       other, net........................   (122,346)     (77,937)     (71,220)
    Loan charge-offs, net................     (1,169)      (3,039)      (1,033)
    Sale of mortgage loans...............   (148,025)     (69,426)    (103,097)
    Transfer of mortgage loans to REO....     (3,966)      (1,333)        (710)
                                            ---------    ---------    ---------
Loans, net and mortgage loans held
    for sale.............................     680,640      518,427      499,389
    Mortgage loans held for sale.........     (3,970)      (8,931)        (316)
                                            ---------    ---------    ---------
Loans, net ..............................    $676,670     $509,496     $499,073
                                            =========    =========    =========
----------
(1)  Other  loans  primarily  consist  of one- to  four-family  lines of  credit
     secured by mortgages.  The amounts indicated  primarily include new amounts
     drawn on such home-equity lines of credit during the periods presented.

(2)  Includes loans purchased from  correspondent  financial  institutions which
     are underwritten  pursuant to the Company's policies and closed in the name
     of the financial  institution but immediately  purchased by the Company for
     its mortgage banking activities.


                                        6
<PAGE>   9

     One- to Four-Family  Mortgage  Lending.  The Company offers both fixed-rate
and  adjustable-rate  mortgage loans secured by one- to  four-family  residences
located in the Company's  primary market area,  with  maturities of up to thirty
years.  Substantially  all of such loans are secured by property  located in the
Company's primary market area. Loan originations are generally obtained from the
Company's commissioned loan representatives, correspondent banking relationships
and wholesale  brokers and their  contacts with the local real estate  industry,
existing or past customers, and members of the local communities.

     At December 31, 1996,  the Company's  total loans  outstanding  were $690.7
million, of which $607.8 million, or 88.0%, were one- to four-family residential
mortgage loans, most of which were primarily owner-occupied  properties.  Of the
one- to four-family  residential  mortgage loans outstanding at that date, 23.5%
were  fixed-rate  loans,  and 76.5% were  adjustable-rate  mortgage  loans.  The
interest rates for the majority of the Company's  adjustable-rate mortgage loans
are indexed to the CMT Index. The Company currently offers  fixed-rate  mortgage
loans with  amortization  periods of five to thirty years. The Company currently
offers a number of  adjustable-rate  mortgage loan programs with interest  rates
which adjust annually with  amortization  schedules of ten to thirty years.  The
Company's  adjustable-rate  mortgage  loans are  originated  with interest rates
which are fixed for an initial period of one, three,  five or seven years and at
the end of such  period  will  adjust  thereafter  either  annually or a greater
period   according  to  their  terms.   The   Company's   one-  to   four-family
adjustable-rate loan products generally reprice based on a margin, currently 275
to 325 basis points,  over the CMT Index for the Treasury security of a maturity
which is comparable to the interest  adjustment period for the loan.  Generally,
all of the  Company's  adjustable-rate  mortgage  loans provide for periodic and
overall caps on the increase or decrease in interest rate at any adjustment date
and  over  the  life of the  loan.  Included  in the  Company's  adjustable-rate
mortgage loan portfolio is a type of adjustable-rate loan which is originated at
an interest rate below the fully-indexed rate and which limits the adjustment of
the interest  rate to 1% annually and 6% over the life of the loan.  The Company
also  offers a  single-family  loan  product  which  has been  popular  with its
customers consisting of a fixed-rate loan up to the conforming  FNMA/FHLMC limit
of $214,000 coupled with a second mortgage  adjustable-rate  loan for the amount
of the loan in excess of the FNMA/FHLMC limit.  After  origination,  the Company
will  typically  sell the  fixed-rate  portion of the loan (to  FNMA/FHLMC)  and
retain  the  adjustable-rate  second  mortgage  portion  of  the  loan  for  its
portfolio.  During 1996, the Company's retained portion of this loan product was
$18.0 million, or 4.4% of total originations.

     The Company generally  originates one- to four-family  residential mortgage
loans in amounts up to 80% of the lower of the  appraised  value or the  selling
price of the property  securing the loan and up to 95% of the appraised value or
selling  price if private  mortgage  insurance is obtained on the portion of the
loan in excess of 75% of the lesser of the  appraised  value or  selling  price.
However, the Company may originate  single-family  owner-occupied mortgage loans
in  amounts  up to 85% of the lesser of the  appraised  value or  selling  price
without private  mortgage  insurance.  Mortgage loans  originated by the Company
generally  include  due-on-sale  clauses  which  provide  the  Company  with the
contractual  right to deem the loan immediately due and payable in the event the
borrower  transfers  ownership of the property  without the  Company's  consent.
Due-on-sale  clauses  are an  important  means  of  adjusting  the  rates on the
Company's  fixed-rate  mortgage  loan  portfolio  and the Company has  generally
exercised its rights under these clauses.

     Multi-Family Mortgage Lending. The Company originates multi-family mortgage
loans  generally  secured by 5 to 120 unit  apartment  buildings  located in the
Company's primary market area. As a result of uncertain market conditions in its
primary market area, the Company currently  originates  multi-family  loans on a
limited and highly  selective basis. In reaching its decision on whether to make
a multi-family loan, the Company considers the value of the underlying  property
as well as the qualifications of the

                                        7

<PAGE>   10

borrower.  Other factors  relating to the property to be considered are: the net
operating income of the mortgaged premises before debt service and depreciation;
the debt  service  ratio  (the ratio of  earnings  before  debt  service to debt
service); and the ratio of loan amount to appraised value. The Company generally
requires a debt  service  ratio of 115% or greater.  Pursuant  to the  Company's
current underwriting  policies, a multi-family mortgage loan may only be made in
an amount  up to 85% of the  appraised  value of the  underlying  property  to a
maximum amount of $4.0 million.  However,  generally loans are not granted which
exceed 80% of the appraised value.  Generally,  all  multi-family  loans made to
corporations,   partnerships  and  other  business   entities  require  personal
guarantees by the principal  borrowers.  On an exception  basis, the Company may
not require a personal guarantee on such loans depending on the creditworthiness
of the borrower and amount of the downpayment.  Subsequent  declines in the real
estate  values  in the  Company's  primary  market  area have  resulted  in some
increase in the loan-to-value ("LTV") ratio on some mortgage loans.

     When evaluating the qualifications of the borrower for a multi-family loan,
the Company considers the financial  resources and income level of the borrower,
the  borrower's  experience  in owning or  managing  similar  property,  and the
Company's  lending  experience  with the borrower.  The  Company's  underwriting
guidelines  require that the borrower be able to demonstrate  strong  management
skills and the ability to maintain the property from current rental income.  The
borrower is required  to present  evidence of the ability to repay the  mortgage
and a history  of making  mortgage  payments  on a timely  basis.  In making its
assessment  of the  creditworthiness  of the  borrower,  the  Company  generally
reviews the financial statements, employment and credit history of the borrower,
as  well  as  other  related  documentation.  The  Company's  multi-family  loan
portfolio at December 31, 1996,  totalled  $21.4 million or 3.1% of total loans.
The Company's largest multi-family loan at December 31, 1996, was a $3.8 million
performing  loan  secured  by a 118 unit  apartment  complex  located in Malden,
Massachusetts.

     Loans  secured by apartment  buildings and other  multi-family  residential
properties  are generally  larger and involve a greater degree of risk than one-
to four-family  residential mortgage loans. Because payments on loans secured by
multi-family   properties  are  often  dependent  on  successful   operation  or
management  of the  properties,  repayment  of such  loans may be  subject  to a
greater  extent to the then  prevailing  conditions in the real estate market or
the economy.  The Company seeks to minimize these risks through its underwriting
policies.

     Commercial  Real Estate  Lending.  The Company  originates  commercial real
estate loans that are secured by properties generally used for business purposes
such as small office  buildings or retail  facilities  located in the  Company's
primary  market  area.  The  Company's  underwriting   procedures  provide  that
commercial  real estate  loans may be made in amounts up to the lesser of 85% of
the appraised value of the property,  or the Company's  current loan limit which
is $4.0 million.  However,  generally  loans are not granted which exceed 80% of
the appraised value.  The Company  currently  originates  commercial real estate
loans with  terms of up to thirty  years  only with  adjustable-rates  which are
indexed to the CMT Index.  The Company's  underwriting  standards and procedures
are similar to those applicable to its multi-family  loans,  whereby the Company
considers the net operating income of the property and the borrower's expertise,
credit history and  profitability.  The Company has generally  required that the
properties  securing  commercial  real estate loans have debt  service  coverage
ratios of at least 115%.  Generally,  all  commercial  real estate loans made to
corporations,   partnerships  and  other  business   entities  require  personal
guarantees by the principal  borrowers.  On an exception  basis, the Company may
not require a personal guarantee on such loans depending on the creditworthiness
of the borrowers  and the amount of the  downpayment.  The Company's  commercial
real estate loan  portfolio at December 31, 1996 was $28.1  million,  or 4.1% of
total loans. The largest commercial real estate loan in the Company's  portfolio
at December 31, 1996 was a  performing  loan which had an  outstanding  carrying
balance  of $2.3  million  and is  secured  by an  office  building  located  in
Watertown, Massachusetts.

                                        8

<PAGE>   11

     Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than one- to four-family  residential  mortgage
loans.  Because  payments on loans secured by commercial real estate  properties
are often  dependent on successful  operation or  management of the  properties,
repayment of such loans may be subject to a great extent to the then  prevailing
conditions  in the real  estate  market or the  economy.  The  Company  seeks to
minimize these risks through its underwriting standards.

     Construction  and  Land  Lending.  The  Company  originates  loans  for the
acquisition and development of property to licensed and experienced  contractors
in its primary market area. The Company's construction loans primarily have been
made  to  finance  the  construction  of  one-  to  four-family,  owner-occupied
residential properties.  While the Company originates loans secured by raw land,
the Company generally does not originate such loans unless the borrower has also
secured  financing  with the Company for the  construction  of structures on the
property.  These loans are primarily  adjustable-rate  loans with  maturities of
less than two years.  Construction  and land  mortgage  loans are  originated in
amounts  up to 75% of the  lesser of the  appraised  value of the  property,  as
improved,  or  sales  price,  unless  such  loan  is for the  construction  of a
residential  property  which cannot exceed an 80% loan to value  ("LTV")  ratio.
Proceeds  of  such  loans  are  dispersed  as  phases  of the  construction  are
completed.  Generally,  if the borrower is a  corporation,  partnership or other
business entity,  personal  guarantees by the principal  borrowers are required.
However,  personal guarantees may not be required on such loans depending on the
creditworthiness  of the borrower and amount of the  downpayment.  The Company's
current loan limit is $4 million.  The Company's  largest  construction and land
loan at December  31, 1996 was a performing  loan with a revolving  $4.5 million
line of credit  with a carrying  balance of  $941,000  and  secured by a 70 unit
residential subdivision in Southborough, Massachusetts. However, at no time will
the loan exceed $4 million At December 31, 1996,  the Company had $12.5  million
of  construction  and land loans which  amounted to 1.8% of the Company's  total
loan portfolio. Working with experienced land developers in the local community,
the Company will continue to expand this area of its lending business.

     Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved,  owner-occupied real
estate.  Risk of loss on a  construction  loan is  dependent  largely  upon  the
accuracy  of the initial  estimate  of the  property's  value at  completion  of
construction or development  compared to the estimated cost (including interest)
of construction.  If the estimate of value proves to be inaccurate,  the Company
may be  confronted  with a  project,  when  completed,  having a value  which is
insufficient to assure full repayment.

     Other Lending. Other loans at December 31, 1996, amounting to $20.9 million
or 3.0% of the  Company's  total loan  portfolio,  consisted  primarily  of home
equity and improvement  loans,  and, to a significantly  lesser extent,  new and
used automobile loans originated by the Company,  personal loans, student loans,
business loans and loans secured by savings  accounts.  Such loans are generally
originated  in the  Company's  primary  market area and generally are secured by
real estate,  personal property,  savings accounts and automobiles.  These loans
are shorter term and generally  contain higher  interest rates than  residential
mortgage loans.

     Substantially  all of  the  Company's  home  equity  lines  of  credit  are
primarily secured by second mortgages on one- to two-family  residences  located
in the Company's primary market area. At December 31, 1996, these loans totalled
$17.4  million,  or 2.5% of the Company's  total loans and 83.3% of other loans.
Generally,  under  the  terms of the  Company's  home-equity  lines  of  credit,
borrowers have the ability to draw on such lines and repay outstanding principal
and  interest  on a monthly  basis on a certain  percentage  of the  outstanding
principal  over a period of up to ten years  and,  thereafter,  the  outstanding
balance drawn on such lines is converted to an  adjustable-rate  loan with terms
of up to ten years. The

                                        9

<PAGE>   12

underwriting  standards  employed  by the  Company  for  these  loans  include a
determination  of  the  applicant's  credit  history  and an  assessment  of the
applicant's  ability to meet existing  obligations  and payments on the proposed
loan and the value of the  collateral  securing the loan.  The  stability of the
applicant's  monthly income may be determined by  verification  of gross monthly
income from primary employment and, additionally,  from any verifiable secondary
income. Creditworthiness of the applicant is of primary consideration.

     Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured  entail  greater risks than one- to four-family  residential  mortgage
loans.  In such  cases,  repossessed  collateral  for a  defaulted  loan may not
provide an adequate source of repayment of the outstanding  loan balance,  since
there is a greater likelihood of damage,  loss or depreciation of the underlying
collateral.  Further,  consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely to
be  adversely  affected by job loss,  divorce,  illness or personal  bankruptcy.
Finally,  the application of various federal and state laws,  including  federal
and state  bankruptcy  and  insolvency  laws,  may limit the amount which can be
recovered on such loans in the event of a default.  At December 31, 1996,  there
were  three  consumer  or  other  loans,  totalling  $14,000,  90  days  or more
delinquent.

     Loan Approval Procedures and Authority.  The Board of Directors establishes
the lending policies and loan approval limits of the Company. In connection with
one- to four-family  mortgage  loans,  the Board of Directors has authorized the
following  persons and committees to approve loans up to the amounts  indicated:
loans in amounts up to $750,000  must be approved by two  designated  members of
the Company's  management;  mortgage  loans in excess of $750,000 and up to $1.0
million  require,  in  addition  to the  foregoing,  the  approval  of the  Loan
Committee and ratification by the Investment Committee;  loans in excess of $1.0
million and up to $1.5 million require, in addition to the foregoing  approvals,
the approval of the  Investment  Committee;  and loans in excess of $1.5 million
require,  in addition to the foregoing  approvals,  the approval of the Board of
Directors.

     In  connection  with  commercial  real  estate  loans,   multi-family   and
construction  (non-owner  occupied) real estate lending,  the Board of Directors
has authorized  the following  persons and committees to approve loans up to the
amounts  indicated:  loans in amounts up to  $750,000  must be  approved  by two
designated members of the Company's management,  one of whom must be a member of
the Loan Committee;  mortgage loans in excess of $750,000 and up to $1.0 million
require, in addition to the foregoing, the approval of the Loan Committee; loans
in excess of $1.0  million and up to $2.0  million  require,  in addition to the
foregoing  approvals,  the approval of the  Investment  Committee;  and loans in
excess of $2.0 million  require,  in addition to the  foregoing  approvals,  the
approval of the Board of Directors. Loans over $500,000 and $1.5 million require
ratification of the Investment Committee and Board of Directors, respectively

     Pursuant  to OTS  regulations,  loans to one  borrower  cannot,  subject to
certain exceptions,  exceed 15% of the Bank's unimpaired capital and surplus. At
December 31, 1996, the loans to one borrower limit was $10.0 million.

     Loan Servicing.  The Company also services mortgage loans for others.  Loan
servicing  includes  collecting  and remitting  loan  payments,  accounting  for
principal and interest,  making  inspections as required of mortgaged  premises,
contacting  delinquent   mortgagors,   supervising   foreclosures  and  property
dispositions in the event of unremedied  defaults,  making certain insurance and
tax payments on behalf of the borrowers and generally  administering  the loans.
The Company has  recognized  gains from excess  servicing,  which is the present
value of any  difference  between the interest  rate charged to the borrower and
the interest rate paid to the purchaser after deducting a normal  servicing fee,
and is recognizable as

                                       10

<PAGE>   13

an adjustment  to the cash gain or loss.  The excess  servicing  gain or loss is
dependent on  prepayment  estimates and discount  rate  assumptions.  All of the
loans  currently being serviced for others are loans which have been sold by the
Company. At December 31, 1996, the Company was servicing $540.4 million of loans
for others.  The gross servicing fee income from loans  originated and purchased
is generally .25% to .38% of the total balance of the loan serviced. The Company
currently  does  not  purchase   servicing  rights  related  to  mortgage  loans
originated by other  institutions.  The Company  recognizes the present value of
the  servicing  income,  net of servicing  expenses,  attributable  to servicing
rights upon sale of the loan.  The Company  amortizes the  capitalized  mortgage
servicing  rights  using a method which  approximates  the level yield method in
proportion  to, and over the period of,  estimated  net  servicing  income.  The
Company reviews prepayment activity on its serviced loans at least semi-annually
and adjusts its capitalized  mortgage  servicing  rights  amortization  schedule
accordingly.  As of December 31, 1996,  the Company had $988,000 of  capitalized
mortgage servicing rights.

Nonperforming and Problem Assets.

     Classified   Assets.   Federal   regulations   and  the   Company's   Asset
Classification  Policy  require  that the  Company  utilize  an  internal  asset
classification  system as a means of  reporting  problem and  potential  problem
assets. The Company has incorporated the OTS internal asset classifications as a
part of its credit monitoring system.  The Company currently  classifies problem
and potential problem assets as  "Substandard,"  "Doubtful" or "Loss" assets. An
asset is considered "Substandard" if it is inadequately protected by the current
net worth and paying  capacity of the obligor or of the collateral  pledged,  if
any.   "Substandard"   assets  include  those  characterized  by  the  "distinct
possibility"  that the  insured  institution  will  sustain  "some  loss" if the
deficiencies are not corrected.  Assets classified as "Doubtful" have all of the
weaknesses   inherent  in  those   classified   "Substandard"   with  the  added
characteristic  that the weaknesses  present make  "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable."  Assets  classified as "Loss" are those considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the  establishment  of a specific loss reserve is not warranted.  Assets
which do not currently  expose the insured  institution  to  sufficient  risk to
warrant  classification  in one of the  aforementioned  categories  but  possess
weaknesses are required to be designated "Special Mention."

     When an insured  institution  classifies  one or more  assets,  or portions
thereof,  as  "Substandard" or "Doubtful," it is required to establish a general
valuation  allowance for loan losses in an amount deemed  prudent by management.
General  valuation   allowances   represent  loss  allowances  which  have  been
established to recognize the inherent risk associated  with lending  activities,
but which,  unlike  specific  allowances,  have not been allocated to particular
problem assets.  When an insured  institution  classifies one or more assets, or
portions  thereof,  as "Loss," it is  required  either to  establish  a specific
allowance  for losses equal to 100% of the amount of the asset so  classified or
to charge off such amount.

     A  savings  institution's  determination  as to the  classification  of its
assets and the amount of its  valuation  allowances  is subject to review by the
OTS which can order the  establishment  of  additional  general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an  interagency  policy  statement on the  allowance  for loan and lease
losses.  The policy statement  provides  guidance for financial  institutions on
both the  responsibilities of management for the assessment and establishment of
adequate  allowances  and  guidance  for  banking  agency  examiners  to  use in
determining the adequacy of general valuation guidelines.  Generally, the policy
statement  recommends that  institutions  have effective systems and controls to
identify,  monitor and address  asset  quality  problems;  that  management  has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
As a result of the declines in local and regional

                                       11

<PAGE>   14

real estate market values and the significant losses experienced by many
financial institutions, there has been a greater level of scrutiny by regulatory
authorities of the loan portfolios of financial institutions undertaken as part
of the examination of institutions by the OTS and the FDIC. While the Company
believes that it has established an adequate allowance for loan losses, there
can be no assurance that regulators, in reviewing the Company's loan portfolio,
will not request the Company to materially increase at that time its allowance
for loan losses, thereby negatively affecting the Company's financial condition
and earnings at that time. Although management believes that, based on
information currently available to it at this time, its allowance for loan
losses is adequate, actual losses are dependent upon future events and, as such,
further additions to the level of allowances for loan losses may become
necessary.

     The Company's Asset Classification Committee reviews and classifies the
Company's assets on a quarterly basis and reports the results of its review to
the Board of Directors. The Company classifies assets in accordance with the
management guidelines described above. At December 31, 1996, the Company had
$7.7 million of loans designated as "Special Mention," $3.8 million of loans
designated as "Substandard," and $2.4 million of loans designated as "Loss."
All loans classified as "Loss" have been charged off for financial statement
purposes. There were no loans classified as "Doubtful." Included in these
amounts was $1.5 million in non-performing loans at December 31, 1996. In the
opinion of management, the remaining special mention and "Substandard" loans of
$10.0 million evidence one or more weaknesses or potential weaknesses and,
depending on the regional economy and other factors, may become non-performing
loans in future periods.

                                       12

<PAGE>   15

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

                                              At December 31, 1996
                                -----------------------------------------------
                                       60-89 Days            90 Days or More
                                -----------------------    --------------------

                                             Principal                Principal
                                 Number       Balance      Number      Balance
                                of Loans      of Loans    of Loans    of Loans
                                ---------    ----------   ---------   ---------
                                              (Dollars in thousands)
One- to four-family..........       15         $1,481        24         $1,463
Multi-family.................        1             60        --             --
Commercial real estate.......       --             --        --             --
Construction and land........       --             --        --             --
Other loans..................        4             56         3             14
                                   ---         ------       ---         ------
Total........................       20         $1,597        27         $1,477
                                   ===         ======       ===         ======
Delinquent loans to loans, net
     and mortgage loans
     held for sale...........                    0.23%                    0.22%


                                              At December 31, 1995
                                -----------------------------------------------
                                       60-89 Days             90 Days or More
                                -----------------------    --------------------

                                             Principal                Principal
                                 Number       Balance      Number      Balance
                                of Loans      of Loans    of Loans    of Loans
                                ---------    ----------   ---------   ---------

One- to four-family..........       11        $   923       23          $1,178
Multi-family.................       --             --        1             720
Commercial real estate.......        1            202        4           2,693
Construction and land........       --             --       --              --
Other loans..................       --             --       --              --
                                   ---         ------      ---          ------
Total........................       12         $1,125       28          $4,591
                                   ===         ======      ===          ======
Delinquent loans to loans, net
     and mortgage loans
     held for sale...........                    0.22%                    0.89%


                                              At December 31, 1994
                                -----------------------------------------------
                                       60-89 Days             90 Days or More
                                -----------------------    --------------------

                                             Principal                Principal
                                 Number       Balance      Number      Balance
                                of Loans      of Loans    of Loans    of Loans
                                ---------    ----------   ---------   ---------
                                             (Dollars in thousands)
One- to four-family..........       16         $1,206        27           $848
Multi-family.................        3            732         3            546
Commercial real estate.......        1          1,232         3          2,126
Construction and land........       --              -         -              -
Other loans..................       --              -         4             51
                                   ---       --------       ---       --------
Total........................       20         $3,170        37         $3,571
                                   ===         ======       ===         ======
Delinquent loans to loans, net
     and  mortgage loans held
     for sale................                    0.63%                    0.72%


                                       13
<PAGE>   16

     Non-Performing  Assets and  Restructured  Loans.  The following  table sets
forth  information  regarding  non-accrual  loans,  restructured  loans and
real estate owned  ("REO").  A restructured loan is one for which the Bank
has modified the terms to provide a temporary reduction in the rate of interest
below the current market rate and, in certain instances, an extension of
payments of principal or interest or both due to the deterioration in the
financial position of the borrower. At December 31, 1996,  restructured  loans
totalled $2.5 million,  consisting of six loans, and REO totalled $2.7 million,
consisting of 10  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,  1996,  1995,  1994,
1993 and 1992,  the  amount of additional  interest income that would have been
recognized on non-accrual loans if such loans had  continued  to perform in
accordance  with their  contractual terms was $103,000, $303,000, $281,000,
$421,000 and $922,000, respectively. For the same periods,  the  difference
between the amount of interest  income which would have been recognized on
restructured  loans if such loans were performing in  accordance  with their
regular  terms and amounts  recognized  was $73,000, $77,000, $294,000,
$461,000 and $443,000, respectively.

<TABLE>
<CAPTION>

                                                                          At December 31,
                                              -----------------------------------------------------------------------
                                                  1996           1995           1994           1993          1992
                                              -------------  -------------  -------------  -------------  -----------
                                                                      (Dollars in thousands)
<S>                                                <C>            <C>             <C>           <C>          <C>
Non-accrual loans:
  Residential real estate:
    One- to four-family....................        $1,463         $1,195          $ 848         $2,088       $3,794
    Multi-family...........................            --            745            546             --        6,005
  Construction and land....................            --             --             --            738          246
  Commercial real estate...................            25          3,312          2,126             --          100
  Other loans..............................            14             --             51             14           35
                                                   ------         ------         ------        -------      -------
    Total..................................         1,502          5,252          3,571          2,840       10,180
Real estate owned, net(3)..................         2,668            971            387          3,103        8,834
                                                   ------         ------         ------        -------      -------
    Total non-performing assets............         4,170          6,223          3,958          5,943       19,014
Restructured loans.........................         2,489          2,941          4,834          4,668       12,112
                                                   ------         ------         ------        -------      -------
Total risk elements........................        $6,659         $9,164         $8,792        $10,611      $31,126
                                                   ======         ======         ======        =======      =======
Allowance for loan losses as a percent
  of loans(1)..............................          0.64%          0.82%          0.74%          1.07%        1.09%
Allowance for loan losses as a percent
  of non-performing loans(2)...............        293.02          81.40         103.61         156.69        43.04
Non-performing loans as a percent
  of loans(1)(2)...........................          0.22           1.00           0.71           0.68         2.54
Non-performing assets as a percent
  of total assets(4).......................          0.51           0.97           0.68           1.19         3.73

</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).

                                       14
<PAGE>   17

The Company  adopted a new accounting  method for measuring  loan  impairment on
January 1, 1995.  Adoption of this  accounting  standard did not have a material
effect on the  comparability of the above tables.  See "Impact of New Accounting
Standards."  At December 31, 1996,  loans which were  characterized  as impaired
pursuant to SFAS 114 and 118 totalled $4.4  million.  All of the $4.4 million in
impaired loans have been measured using the fair value of the collateral method.
During the year ended December 31, 1996, the average  recorded value of impaired
loans was $5.4 million, $321,000 of interest income was recognized, all of which
was recorded on a cash basis,  and  $497,000 of interest  income would have been
recognized  under original  terms.  For a discussion of SFAS 114, see "Impact of
New Accounting Standards."

                                                    At December 31, 1996
                                                 ---------------------------
                                                   1996               1995
                                                 -------             -------
                                                       (In thousands)
Impaired loans:
Residential real estate:
  One-to four-family                               $1,763             $2,828
  Multi-family                                      2,271              1,367
Commercial real estate                                246              4,062
Other loans                                           112                 99
Impaired loan valuation
  allowance                                            --              (618)
                                                  -------            -------
     Total                                         $4,392             $7,738
                                                   ======             ======

     Allowance for Loan Losses.  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 general economy.  The allowance for
loan losses is maintained at an amount  management  considers  adequate to cover
estimated  losses in loans  receivable  which are deemed  probable and estimable
based on information  currently  known to management.  Amounts  provided for the
years  1996,  1995 and 1994 were  $1.3  million,  $3.6  million,  and  $283,000,
respectively.  During the year ended 1996, there were recoveries of $343,000 and
charge-offs of $1.5 million made against this allowance.  The allowance is based
upon 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.  As of December 31, 1996, the Company's  allowance for
loan losses was 0.64% of total  loans as  compared  to 0.82% as of December  31,
1995.  The Company had  non-accrual  loans of $1.5  million and $5.3  million at
December 31, 1996 and December 31, 1995, 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 the  allowance for loan
losses.

                                       15

<PAGE>   18

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

<TABLE>
<CAPTION>

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


                                       16

<PAGE>   19

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

<TABLE>
<CAPTION>

                                                                 At December 31,
                           -------------------------------------------------------------------------------------------
                                              1996                                            1995
                           -------------------------------------------    --------------------------------------------
                                          Percent of     Percent of                       Percent of      Percent of
                                          Allowance       Loans in                        Allowance        Loans in
                                           to Total     Each Category                      to Total      Each Category
                              Amount      Allowance    to Total Loans        Amount       Allowance      to Total Loans
                           ------------  ------------  ---------------    ------------  --------------   -------------
                                                             (Dollars in thousands)
<S>                          <C>           <C>              <C>             <C>             <C>             <C>
One- to four-family....      $1,899         43.16%           88.00%         $1,974           46.18%          85.44%

Multi-family...........         274          6.23             3.10             373            8.72            5.35

Commercial real estate.         451         10.25             4.07           1,285           30.06            5.05

Construction and land..         463         10.52             1.81             580           13.57            0.66

Other loans............          61          1.39             3.02              47            1.10            3.50

Unallocated............       1,252         28.45               --              16            0.37              --
                             ------        ------           ------          ------          ------          ------
    Total allowance
      for loan losses..      $4,400        100.00%          100.00%         $4,275          100.00%         100.00%
                             ======        ======           ======          ======          ======          ======
</TABLE>

<TABLE>
<CAPTION>

                                                               At December 31,
                       -----------------------------------------------------------------------------------------------

                                    1994                             1993                            1992
                       ------------------------------   ------------------------------   -----------------------------

                                             Percent                           Percent                       Percent of
                                              of Loans                         of Loans                       of Loans
                                 Percent of   in Each             Percent of   in Each             Percent    in Each
                                 Allowance   Category             Allowance   Category             Allowance Category
                                 to Total     to Total            to Total     to Total            to Total   to Total
                        Amount   Allowance    Loans     Amount    Allowance    Loans     Amount    Allowance   Loans
                       --------  ---------   --------   -------   ---------   --------   -------   --------  ---------
                                                           (Dollars in thousands)
<S>                      <C>       <C>        <C>        <C>        <C>        <C>        <C>       <C>        <C>
One-to
   four-family.......    $1,309    35.38%     84.77%     $1,467     32.97%     81.57%     $1,564    35.70%     78.46%

Multi-family.........       393     10.62       5.79        369       8.29       7.28        334      7.63       7.99

Commercial real
   estate............       655     17.70       5.69        646      14.52       5.88        691     15.77       7.63

Construction and land       416     11.24       0.68        594      13.35       1.13        252      5.75       1.22

Other loans..........        92      2.49       3.07         98       2.20       4.14        128      2.92       4.70

Unallocated..........       835     22.57         --      1,276      28.67          --     1,412     32.23         --
                         ------    ------    --------    ------     ------    --------    ------    ------     ------
   Total allowance
        for loan losses  $3,700   100.00%    100.00%     $4,450    100.00%    100.00%     $4,381    100.00%    100.00%
                         ======   ======     ======      ======    ======     ======      ======    ======     ======

</TABLE>

                                       17
<PAGE>   20

Real Estate Owned

     At December  31, 1996,  the Company had $2.7 million of real estate  owned,
net  of  valuation  allowances.  When  the  Company  acquires  property  through
foreclosure  or deed in lieu of  foreclosure,  it is  initially  recorded at the
lower of the recorded  investment in the corresponding loan or the fair value of
the related assets at the date of foreclosure,  less costs to sell.  Thereafter,
if there is a  further  deterioration  in  value,  the  Company  provides  for a
specific valuation allowance and charges operations for the diminution in value.
It is the policy of the Company to have obtained an appraisal on all real estate
subject to foreclosure  proceedings prior to the time of foreclosure.  It is the
Company's  policy  to  require  appraisals  on a  periodic  basis on  foreclosed
properties and conduct periodic inspections on foreclosed properties.

Investment Activities

     The  investment  policy  of  the  Company,  as  approved  by the  Board  of
Directors,  requires  management  to  maintain  adequate  liquidity,  generate a
favorable return on investments without incurring undue interest rate and credit
risk  and  to  complement  the  Company's  lending  activities.  Generally,  the
Company's  investment  policy is more restrictive than the OTS regulations allow
and,  accordingly,  the Company has invested  primarily in U.S.  Government  and
Agency  securities,  FDIC insured  certificates  of deposit,  mutual funds which
qualify  as liquid  assets  under the OTS  regulations,  federal  funds and U.S.
government sponsored agency issued  mortgage-backed  securities.  As required by
SFAS 115, the Company has established an investment portfolio of securities that
are categorized as held to maturity, available for sale or held for trading. The
Company does not  currently  maintain a portfolio of securities  categorized  as
held for trading.  The  substantial  majority of the  Company's  investment  and
mortgage-backed  securities  are  purchased  for the held to maturity  portfolio
which such portfolio  totalled $62.2 million,  or 7.6% of assets.  The Company's
current policies  restrict the amount of securities  classified as available for
sale to 5% of the Company's assets. At December 31, 1996, the available for sale
portfolio totalled $24.7 million or 3.0% of the Company's assets. The investment
policy provides  different  management  levels of approval,  from the investment
officer up to and  including  the Board of  Directors,  depending on the size of
purchase or sale and monthly  cumulative  purchase or sale  amounts.  Generally,
pursuant to the Company's  policies,  the Board must provide prior  approval for
all individual  securities  investments  over $10.0 million and approval for all
monthly  purchases  which  aggregate  $25.0  million  or  more.  The  Investment
Committee  of the  Board is  provided  a  detail  of the  held to  maturity  and
available  for sale  investment  portfolio  on a quarterly  basis.  The Board of
Directors ratifies all of the activity in the investment  portfolio on a monthly
basis.

     At  December  31,  1996,   the  Company  had  invested   $66.6  million  in
mortgage-backed  securities,  or 8.1% of total assets,  which were guaranteed by
GNMA, insured by either FNMA or FHLMC or privately issued. Of the $66.6 million,
$40.3 million were GNMA securities,  of which $36.0 million were adjustable-rate
with 1% maximum annual rate  adjustments and lifetime  maximum interest rates of
10% to 13%. Investments in mortgage-backed securities involve a risk that actual
prepayments  will be greater  than  estimated  prepayments  over the life of the
security,  which may require  adjustments to the  amortization of any premium or
accretion of any discount relating to such instruments  thereby reducing the net
yield on such securities.  There is also  reinvestment  risk associated with the
cash flows from such  securities or in the event such securities are redeemed by
the issuer.  In addition,  the market value of such  securities may be adversely
affected by changes in interest  rates.  At December 31,  1996,  mortgage-backed
securities available for sale and held to maturity amounted to $23.6 million and
$43.0 million, respectively.

                                       18

<PAGE>   21

     The  following   table  sets  forth  the   composition   of  the  Company's
mortgage-backed securities portfolio in dollar amounts and in percentages of the
respective portfolios at the dates indicated.

<TABLE>
<CAPTION>

                                                                         At December 31,
                                            -------------------------------------------------------------------------
                                                    1996                       1995                     1994
                                            ---------------------     ----------------------   ----------------------
                                                         Percent                   Percent                   Percent
                                              Amount    of Total       Amount      of Total      Amount     of Total
                                            ----------  ---------     --------    ----------   ----------   ---------
                                                                      (Dollars in thousands)

<S>                                           <C>         <C>          <C>           <C>          <C>         <C>
Mortgage-backed securities:
   GNMA(1)(3).............................    $40,321      60.53%      $44,385        75.24%      $35,671      89.62%

   FHLMC(2)(4)............................     11,239      16.87        13,092        22.20         2,349       5.90

   FNMA...................................      1,147       1.72         1,512         2.56         1,781       4.48

   Privately issued collateralized
     mortgage obligations.................     13,905      20.88            --           --            --         --
                                               ------     ------        ------       ------        ------     ------
     Total mortgage-backed securities.....     66,612     100.00%       58,989       100.00%       39,801     100.00%
                                                          ======                     ======                   ======
Less:
   Mortgage-backed securities available
     for sale - GNMA(3)...................     13,710                   12,605                         --

   Mortgage-backed securities available
     for sale - FHLMC(4)..................      9,883                   11,268                         --
                                                -----                   ------                    -------
   held to maturity.......................    $43,019                  $35,116                    $39,801
                                              =======                  =======                    =======
</TABLE>

----------
(1)  Includes $341,000, $527,000 and $305,000 of unamortized premiums related to
     GNMA securities as of December 31, 1996, 1995 and 1994, respectively.  Also
     includes $77,000 of unamortized  discounts related to GNMA securities as of
     December 31, 1996.
(2)  Includes  $187,000 and $234,000 of  unamortized  premiums  related to FHLMC
     securities as of December 31, 1996 and 1995, respectively.
(3)  Is net of unrealized loss of $169,000 at December 31, 1996.
(4)  Is net of unrealized loss of $153,000 at December 31, 1996.


                                       19

<PAGE>   22

     The  following  tables set forth the Company's  mortgage-backed  securities
activities for the periods indicated:

                                                            For the Year
                                                         Ended December 31,
                                                    ---------------------------
                                                      1996      1995      1994
                                                    -------   -------   -------
                                                           (In thousands)
Beginning balance .............................     $58,989   $39,801   $45,232
   Mortgage-backed securities purchased -
     available for sale........................      10,666    23,873        --
     held to maturity..........................      13,891        --        --

   Less:
     Sale of mortgage-backed securities
       available for sale .....................     10,614)        --        --

     Principal repayments .....................     (5,934)    (4,586)   (5,307)

     Change in unrealized losses...............       (322)        --        --

     Accretion of premium, net of discount.....        (64)       (99)     (124)
                                                    -------  --------   -------
Ending balance ................................    $66,612    $58,989   $39,801
                                                    =======   =======   =======

     The following table sets forth certain  information  regarding the carrying
amounts and fair values of the Company's mortgage-backed  securities at the
dates indicated:

<TABLE>
<CAPTION>

                                                                    At December 31,
                                      ---------------------------------------------------------------------------
                                               1996                     1995                      1994
                                      ----------------------   ----------------------   -------------------------
                                       Carrying      Fair       Carrying      Fair       Carrying        Fair
                                        Amount       Value       Amount       Value       Amount        Value
                                      ----------   ---------   ----------   ---------   ----------   ------------
                                                                    (In thousands)
<S>                                      <C>         <C>          <C>         <C>         <C>            <C>
Mortgage-backed securities:
   Held to maturity:
     FNMA..........................      $1,147      $1,129       $1,512      $1,531      $ 1,781        $ 1,630
     FHLMC.........................       1,356       1,330        1,824       1,830        2,349          2,136
     GNMA..........................      26,611      26,696       31,780      32,286       35,671         32,855
     Privately issued collateralized
       mortgage obligations........      13,905      13,878           --          --           --             --
                                         ------      ------       ------      ------     --------       --------
       Total held to maturity......      43,019      43,033       35,116      35,647       39,801         36,621
                                         ------      ------       ------      ------     --------       --------
   Available for sale:
     GNMA..........................      13,710      13,710       12,605      12,605           --             --
     FHLMC.........................       9,883       9,883       11,268      11,268           --             --
                                         ------      ------      -------     -------     --------       --------
       Total available for sale....      23,593      23,593       23,873      23,873           --             --
                                         ------      ------       ------     -------     --------       --------
       Total mortgage-backed
       securities..................     $66,612     $66,626      $58,989     $59,520      $39,801        $36,621
                                        =======     =======      =======     =======      =======        =======

</TABLE>

                                       20

<PAGE>   23

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

<TABLE>
<CAPTION>

                                                                     At December 31,
                                       --------------------------------------------------------------------------

                                                1996                     1995                       1994
                                       ----------------------   ----------------------   ------------------------

                                        Carrying      Fair       Carrying      Fair       Carrying       Fair
                                         Amount       Value       Amount      Value        Amount        Value
                                       ----------   ---------   ----------  ----------   -----------  -----------
                                                                      (In thousands)
<S>                                     <C>          <C>          <C>         <C>          <C>           <C>
Daily federal funds sold and
short-term investments..............    $ 2,943      $ 2,943      $10,460     $10,460      $   448       $   448
                                        -------       ------       ------      ------       ------        ------

Investment securities:
  Held to maturity:

    Certificates of deposit.........        250          250          495         495          198           198

    U.S. Government obligations,
      federal agency
      obligations, and other
      obligations...................     18,920       18,795       16,309      16,411       14,586        13,697
                                        -------       ------       ------      ------       ------        ------
    Total held to maturity..........     19,170       19,045       16,804      16,906       14,784        13,895
                                        -------       ------       ------      ------       ------        ------
  Available for sale:
    U.S. Government obligations,
       federal agency
       obligations, and other
       obligations..................         --           --           --          --           --            --
                                        -------       ------       ------      ------       ------        ------
    Cash management fund(1).........      1,085        1,085        1,022       1,022           --            --
                                        -------      -------      -------     -------      -------       -------
       Total available for sale.....      1,085        1,085        1,022       1,022           --            --
                                        -------      -------      -------     -------      -------       -------
Total investment securities.........    $23,198      $23,073      $28,286     $28,388      $15,232       $14,343
                                        =======      =======      =======     =======      =======       =======

</TABLE>


----------
(1) Consists  of  securities  issued  by  an  institutional  mutual  fund  which
    primarily invests in short-term U.S. Government securities.


                                       21
<PAGE>   24
     The table  below sets forth  certain  information  regarding  the  carrying
amount,  weighted  average  yields and  contractual  maturities of the Company's
short-term investments,  investment securities and mortgage-backed securities as
of December 31, 1996.

<TABLE>
<CAPTION>
                                                                   At December 31, 1996
                                        ---------------------------------------------------------------------------
                                                                      More than One            More than Five
                                            One Year or Less        Year to Five Years       Years to Ten Years
                                        ------------------------  ----------------------  -------------------------
                                                      Weighted                 Weighted                  Weighted
                                         Carrying      Average     Carrying    Average     Carrying       Average
                                          Amount        Yield       Amount      Yield       Amount         Yield
                                        ----------   -----------  ----------  ----------  -----------   -----------
                                                                  (Dollars in thousands)
<S>                                       <C>             <C>     <C>              <C>        <C>              <C>
Daily federal funds sold and short-term
FP
investments..........................     $2,943          5.75%   $       --        --%      $   --            --%
Investment securities:
   Held to maturity:
     Certificates of deposit.........         --            --           250      5.17           --            --
     U.S. Government obligations,
        federal agency obligations,
        and other obligations........      2,004          5.64        15,916      6.03        1,000          7.00
                                          ------                  ----------                -------
         Total held to maturity......      2,004          5.64        16,166      6.02        1,000          7.00
                                          ------                  ----------      ----      -------
   Available for sale:
     U.S. Government obligations,
          federal agency obligations,
          and other obligations......         --            --            --        --           --            --
     Cash management fund(1).........      1,085          5.98            --        --           --            --
                                          ------                  ----------                -------
       Total available for sale......      1,085          5.98            --        --           --            --
                                          ------                  ----------                -------
Total investment securities..........     $6,032          5.75%   $   16,166      6.02%      $1,000          7.00%
                                          ======         =====    ==========      ====      =======          ====
Mortgage-backed securities:
   Held to maturity:
     FNMA............................     $   --            --%   $       --        --%      $1,063          7.00%
     GNMA............................         --            --            51      6.50        3,066          8.19
     FHLMC...........................         --            --            --        --        1,356          7.00
     Privately issued collateralized
       mortgage obligation...........         --            --            --        --           --            --
                                          ------                  ----------                   ----
       Total held to maturity........     $   --            --    $       51      6.50       $5,485          7.67
                                          ------                  ----------                 ------
   Held for sale:
     GNMA............................     $   --            --    $       --        --        $  --            --
     FHLMC...........................         --            --            --        --        9,883          6.98
                                          ------                  ----------                 ------
       Total held for sale...........         --            --            --        --        9,883          6.98
                                          ------                  ----------                 ------
Total mortgage-backed securities.....     $   --            --%   $       51      6.50%     $15,368          7.23%
                                          ======         =====    ==========      ====      =======          ====

<CAPTION>
                                                            At December 31, 1996
                                          --------------------------------------------------------

                                             More than Ten Years                 Total
                                          --------------------------  ----------------------------
                                                          Weighted                     Weighted
                                           Carrying       Average       Carrying        Average
                                            Amount         Yield         Amount          Yield
                                          -----------   ------------  ------------   -------------
                                                           (Dollars in thousands)

<S>                                         <C>            <C>         <C>               <C>
Daily federal funds sold and short-term
investments..........................       $  --             --%      $ 2,943            5.75%
Investment securities:
   Held to maturity:
     Certificates of deposit.........          --             --           250            5.17
     U.S. Government obligations,
        federal agency obligations,
        and other obligations........          --             --        18,920            6.04
                                            -----                      -------
         Total held to maturity......          --             --        19,170            6.03
                                            -----                      -------
   Available for sale:
     U.S. Government obligations,
          federal agency obligations,
          and other obligations......          --             --            --              --
     Cash management fund(1).........          --             --         1,085            5.98
                                            -----                      -------
       Total available for sale......          --             --         1,085            5.98
                                            -----                      -------
Total investment securities..........       $  --             --%      $23,198            5.99%
                                            =====           ====       =======            ====
Mortgage-backed securities:
   Held to maturity:
     FNMA............................       $  83           6.98%      $ 1,146            7.00%
     GNMA............................      23,495           7.09        26,612            7.22
     FHLMC...........................          --             --         1,356            7.00
     Privately issued collateralized
       mortgage obligation...........      13,905           7.16        13,905            7.16
                                          -------                      -------
       Total held to maturity........     $37,483           7.12       $43,019            7.19
                                          -------                      -------
   Held for sale:
     GNMA............................     $13,710           5.98       $13,710            5.98
     FHLMC...........................          --             --         9,883            6.98
                                          -------                      -------
       Total held for sale...........      13,710           5.98        23,593            6.40
                                          -------                      -------
Total mortgage-backed securities.....     $51,193           6.81%      $66,612            6.91%
                                          =======           ====       =======            ====
</TABLE>

----------
(1)  Consists  of  securities  issued  by an  institutional  mutual  fund  which
     primarily invests in short-term U.S. Government securities.

                                       22

<PAGE>   25

Sources of Funds

     General. Deposits, loan repayments and prepayments,  proceeds from sales of
loans,  cash flows  generated from  operations and FHLB advances are the primary
sources  of the  Company's  funds for use in  lending,  investing  and for other
general purposes.

     Deposits.  The Company offers a variety of deposit accounts with a range of
interest  rates and  terms.  The  Company's  deposits  consist of  savings,  NOW
accounts, checking accounts, money market accounts and certificate accounts. For
the year ended  December  31, 1996,  core  deposits  represented  49.3% of total
average  deposits.  The flow of deposits is influenced  significantly by general
economic  conditions,  changes in money market rates,  prevailing interest rates
and  competition.  The Company's  deposits are obtained  predominantly  from the
areas in which its branch offices are located.  The Company relies  primarily on
customer service and long-standing  relationships  with customers to attract and
retain these  deposits;  however,  market  interest  rates and rates  offered by
competing financial  institutions  significantly affect the Company's ability to
attract and retain deposits.  The Company uses traditional  means of advertising
its deposit  products,  including  radio and print media and generally  does not
solicit deposits from outside its market area. Certificate accounts in excess of
$100,000 are not  actively  solicited by the Company and the Company did not use
brokers to obtain deposits during 1996.

     The following  table  presents the deposit  activity of the Company for the
periods indicated:

                                           For the Year Ended December 31,
                                      ----------------------------------------
                                         1996           1995          1994
                                      ----------    -----------    -----------
                                                   (In thousands)
Net withdrawals.....................    $(6,425)       $(9,179)       $(36,430)
Interest credited on
  deposit accounts..................     16,139         15,119          12,696
                                         ------         ------        --------
Total increase (decrease)
  in deposit accounts...............     $9,714        $ 5,940        $(23,734)
                                         ======        =======        ========

     At December 31, 1996, the Company had $15.3 million in certificate accounts
in amounts of $100,000 or more maturing as follows:

                                                                  Weighted
               Maturity Period                  Amount          Average Rate
--------------------------------------------  -----------      --------------
                                                   (Dollars in thousands)
Three months or less........................     $ 4,376             5.38%
Over 3 through 6 months.....................       3,705             5.48
Over 6 through 12 months....................       2,663             5.47
Over 12 months..............................       4,512             5.78
                                                  ------
Total.......................................     $15,256             5.54%
                                                 =======            =====


                                       23

<PAGE>   26

     The following table sets forth the  distribution  of the Company's  average
deposit  accounts for the periods  indicated  and the weighted  average  nominal
interest rates on each category of deposits presented.  Averages for the periods
presented utilize average month-end balances.

<TABLE>
<CAPTION>

                                                                    For the Year Ended December 31,
                                  -------------------------------------------------------------------------------------------------
                                               1996                             1995                              1994
                                  ------------------------------- --------------------------------- -------------------------------
                                             Percent   Weighted               Percent    Weighted               Percent    Weighted
                                             of Total   Average              of Total     Average               of Total    Average
                                   Average   Average    Nominal    Average    Average     Nominal    Average    Average     Nominal
                                   Balance   Deposits    Rate      Balance   Deposits      Rate      Balance    Deposits     Rate
                                  --------- --------- ----------- --------- ----------- ----------- ---------- ----------  --------
                                                                        (Dollars in thousands)
<S>                                <C>       <C>          <C>     <C>          <C>          <C>     <C>          <C>          <C>
Money market deposit accounts..   $46,540    11.01%       3.01%   $49,693      11.89%       2.99%   $ 59,699     14.08%       2.46%
Savings accounts...............    90,763    21.47        2.49     99,498      23.81        2.49     119,253     28.13        2.50
NOW accounts...................    66,336    15.69        1.36     65,661      15.71        1.49      64,875     15.30        1.50
Non-interest-bearing accounts..    19,542     4.62                 14,016       3.35                  11,589      2.73
                                 --------   ------               --------     ------                --------    ------
     Total.....................   223,181    52.79                228,868      54.76                 255,416     60.24
                                 --------   ------               --------     ------                --------    ------
Certificate accounts:
   Less than six months........    23,748     5.62        4.96     16,682       3.99        4.81      17,161      4.05        2.92
   Over six through 12 months..    49,259    11.65        5.48     41,343       9.89        5.57      28,278      6.67        3.69
   Over 12 through 36 months...    70,849    16.75        5.77     75,445      18.05        5.44      64,941     15.32        4.67
   Over 36 months..............     6,973     1.65        5.40      6,670       1.60        5.44       7,277      1.72        5.67
   IRA/KEOGH...................    48,769    11.54        5.81     48,940      11.71        5.68      50,915     12.00        4.68
                                 --------   ------               --------     ------                --------    ------
     Total certificate accounts   199,598    47.21                189,080      45.24                 168,572     39.76
                                 --------   ------               --------     ------                --------    ------
       Total average deposits..  $422,779   100.00%              $417,948     100.00%               $423,988    100.00%
                                 ========   ======               ========     ======                ========    ======
</TABLE>

                                                                 24

<PAGE>   27

     The following table  presents,  by various rate  categories,  the amount of
certificate  accounts  outstanding  at the dates  indicated  and the  periods to
maturity of the certificate accounts outstanding at December 31, 1996.

<TABLE>
<CAPTION>

                                       Period to Maturity from December 31, 1996                          At December 31,
                            ----------------------------------------------------------------   ------------------------------------
                            Less than     One to        Two to        Three to     Four to
                             One Year    Two years   Three years     Four years   Five years      1996         1995        1994
                            ----------  -----------  ------------    ----------   ----------   -----------  -----------  ----------
                                                                         (In thousands)
<S>                          <C>          <C>           <C>           <C>            <C>         <C>          <C>           <C>
Certificate accounts:
0 to 4.00%...............     $  1,480      $    --       $     2        $   --       $    4      $  1,486     $  1,977    $ 49,119
4.01 to 5.00%............        1,086          163           381            --           --         1,630       16,130      73,328
5.01 to 6.00%............      110,990       33,969         3,482         2,448        1,004       151,893      101,060      43,179
6.01 to 7.00%............       21,470        3,817        12,587         5,927        1,220        45,021       76,878       6,656
7.01 to 8.00%............           --           --            94            --           --            94          129         278
8.01 to 9.00%............           --           --            --            --           --            --           --         449
Over 9.01%...............           --           --            --            --           --            --           --          29
                              --------      -------       -------        ------       ------      --------     --------    --------

   Total.................     $135,026      $37,949       $16,546        $8,375       $2,228      $200,124     $196,174    $173,038
                              ========      =======       =======        ======       ======      ========     ========    ========
</TABLE>

     Borrowings.  The Company utilizes  advances from the FHLB as an alternative
to retail deposits to fund its operations and may do so in the future as part of
its operating  strategy.  During 1996,  the Company  increasingly  utilized FHLB
borrowings   to  fund  its  asset   growth,   primarily   its   origination   of
adjustable-rate   one-  to   four-family   loans.   These  FHLB   advances   are
collateralized  primarily  by  certain  of  the  Company's  mortgage  loans  and
mortgage-backed  securities  and  secondarily  by the  Company's  investment  in
capital stock of the FHLB. FHLB advances are made pursuant to several  different
credit  programs,  each  of  which  has its  own  interest  rate  and  range  of
maturities.   The  maximum   amount  that  the  FHLB  will   advance  to  member
institutions,  including the Company, fluctuates from time to time in accordance
with the policies of the OTS and the FHLB.  See  "Regulation - Federal Home Loan
Bank System."  During the year ended December 31, 1996,  the Company  borrowed,
net of  repayments,  $176.6  million from the FHLB.  At December  31, 1996,  the
Company  had  $296.5  million  in  outstanding  advances  from the FHLB and $3.5
million in repurchase agreements.

                                       25

<PAGE>   28

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

                                                      At or For the Year
                                                      Ended December 31,
                                              --------------------------------
                                               1996         1995       1994
                                               ----         ----       ----
                                                     (Dollars in thousands)
FHLB advances:
  Average balance outstanding.............   $217,628     $133,268   $  77,645
                                             ========     ========   =========
  Maximum amount outstanding at
     any month-end during the period......   $303,374     $148,274    $141,390
                                             ========     ========    ========
  Balance outstanding at end of period....   $296,500     $119,909    $135,031
                                             ========     ========    ========
  Weighted average interest rate
     during the period....................       5.86%        6.30%       5.46%
                                                 ====         ====        ====
  Weighted average interest rate at end
      of period...........................       5.88%        5.95%       5.99%
                                                 ====         ====        ====

                                                          At or For the Year
                                                          Ended December 31,
                                                      ------------------------
                                                        1996           1995
                                                      ---------      --------
                                                       (Dollars in thousands)
Securities sold under agreements to repurchase:
   Average balance outstanding.....................     $7,496         $   96
   Maximum amount outstanding at
      any month-end during the period..............     $9.973         $7,000
                                                        ======         ======
   Balance outstanding at end of period............     $3,500         $7,000
                                                        ======         ======
   Weighted average interest rate
      during the period............................       5.86%          5.43%
                                                          ====           ====
   Weighted average interest rate at end
       of period...................................       5.45%          5.43%
                                                          ====           ====

Subsidiary Activities

     Leader  Corporation  ("Leader  Corp.")  and BFS Service  Corp.  ("BFS") are
wholly-owned  subsidiaries of the Company.  BFS is not currently  conducting any
activities. In 1986 and 1987, Leader Corp. entered into four real estate limited
partnerships and invested in one other real estate project.  With the subsequent
downturn  in the local  real  estate  market,  all of the  entities  experienced
significant  operating losses.  One partnership and the wholly owned real estate
project was terminated in 1991. Two other partnerships  substantially  concluded
their business in 1993 and are in the process of being dissolved. The

                                       26

<PAGE>   29

fourth partnership,  Connelly Hill Limited  Partnership  ("Connelly Hill"), sold
its only parcel of land to a developer on January 31, 1997.

     In 1994, the Company,  through Leader Corp., permitted Liberty Financial, a
third party securities broker, to offer various uninsured investment products to
the Company's  customers.  Leader Corp.  entered into a contract with such third
party brokerage concern to perform brokerage services in segregated areas of the
Company's branches. Under this contract, Liberty Financial leases space from the
Company at three of the Company's branch  locations,  pays rent and a percentage
of sales to Leader Corp.

     At December 31, 1996,  Leader Corp. had a retained  deficit of $2.4 million
and for the years ended December 31, 1996 and 1995 had a net loss of $38,000 and
$94,000, respectively.

Personnel

     As of December 31, 1996, the Company had 169 authorized  full-time employee
positions  and 71  authorized  part-time  employee  positions,  for a  total  of
approximately 200 full time equivalents.  The employees are not represented by a
collective  bargaining unit and the Company  considers its relationship with its
employees to be good.

                           REGULATION AND SUPERVISION

General

     As a result of the  Company's  acquisition  of  Broadway  National  Bank in
February 1997, the Company became a bank holding company. The Company, as a bank
holding company,  is required to file certain reports with, and otherwise comply
with the rules and  regulations  of the Federal  Reserve Board ("FRB") under the
Bank  Holding  Company  Act of 1956,  as  amended  ("BHCA").  In  addition,  the
activities of savings  institutions,  such as the Bank, are governed by the HOLA
and the Federal  Deposit  Insurance Act ("FDI Act").  The activities of national
banks are generally governed by the National Bank Act and the FDI Act.

     The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer.
The Bank is a member  of the  Federal  Home Loan Bank  ("FHLB")  System  and its
deposit accounts are insured up to applicable limits by the Savings  Association
Insurance Fund ("SAIF") managed by the FDIC. The Bank must file reports with the
OTS and the FDIC  concerning its activities and financial  condition in addition
to obtaining  regulatory  approvals prior to entering into certain  transactions
such as mergers with, or acquisitions of other  institutions.  Broadway National
Bank  is  subject  to  extensive  regulation  examination  and  supervision  and
reporting with the OCC, as its primary federal  regulator,  and the FDIC, as the
deposit insurer.  Broadway  National Bank is a member of the Bank Insurance Fund
("BIF")  managed  by  the  FDIC.  The  OTS  and/or  the  FDIC  conduct  periodic
examinations to test the Bank's safety and soundness and compliance with various
regulatory   requirements.   This  regulation  and  supervision   establishes  a
comprehensive  framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors.  The
regulatory structure also gives the regulatory  authorities extensive discretion
in connection with their supervisory and enforcement  activities and examination
policies,  including  policies with respect to the  classification of assets and
the  establishment of adequate loan loss reserves for regulatory  purposes.  Any
change in such  regulatory  requirements  and policies,  whether by the OTS, the
OCC,  the FDIC or the  Congress,  could  have a material  adverse  impact on the
Company,  the Bank, Broadway National Bank and their operations.  Certain of the
regulatory requirements applicable to the

                                       27

<PAGE>   30

Bank  and to the  Company  are  referred  to  below  or  elsewhere  herein.  The
description  of  statutory  provisions  and  regulations  applicable  to savings
institutions  and their  holding  companies set forth in this Form 10-K does not
purport to be a complete  description of such statutes and regulations and their
effects on the Bank, Broadway National Bank and the Company.

Holding Company Regulation

     Federal  Regulation.  Due to its control of  Broadway  National  Bank,  the
Company is subject to examination,  regulation, and periodic reporting under the
BHCA, as administered by the FRB.

     The Company is required to obtain the prior  approval of the FRB to acquire
all, or substantially  all, of the assets of any bank or bank holding company or
merge  with  another  bank  holding  company.  Prior FRB  approval  will also be
required for the Company to acquire  direct or indirect  ownership or control of
any voting  securities  of any bank or bank  holding  company if,  after  giving
effect to such  acquisition,  it would,  directly or indirectly,  own or control
more than 5% of any class of voting shares of such bank or bank holding company.
Bank holding  companies may acquire  additional  banks in any state,  subject to
certain restrictions such as deposit concentration.  In addition to the approval
of the FRB,  before any bank  acquisition  can be completed,  prior approval may
also  be  required  to  be  obtained  from  other  agencies  having  supervisory
jurisdiction over the bank to be acquired.

     A bank  holding  company  is  generally  prohibited  from  engaging  in, or
acquiring direct or indirect control of more than 5% of the voting securities of
any company engaged in, non-banking activities.  One of the principal exceptions
to this  prohibition is for activities found by the FRB to be so closely related
to banking or managing or  controlling  banks to be a proper  incident  thereto.
Some of the principal activities that the FRB has determined by regulation to be
closely related to banking are: (i) making or servicing  loans;  (ii) performing
certain data processing  services;  (iii) providing discount brokerage services;
(iv) acting as fiduciary,  investment or financial advisor;  (v) finance leasing
personal or real property;  (vi) making  investments in corporations or projects
designed primarily to promote community  welfare;  and (vii) acquiring a savings
association,  like the Bank,  provided that the savings association only engages
in activities  permitted  bank holding  companies.  The FRB has adopted  capital
adequacy  guidelines  for  bank  holding  companies  (on a  consolidated  basis)
substantially  similar to those of the OTS for the Bank and the OCC for Broadway
National  Bank.  See  "Capital  Requirements."  The  Company's  total and Tier 1
capital exceeds these requirements.

     Bank holding companies are generally required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross  consideration for the purchase or redemption,  when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the Company's consolidated net worth. The FRB
may disapprove  such a purchase or redemption if it determines that the proposal
would  constitute  an unsafe and  unsound  practice,  or would  violate any law,
regulation,  FRB order or  directive,  or any  condition  imposed by, or written
agreement  with,  the FRB. The FRB has now adopted an exception to this approval
requirement for well-capitalized  bank holding companies that meet certain other
conditions.

     The FRB has issued a policy statement regarding the payment of dividends by
bank holding  companies.  In general,  the FRB's policies provide that dividends
should be paid only out of current  earnings and only if the prospective rate of
earnings  retention  by the bank holding  company  appears  consistent  with the
organization's  capital needs, asset quality,  and overall financial  condition.
The FRB's policies also require that a bank holding company serve as a source of
financial  strength to it  subsidiary  banks by standing  ready to use available
resources to provide  adequate  capital  funds to those banks during  periods of
financial  stress or adversity and by maintaining the financial  flexibility and
capital-raising

                                       28

<PAGE>   31

capacity to obtain additional resources for assisting its subsidiary banks where
necessary.  These regulatory policies could affect the ability of the Company to
pay dividends or otherwise engage in capital distributions.

     The status of the Company as a registered  bank holding  company  under the
BHCA does not exempt it from  certain  Federal  and state  laws and  regulations
applicable to corporations  generally,  including,  without limitation,  certain
provisions of the Federal securities laws.

     Under  the FDI Act,  depository  institutions  are  liable  to the FDIC for
losses  suffered or anticipated by the FDIC in connection  with the default of a
commonly  controlled  depository  institution or any assistance  provided by the
FDIC to such an  institution  in danger of default.  This applies to  depository
institutions controlled by the same bank holding company.

     The Company and its  subsidiaries  will be  affected  by the  monetary  and
fiscal policies of various agencies of the United States  Government,  including
the Federal  Reserve  System.  In view of changing  conditions  in the  national
economy and in the money  markets,  it is impossible  for the  management of the
Company to accurately predict future changes in monetary policy or the effect of
such changes on the business or financial condition of the Company,  the Bank or
Broadway National Bank.

     State  Regulation.  The Company is also a "bank holding company" within the
meaning of the  Massachusetts  bank holding  company laws. The prior approval of
the Massachusetts Board of Bank Incorporation is required before the Company may
acquire all or substantially all of the assets of any depository institution (or
holding  company   thereof)  merge  with  a  holding  company  of  a  depository
institution  or  acquire  more  than  5% of the  voting  stock  of a  depository
institution or holding company thereof.

Acquisition of the Holding Company

     Federal Regulation. Under the Federal Change in Bank Control Act ("CIBCA"),
a notice must be  submitted to the FRB if any person  (including a company),  or
group  acting  in  concert,  seeks  to  acquire  10% or  more  of the  Company's
outstanding voting stock, unless the FRB has found that the acquisition will not
result in a change in control of the  Company.  Under the CIBCA,  the FRB has 60
days from the  filing of a complete  notice to act,  taking  into  consideration
certain  factors,  including  the  financial  and  managerial  resources  of the
acquirer, the convenience and needs of the communities served by the Company and
the Bank, and the anti-trust effects of the acquisition.

     Under the BHCA, any company would be required to obtain prior approval from
the FRB before it may obtain  "control" of the Company within the meaning of the
BHCA.  Control  generally  is defined to mean the  ownership or power to vote 25
percent or more of any class of voting  securities of the Company or the ability
to control in any manner the election of a majority of the Company's  directors.
An existing  bank  holding  company  would be required to obtain the FRB's prior
approval under the BHCA before  acquiring  more than 5% of the Company's  voting
stock.  See  "Holding  Company  Regulation."  Approval  of  the  Board  of  Bank
Incorporation  may also be required for  acquisition  of the Company  under some
circumstances.

Federal Banking Regulations

     Capital   Requirements.   The  OTS  capital   regulations  require  savings
institutions to meet three minimum capital  standards:  a 1.5% tangible  capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below also establish,

                                       29

<PAGE>   32

in effect, a minimum 2% tangible capital standard,  a 4% leverage (core) capital
ratio (3% for  institutions  receiving the highest rating on the CAMEL financial
institution  examination  rating  system),  and,  together  with the  risk-based
capital standard itself, a 4% Tier I risk-based  capital standard.  Core capital
is defined as common stockholders' equity (including retained earnings), certain
noncumulative  perpetual  preferred  stock and  related  surplus,  and  minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain purchased mortgage servicing rights and credit card  relationships.
The OTS regulations also require that, in meeting the tangible,  leverage (core)
and risk-based capital standards, institutions must generally deduct investments
in  and  loans  to  subsidiaries  engaged  in  activities  as  a  principle  not
permissible for a national bank.

     The  risk-based  capital  standard  for savings  institutions  requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary  capital) to risk-weighted  assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets,  are multiplied by a risk-weight factor of 0% to 100%,
as assigned by the OTS capital  regulation  based on the risks OTS  believes are
inherent  in the type of asset.  The  components  of Tier I (core)  capital  are
equivalent to those discussed earlier.  The components of supplementary  capital
currently include  cumulative  preferred stock,  long-term  perpetual  preferred
stock,  mandatory  convertible  securities,  subordinated  debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted  assets.  Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.

     National Banks are required by OCC regulation to maintain  leverage  (core)
capital at least equal to 4% (3% for  institutions  receiving the highest rating
on  the  CAMEL  financial  institution  examination  rating  system)  and  an 8%
risk-based capital ratio.  National banks are subject to identical  requirements
under the prompt  corrective  action  standards.  The OCC's  regulations  do not
establish a separate  interest  rate risk  component  for national  bank capital
requirements.

                                       30

<PAGE>   33

     The following  table presents the Bank's  capital  position at December 31,
1996 relative to fully phased-in regulatory requirements.

<TABLE>
<CAPTION>

                                                                                        Capital
                                                             Excess         ---------------------------------
                                          Required        (Deficiency)          Actual           Required
                         Capital           Capital           Amount            Percent            Percent
                    -----------------   -------------   -----------------   --------------    ---------------
                                                     (Dollars in thousands)
<S>                        <C>              <C>                 <C>               <C>                <C>
Tangible............       $53,910          $11,934             $41,976            6.8%              1.5%
Core (Leverage).....        53,910           23,868              30,042            6.8               3.0%
Risk-based..........        58,310           35,301              23,009           13.2               8.0%

</TABLE>

     Prompt  Corrective  Regulatory  Action.  Under the prompt corrective action
regulations,  the OTS with  respect  to  savings  associations  and the OCC with
respect to National  Banks,  are  required to take certain  supervisory  actions
against  undercapitalized  institutions,  the severity of which depends upon the
institution's degree of undercapitalization. Generally, a depository institution
is considered "well  capitalized" if its ratio of total capital to risk-weighted
assets is at least  10%,  its ratio of Tier I (core)  capital  to  risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the appropriate  regulator to
meet  a  specific   capital  level.  An  institution   generally  is  considered
"adequately  capitalized" if its ratio of total capital to risk-weighted  assets
is at least 8%, its ratio of Tier I (core) capital to risk-weighted assets is at
least 4%, and its ratio of core  capital  to total  assets is at least 4% (3% if
the institution  receives the highest CAMEL rating).  An institution  that has a
ratio of total capital to risk weighted  assets of less than 8%, a ratio of Tier
I (core)  capital  to  risk-weighted  assets  of less than 4% or a ratio of core
capital to total  assets of less than 4% (3% or less for  institutions  with the
highest  examination  rating)  is  considered  to  be   "undercapitalized."   An
institution  that has a total  risk-based  capital  ratio less than 6%, a Tier 1
capital  ratio  of less  than 3% or a  leverage  ratio  that is less  than 3% is
considered to be "significantly  undercapitalized" and an institution that has a
tangible  capital  to  assets  ratio  equal to or less  than 2% is  deemed to be
"critically  undercapitalized."  Subject  to a  narrow  exception,  the  banking
regulator is required to appoint a receiver or  conservator  for an  institution
that is  "critically  undercapitalized."  The  regulation  also  provides that a
capital  restoration  plan must be filed with the OTS within 45 days of the date
an institution  receives  notice that it is  "undercapitalized,"  "significantly
undercapitalized"  or "critically  undercapitalized."  Compliance  with the plan
must  be  guaranteed  by any  parent  holding  company.  In  addition,  numerous
mandatory   supervisory   actions   become   immediately    applicable   to   an
undercapitalized   institution,   including,   but  not  limited  to,  increased
monitoring by regulators and restrictions on growth,  capital  distributions and
expansion.  The  appropriate  agency  could  also  take any one of a  number  of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.

     Insurance of Deposit  Accounts.  Deposits of the Bank are presently insured
by the SAIF and Broadway National Bank is a member of the BIF. Both the SAIF and
the BIF (the deposit  insurance fund that covers most commercial bank deposits),
are  statutorily  required  to be  capitalized  to a 1.25%  of  insured  reserve
deposits ratio. Until recently,  members of the SAIF and BIF were paying average
deposit  insurance  premiums of between 24 and 25 basis points.  The BIF met the
required  reserve in 1995,  whereas the SAIF was not  expected to meet or exceed
the required level until 2002 at the earliest.  This situation was primarily due
to the statutory requirement that SAIF members make payments on bonds

                                       31

<PAGE>   34

issued in the late 1980s by the Financing  Corporation  ("FICO") to recapitalize
the predecessor to the SAIF.

     In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new  assessment  rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual  administration  fee of only $2,000.  With respect to
SAIF member institutions, the FDIC adopted a final rule retaining the previously
existing  assessment rate schedule  applicable to SAIF member institutions of 23
to 31 basis points. As long as the premium differential  continued,  it may have
had adverse  consequences  for SAIF members,  including  reduced earnings and an
impaired  ability to raise  funds in the  capital  markets.  In  addition,  SAIF
members, such as the Bank were placed at a substantial competitive  disadvantage
to BIF members  with respect to pricing of loans and deposits and the ability to
achieve lower operating costs.

     On September 30, 1996, the President signed into law the Deposit  Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time  assessment  on  SAIF  member  institutions,  including  the  Bank,  to
recapitalize  the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995,  payable  November  27,  1996 (the "SAIF  Special  Assessment").  The SAIF
Special Assessment was recognized by the Bank as an expense in the quarter ended
September 30, 1996 and is generally tax deductible.  The SAIF Special Assessment
recorded  by the Bank  amounted  to $2.7  million  on a  pre-tax  basis and $1.6
million on an after-tax basis.

     The Funds Act also  spreads the  obligations  for payment of the FICO bonds
across all SAIF and BIF  members.  Beginning on January 1, 1997,  BIF  deposits,
including  those held by the National Bank,  will be assessed for a FICO payment
of 1.3 basis points,  while SAIF  deposits will pay 6.48 basis points.  Full pro
rata sharing of the FICO payments between BIF and SAIF members will occur on the
earlier of January  1, 2000 or the date the BIF and SAIF are  merged.  The Funds
Act specifies that the BIF and SAIF will be merged on January 1, 1999,  provided
no savings associations remain as of that time.

     As a result of the Funds Act, the FDIC recently voted to effectively  lower
SAIF  assessments  to 0 to 27  basis  points  as of  January  1,  1997,  a range
comparable  to that of BIF members.  SAIF members will also continue to make the
FICO  payments  described  above.  The FDIC  also  lowered  the SAIF  assessment
schedule  for the fourth  quarter of 1996 to 18 to 27 basis  points.  Management
cannot  predict the level of FDIC insurance  assessments  on an on-going  basis,
whether the savings  association  charter will be  eliminated or whether the BIF
and SAIF will eventually be merged.

     The Bank's  assessment  rate for  fiscal  1996  ranged  from 18 to 23 basis
points and the premium paid for this period was $916,000. Broadway National Bank
paid an  administrative  fee of  $2,000  to the FDIC  for  1996.  A  significant
increase in FDIC  insurance  premiums would likely have an adverse effect on the
operating  expenses  and  results  of  operations  of the Bank  and/or  Broadway
National Bank.

     Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound  condition  to  continue  operations  or has  violated  any
applicable law, regulation,  rule, order or condition imposed by the regulators.
The  management  of the Bank and  Broadway  National  Bank  does not know of any
practice,  condition  or  violation  that might lead to  termination  of deposit
insurance.

     Thrift  Rechartering  Legislation.  The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings  associations as
of that date. That legislation also requires

                                       32

<PAGE>   35

that the  Department  of Treasury  submit a report to Congress by March 31, 1997
that makes  recommendations  regarding a common financial  institutions charter,
including  whether  the  separate  charters  for  thrifts  and  banks  should be
abolished.  Various proposals to eliminate the federal thrift charter,  create a
uniform financial  institutions charter and abolish the OTS have been introduced
in Congress.  The bills would require federal savings institutions to convert to
a national  bank or some type of state  charter by a specified  date (January 1,
1998 in one bill, June 30, 1998 in the other) or they would automatically become
national banks. Converted federal thrifts would generally be required to conform
their  activities to those permitted for the charter selected and divestiture of
nonconforming  assets would be required  over a two year period,  subject to two
possible one year  extensions.  State chartered  thrifts would become subject to
the same federal regulation as applies to state commercial banks. The Company is
unable to predict whether such legislation would be enacted, the extent to which
the  legislation  would  restrict  or  disrupt  its  operations  or those of its
subsidiary or whether the BIF and SAIF funds will eventually merge.

     Loans to One Borrower.  Under the HOLA, savings  institutions are generally
subject to the limits on loans to one  borrower  applicable  to national  banks.
Generally, savings institutions may not make a loan or extend credit to a single
or  related  group of  borrowers  in  excess of 15% of its  unimpaired  capital,
surplus, and allowable general valuation allowance.  An additional amount may be
lent, equal to 10% of unimpaired capital, surplus and allowable general
valuation allowance, if such loan is secured by readily-marketable collateral,
which is defined to include  certain  financial instruments and bullion.
National banks are generally subject to similar loan to one borrower  limits.
At December  31,  1996,  the Bank's limit on loans to one borrower was $10.0
million and Broadway National  Bank's limit was $2.4 million. At December 31,
1996, the Bank's largest aggregate outstanding balance of loans to one
borrower was $3.8 million and Broadway  National Bank's largest aggregate
outstanding balance of loans to one borrower was $1.9 million.

     QTL Test. The HOLA requires savings  institutions to meet a QTL test. Under
the QTL test,  a savings and loan  association  is required to maintain at least
65% of its "portfolio assets" (total assets less: (i) specified liquid assets up
to 20% of total assets;  (ii)  intangibles,  including  goodwill;  and (iii) the
value of  property  used to  conduct  business)  in  certain  "qualified  thrift
investments" (primarily residential mortgages and related investments, including
certain  mortgage-backed  securities)  in at least 9 months out of each 12 month
period.

     A  savings  institution  that  fails  the QTL test is  subject  to  certain
operating  restrictions and may be required to convert to a bank charter.  As of
December  31,  1996,  the Bank  maintained  93.1%  of its  portfolio  assets  in
qualified thrift investments and, therefore, met the QTL test.

     National banks are not subject to the QTL test.

     Limitation on Capital  Distributions.  OTS regulations  impose  limitations
upon all capital distributions by savings institutions,  such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another  institution  in a cash-out  merger and other  distributions  charged
against  capital.  The rule establishes  three tiers of institutions,  which are
based primarily on an  institution's  capital level. An institution that exceeds
all fully phased-in  capital  requirements  before and after a proposed  capital
distribution  ("Tier 1 Bank") and has not been  advised by the OTS that it is in
need of more than normal  supervision,  could,  after  prior  notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus  capital  ratio"
(the  excess  capital  over its fully  phased-in  capital  requirements)  at the
beginning  of the  calendar  year or (ii) 75% of its net income for the previous
four  quarters.   Any  additional  capital  distributions  would  require  prior
regulatory  approval.  In the event the Bank's capital fell below its regulatory
requirements or the

                                       33

<PAGE>   36

OTS notified it that it was in need of more than normal supervision,  the Bank's
ability to make capital distributions could be restricted.  In addition, the OTS
could prohibit a proposed capital  distribution by any institution,  which would
otherwise  be  permitted  by the  regulation,  if the OTS  determines  that such
distribution  would constitute an unsafe or unsound practice.  In December 1994,
the OTS proposed  amendments to its capital  distribution  regulation that would
generally  authorize the payment of capital  distributions  without OTS approval
provided that the payment does not cause the institution to be  undercapitalized
within  the  meaning  of  the  prompt  corrective  action  regulation.  However,
institutions  in a holding  company  structure  would still have a prior  notice
requirement. At December 31, 1996, the Bank was a Tier 1 Bank.

     National  banks may not pay dividends out of its permanent  capital and may
not,  without OCC  approval,  pay dividends in excess of the total of the bank's
retained net income for the year combined with retained net income for the prior
two years.  A national  bank may not pay a dividend  that would cause it to fall
below regulatory capital standards.

     Liquidity.  The Bank is required to  maintain an average  daily  balance of
specified  liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term  borrowings.
This liquidity  requirement is currently 5% but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%  depending  upon economic
conditions and the savings flows of member  institutions.  OTS regulations  also
require each member savings  institution to maintain an average daily balance of
short-term liquid assets at a specified  percentage  (currently 1%) of the total
of its net withdrawable  deposit accounts and borrowings  payable in one year or
less.  Monetary  penalties  may be imposed for  failure to meet these  liquidity
requirements.  The Bank's liquidity and short-term liquidity ratios for December
31,  1996  were  8.0% and  4.8%  respectively,  which  exceeded  the  applicable
requirements.  The Bank has never  been  subjected  to  monetary  penalties  for
failure to meet its liquidity  requirements.  Broadway  National Bank, under OCC
regulations, is not subject to regulatory liquidity requirements.

     Assessments.  Savings  institutions  are required to pay assessments to the
OTS to  fund  the  agency's  operations.  The  general  assessments,  paid  on a
semi-annual  basis,  are computed upon the savings  institution's  total assets,
including consolidated subsidiaries,  as reported in the Bank's latest quarterly
thrift  financial  report.  The assessments paid by the Bank for the fiscal year
ended December 31, 1996 totalled $136,000.

     National  banks pay  assessments  to the OCC to fund its  operations.  Such
assessments  for Broadway  National  Bank amounted to $32,000 for the year ended
December 31, 1996.

     Branching.   OTS  regulations  permit  nationwide  branching  by  federally
chartered  savings  institutions to the extent allowed by federal statute.  This
permits federal savings  institutions  to establish  interstate  networks and to
geographically  diversify their loan  portfolios and lines of business.  The OTS
authority  preempts any state law  purporting  to regulate  branching by federal
savings institutions.

     National  banks are  authorized to establish  branches  within the state in
which they are  headquartered  but only to the extent state law allows branching
by state banks. The Riegle-Neal  Interstate Banking and Branching Efficiency Act
of 1994 (the "Act")  provides  for  interstate  branching  for  national  banks,
effective  June 1,  1997.  Under  the Act,  interstate  branching  by  merger is
authorized  on June 1, 1997  unless the state in which the bank is to branch has
enacted a law opting out of interstate branching or expedites the effective date
by passing legislation. De novo interstate branching will be permitted by

                                       34

<PAGE>   37

the Act to the extent  the state into which the bank is to branch has  enacted a
law authorizing out-of-state banks to establish de novo branches.

     Transactions   with  Related   Parties.   The  authority  of  a  depository
institution  to engage in  transactions  with  related  parties or  "affiliates"
(e.g., any company that controls or is under common control with an institution,
including the Company) is limited by Sections 23A and 23B of the Federal Reserve
Act ("FRA").  Section 23A limits the  aggregate  amount of covered  transactions
with any  individual  affiliate to 10% of the capital and surplus of the savings
institution. The aggregate amount of covered transactions with all affiliates is
limited  to  20% of the  savings  institution's  capital  and  surplus.  Certain
transactions  with  affiliates  are required to be secured by  collateral  in an
amount and of a type  described  in Section 23A and the  purchase of low quality
assets from affiliates is generally  prohibited.  Section 23B generally provides
that certain transactions with affiliates,  including loans and asset purchases,
must be on terms and under circumstances,  including credit standards,  that are
substantially  the same or at least as  favorable  to the  institution  as those
prevailing  at  the  time  for  comparable   transactions  with   non-affiliated
companies.  In addition,  savings institutions like the Bank are prohibited from
lending to any affiliate that is engaged in activities  that are not permissible
for  bank  holding  companies  and  no  savings  institution  may  purchase  the
securities of any affiliate other than a subsidiary.

     The  authority of the Bank and Broadway  National  Bank to extend credit to
executive  officers,  directors and 10%  shareholders  ("insiders"),  as well as
entities such persons  control,  is governed by Sections  22(g) and 22(h) of the
FRA and Regulation O thereunder.  Among other things, such loans are required to
be made on  terms  substantially  the  same as  those  offered  to  unaffiliated
individuals  and to not involve more than the normal risk of  repayment.  Recent
legislation  created an exception to this requirement for loans made pursuant to
a benefit or compensation  program that is widely  available to all employees of
the institution  and does not give preference to insiders over other  employees.
Regulation O also places  individual and aggregate limits on the amount of loans
that  institutions  may make to insiders  based,  in part, on the  institution's
capital position and requires certain board approval procedures to be followed.

     Enforcement.   Under  the  FDI  Act,   the  OTS  has  primary   enforcement
responsibility  over  savings  institutions,  the  OCC has  primary  enforcement
authority  over  national  banks and both  agencies  have the authority to bring
actions  against  the  respective  institutions  and all  institution-affiliated
parties, including stockholders,  and any attorneys,  appraisers and accountants
who knowingly or  recklessly  participate  in wrongful  action likely to have an
adverse effect on an insured  institution.  Formal  enforcement action may range
from the issuance of a capital directive or cease and desist order to removal of
officers and/or  directors to institution of  receivership,  conservatorship  or
termination  of  deposit  insurance.  Civil  penalties  cover  a wide  range  of
violations  and can amount to  $25,000  per day,  or even $1 million  per day in
especially  egregious  cases.  Under the FDI Act, the FDIC has the  authority to
recommend to OTS that  enforcement  action be taken with respect to a particular
savings institution or the OCC with respect to a national bank. If action is not
taken by the agency,  the FDIC has  authority to take such action under  certain
circumstances.  Federal  law also  establishes  criminal  penalties  for certain
violations.

     The FRB has similar enforcement authority with respect to the Company.

     Standards  for Safety and  Soundness.  The federal  banking  agencies  have
adopted Interagency  Guidelines  Prescribing  Standards for Safety and Soundness
("Guidelines")  and a final rule to  implement  safety and  soundness  standards
required  under the FDI Act. The  Guidelines  set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at  insured  depository   institutions  before  capital  becomes  impaired.  The
standards set forth in the Guidelines address

                                       35

<PAGE>   38

internal  controls  and  information  systems;  internal  audit  system;  credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation,  fees and benefits.  If the  appropriate  federal  banking  agency
determines  that an  institution  fails to meet any standard  prescribed  by the
Guidelines,  the agency may require the  institution  to submit to the agency an
acceptable plan to achieve compliance with the standard,  as required by the FDI
Act. The final rule establishes  deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.

Federal Reserve System

     The Federal  Reserve Board  regulations  require  savings  institutions  to
maintain  non-interest  earning  reserves  against  their  transaction  accounts
(primarily NOW and regular checking  accounts).  During fiscal 1996, the Federal
Reserve Board regulations generally required that reserves be maintained against
aggregate  transaction  accounts  as follows:  for  accounts  aggregating  $52.0
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts  aggregating greater than $52.0 million, the
reserve  requirement  is $1.6  million plus 10%  (subject to  adjustment  by the
Federal  Reserve  Board  between  8% and  14%)  against  that  portion  of total
transaction  accounts  in excess of $52.0  million.  The first  $4.3  million of
otherwise  reservable  balances  (subject to adjustments by the Federal  Reserve
Board)  were  exempted  from the  reserve  requirements.  The Bank and  Broadway
National  Bank  maintained  compliance  with the foregoing  requirements  during
fiscal 1996.

Federal Securities Laws

     The Company's  common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to
the   information   and  proxy   solicitation   requirements,   insider  trading
restrictions, and other requirements under the Exchange Act.

     Shares of the common stock  purchased by persons who are not  affiliates of
the Company may be resold without registration. Shares purchased by an affiliate
of the Company will be subject to the resale  restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the  other  conditions  of Rule  144  (including  those  that  require  the
affiliate's  sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration,  a number of shares not
to exceed in any  three-month  period the  greater of (i) 1% of the  outstanding
shares of the  Company  or (ii) the  average  weekly  volume of  trading in such
shares during the preceding  four calendar  weeks.  Provision may be made in the
future by the Company to permit  affiliates to have their shares  registered for
sale under the Securities Act under certain circumstances.

                           FEDERAL AND STATE TAXATION

Federal Taxation

     General.  The  Company  and the  Bank  report  their  federal  income  on a
consolidated  basis and the  accrual  method of  accounting,  and are subject to
federal  income  taxation  in the same  manner as other  corporations  with some
exceptions,  including  particularly  the Bank's reserve for bad debts discussed
below.  Broadway  National  Bank will also  report its income on a  consolidated
basis with the  Company  and Bank  effective  February  8, 1997.  The  following
discussion  of tax matters is intended only as a summary and does not purport to
be a  comprehensive  description of the tax rules  applicable to the Bank or the
Company.  The Bank was audited by the IRS during 1996, and covered the tax years
1991, 1992 and 1993. For its 1996 taxable year, the Bank is subject to a maximum
federal income tax rate of 34%.

     Bad Debt Reserves.  For fiscal years  beginning prior to December 31, 1995,
thrift  institutions which qualified under certain  definitional tests and other
conditions of the Internal  Revenue Code of 1986 (the "Code") were  permitted to
use certain  favorable  provisions to calculate  their  deductions  from taxable
income  for  annual  additions  to their bad debt  reserve.  A reserve  could be
established for bad debts on qualifying real property loans  (generally  secured
by  interests  in  real  property  improved  or to be  improved)  under  (i) the
Percentage of Taxable  Income  Method (the "PTI Method") or (ii) the  Experience
Method.  The reserve for  nonqualifying  loans was computed using the Experience
Method.

     The Small Business Job  Protection Act of 1996 (the "1996 Act"),  which was
enacted on August 20, 1996,  requires  savings  institutions to recapture (i.e.,
take into income) certain portions of their  accumulated bad debt reserves.  The
1996 Act repeals the reserve  method of accounting  for bad debts  effective for
tax years beginning  after 1995.  Thrift  institutions  that would be treated as
small banks are  allowed to utilize the  Experience  Method  applicable  to such
institutions,  while thrift  institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the

                                       36

<PAGE>   39

specific charge-off method.  Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.

     A thrift  institution  required to change its method of computing  reserves
for bad debts  will  treat  such  change  as a change  in method of  accounting,
initiated by the taxpayer, and having been made with the consent of the IRS. Any
Section 481(a) adjustment  required to be taken into income with respect to such
change  generally  will be taken into income  ratably  over a  six-taxable  year
period,  beginning with the first taxable year beginning after 1995,  subject to
the residential loan requirement.

     Under the residential loan requirement provision, the recapture required by
the  1996 Act  will be  suspended  for  each of two  successive  taxable  years,
beginning with the Bank's current  taxable year, in which the Bank  originates a
minimum of certain  residential  loans based upon the  average of the  principal
amounts of such loans made by the Bank  during its six taxable  years  preceding
its current taxable year.

     Under the 1996 Act, for its current and future taxable  years,  the Bank is
not permitted to make additions to its tax bad debt reserves.  In addition,  the
Bank is required to  recapture  (i.e.,  take into income) over a six year period
the excess of the balance of its tax bad debt  reserves as of December  31, 1995
other than its supplemental reserve for losses on loans, if any over the balance
of such reserves as of December 31, 1987. The Company has previously  recorded a
deferred tax  liability  equal to the bad debt  recapture  and as such,  the new
rules will have no effect on net income or income tax expense.

     Distributions.  Under  the  1996  Act,  if  the  Bank  makes  "non-dividend
distributions"  to the Company,  such  distributions  will be considered to have
been made from the Bank's  unrecaptured  tax bad debt  reserves  (including  the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount  distributed  (but not in excess of the amount
of  such  reserves)  will  be  included  in  the  Bank's  income.   Non-dividend
distributions  include  distributions  in  excess  of  the  Bank's  current  and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock,  and  distributions in partial or complete
liquidation.  Dividends paid out of the Bank's  current or accumulated  earnings
and profits will not be so included in the Bank's income.

     The amount of additional  taxable income  triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution.  Thus, if the Bank makes a non-dividend distribution
to the  Company,  approximately  one  and  one-half  times  the  amount  of such
distribution  (but  not in  excess  of the  amount  of such  reserves)  would be
includable  in income for federal  income tax  purposes,  assuming a 34% federal
corporate  income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.

     SAIF Recapitalization  Assessment.  The Funds Act levied a 65.7-cent fee on
every $100 of thrift  deposits held on March 31, 1995.  For financial  statement
purposes,  this  assessment  was  reported as an expense  for the quarter  ended
September  30, 1996.  The Funds Act  includes a provision  which states that the
amount of any special  assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.

State and Local Taxation

     Commonwealth  of   Massachusetts.   On  July  27,  1995,  the  Governor  of
Massachusetts  approved  legislation  to  reduce  the  tax  rate  applicable  to
financial institutions, including savings banks, from 12.54% on their net income
to 10.50% on their net income apportioned to Massachusetts.  The reduced rate is
to

                                       37

<PAGE>   40

be  phased-in  over a five year  period  whereby  the rates are 12.13% for 1995,
11.72%  for 1996,  11.32% for 1997,  10.91%  for 1998 and  10.50% for 1999.  Net
income for years  beginning  before  January 1, 1999  includes  gross  income as
defined under the  provisions of the Internal  Revenue Code,  plus interest from
bonds,   notes  and   evidences  of   indebtedness   of  any  state,   including
Massachusetts,  less the  deductions,  excluding  the  deductions  for dividends
received,  state taxes,  and losses sustained in other taxable years, as defined
under the provisions of the Internal  Revenue Code. For taxable years  beginning
on or after January 1, 1999,  the definition of state taxable income is modified
to allow a deduction for  ninety-five  percent of dividends  received from stock
where  the  Bank  owns  fifteen  percent  or more  of the  voting  stock  of the
institution  paying the dividend and to allow  deductions from certain  expenses
allocated to federally tax exempt  obligations.  Subsidiary  corporations of the
Bank conducting business in Massachusetts must file separate Massachusetts state
tax returns and are taxed as financial institutions,  with certain modifications
and  grandfathering  for taxable  years before  1995.  The net worth or tangible
property of such subsidiaries is taxed at a rate of 0.26%. Such subsidiaries may
file consolidated tax returns on the net earnings portion of the corporate tax.

     Corporations which qualify as "securities  corporations," as defined by the
Massachusetts  tax code,  are taxed at a  special  rate of 0.33% of their  gross
income if they qualify as a "bank-holding  company" under the  Massachusetts tax
code.  The Company has  applied  for and  received  approval to be taxed at this
reduced  tax  rate as long  as it is  exclusively  engaged  in  activities  of a
"securities  corporation." The Company believes it will continue to qualify as a
securities corporation because a separate subsidiary was formed to make the loan
to the Bank's Employee Stock  Ownership Plan and the Company's other  activities
qualify as activities permissible for a securities  corporation.  If the Company
fails to so qualify,  however, it will be taxed as a financial  institution at a
rate of 10.50%, rather than at the phased-in rates, beginning with fiscal 1995.

     Delaware  Taxation.  As a Delaware  holding  company not earning  income in
Delaware,  the  Company  is exempt  from  Delaware  corporate  income tax but is
required to file an annual  report with and pay an annual  franchise  tax to the
State of Delaware.

                       IMPACT OF NEW ACCOUNTING STANDARDS

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


                                       38

<PAGE>   41

Item 2.  Properties.

     The  Company  conducts  its  business  through an  administrative  and full
service  office  located  in  Burlington  and seven  other full  service  branch
offices.  The Company believes it's current  facilities are adequate to meet the
present and immediately foreseeable needs of the Company.

<TABLE>
<CAPTION>

                                                         Original                                     Net Book Value
                                                           Year                                       of Property or
                                            Leased        Leased               Date of                  Leasehold
                                              or            or                  Lease                Improvements at
               Location                     Owned        Acquired            Expiration             December 31, 1996
---------------------------------------   ----------   ------------    -----------------------   ------------------------
                                                                                                      (In thousands)
<S>                                         <C>               <C>         <C>                             <C>
Administrative/Branch/Home
Office:
   17 New England Executive Park            Leased            1988        November 1998 (1)               $1,496
   Burlington, MA  01803
Branch Offices:
   980 Massachusetts Avenue                 Owned             1976               --                          482
   Arlington, MA  02174
   60 The Great Road                        Owned             1971               --                          450
   Bedford, MA  01730
   459 Boston Road                          Owned             1972               --                          427
   Billerica, MA  01821
   75 Federal Street                        Leased            1988       September 1998 (1)                  185
   Boston, MA  02110
   1840 Massachusetts Avenue                Owned             1960               --                        1,164
   Lexington, MA  02173
   31 Cross Street                          Owned             1971               --                          563
   Peabody, MA  01960
   200 Linden Street                        Leased            1973        November 1998 (1)                  212
                                                                                                           -----
   Wellesley, MA  02181
      Total............................                                                                   $4,979
                                                                                                          ======
</TABLE>

----------
(1)  The  Company has  options to renew  these  leases  which range from 5 to 15
     years.

Item 3.  Legal Proceedings.

     The Company is not involved in any pending material legal proceedings other
than routine  legal  proceedings  occurring in the ordinary  course of business.
Such routine legal proceedings,  in the aggregate, are believed by management to
be immaterial to the Company's financial condition or results of operations.


                                       39

<PAGE>   42

     In  1993,  the  Company  foreclosed  on and  took  possession  of a 35 unit
multi-family  residential complex located in Lowell,  Massachusetts.  Subsequent
thereto,  the Company  instituted an action in the Superior  Court for Middlesex
County (C.A. No. 94-4127) to recover a $735,000  deficiency against the borrower
whereafter  the borrower  countersued  the Company and two of its officers.  The
borrower  sought  damages  against the Company and the two members of management
claiming,  among other  things,  $2.9 million in damages for a breach of an oral
agreement to forbear.  On February 24, 1996, the court granted summary  judgment
for the Company and its two  officers.  The  defendant  has appealed the summary
judgment.  The  Company  has been  advised by its  counsel  that there is little
possibility  that the  borrower  will prevail on his  counterclaims  against the
Company.

Item 4.  Submission of Matters to a Vote of Security Holders.

     None.

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

     Information  relating  to the market  for  Registrant's  common  equity and
related  stockholder  matters  appears under  "Shareholder  Information"  in the
Registrant's  1996 Annual Report to  Stockholders on page 64 and is incorporated
herein by reference.

Item 6.  Selected Financial Data.

     The above-captioned  information appears under "Selected Financial Data" of
the Corporation in the Registrant's  1996 Annual Report to Stockholders on pages
6 and 7 is incorporated herein by reference.

Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations.

     The  above-captioned  information  appears under Management  Discussion and
Analysis of Financial  Condition  and Results of  Operation in the  Registrant's
1996 Annual  Report to  Stockholders  on pages 9 through 22 and is  incorporated
herein by reference.

Item 8.  Financial Statements and Supplementary Data.

     The Consolidated  Financial  Statements of BostonFed Bancorp,  Inc. and its
subsidiaries,  together with the report thereon by KPMG Peat Marwick LLP appears
in the  Registrant's  1996 Annual Report to  Stockholders on pages 23 through 62
and are incorporated herein by reference.

Item 9.  Change In and Disagreements with Accountants on Accounting and
          Financial Disclosure.

     None.


                                      40
<PAGE>   43

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.

     The  information  relating  to  Directors  and  Executive  Officers  of the
Registrant  is  incorporated  herein  by  reference  to the  Registrant's  Proxy
Statement for the Annual Meeting of Stockholders to be held on April 28, 1997 at
pages 5 through 7.

Item 11. Executive Compensation.

        The  information  relating to  executive  compensation  is  incorporated
herein by reference to the  Registrant's  Proxy Statement for the Annual Meeting
of Stockholders to be held on April 28, 1997 at pages 13 through 18.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

     The information relating to security ownership of certain beneficial owners
and management is  incorporated  herein by reference to the  Registrant's  Proxy
Statement for the Annual Meeting of  Stockholders  to be held on April 28, 1997,
at pages 3 through 7.

Item 13.  Certain Relationships and Related Transactions.

     The information relating to certain  relationships and related transactions
is incorporated  herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 28, 1997, at page 19.

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

     (a)  The following documents are filed as a part of this report:

          (1)  Consolidated Financial Statements of the Company are incorporated
               by reference to the following  indicated pages of the 1996 Annual
               Report to Stockholders:

                                                                          PAGE
Independent Auditors' Report..........................................     23

Consolidated Balance Sheets as of
  December 31, 1996 and 1995..........................................     24

Consolidated Statements of Income for the Years Ended
  December 31, 1996, 1995 and 1994....................................     26

Consolidated Statements of Changes in Stockholders' Equity for
  the Years Ended December 31, 1996, 1995 and 1994....................     27



                                      41
<PAGE>   44



Consolidated Statements of Cash Flows for the Years
  Ended December 31, 1996, 1995 and 1994..............................     29

Notes to Consolidated Financial Statements............................     31

     The remaining  information appearing in the Annual Report to Stockholder is
not  deemed to be filed as part of this  report,  except as  expressly  provided
herein.

     (2)  All schedules are omitted because they are not required or applicable,
          or the required  information  is shown in the  consolidated  financial
          statements or the notes thereto.

     (3)  Exhibits

          (a)  The following exhibits are filed as part of this report.

                  3.1   Restated Certificate of Incorporation of BostonFed
                        Bancorp, Inc.* 3.2 Bylaws of BostonFed Bancorp, Inc.*
                  4.0   Stock Certificate of BostonFed Bancorp, Inc.*
                  10.1  Employment Agreement between the Bank and David F.
                        Holland and Employment Agreement between the Company and
                        David F. Holland*
                  10.2  Employment Agreement between Bank and David P. Conley
                        and Employment Agreement between the Company and David
                        P. Conley*
                  10.3  Employment Agreement between Bank and John A. Simas and
                        Employment Agreement between the Company and John A.
                        Simas*
                  10.4  Form of Change in Control Agreement between the Bank and
                        Executive and between the Company and Executive*
                  10.5  Boston Federal Savings Bank Employee Severance
                        Compensation Plan*
                  10.6  Employee Stock Ownership Plan and Trust*
                  10.7  BostonFed Bancorp, Inc. 1996 Stock-Based Incentive
                        Plan**
                  10.8  BostonFed Bancorp, Inc. 1997 Stock Incentive Plan***
                  13.0  1996 Annual Report to Stockholders (filed herewith)
                  21.0  Subsidiary information is incorporated herein by
                        reference to "Part I - Subsidiaries"
                  23.0  Consent of KPMG Peat Marwick LLP
                  27.0  Financial Data Schedule (filed herewith)

               ----------
               *    Incorporated herein by reference into this document from the
                    Exhibits to Form S-1, Registration Statement, and any
                    amendments thereto, filed on July 21, 1995, Registration No.
                    33-94860
               **   Incorporated herein by reference into this document from the
                    Proxy Statement for the 1996 Annual Meeting of Stockholders
                    dated March 20, 1996.
               ***  Incorporated herein by reference into this document from the
                    Proxy Statement for the 1997 Annual Meeting of Stockholders
                    dated March 28, 1997.
               (b)  Reports on Form 8-K.

                         None.


                                      42
<PAGE>   45

                                   SIGNATURES

     Pursuant to the  requirements of Section 13 of the Securities  Exchange Act
of 1934,  the  Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                    BOSTONFED BANCORP, INC.


                                    By:  /s/ David F. Holland
                                         -----------------------------
                                         David F. Holland
                                         President and Chief Executive Officer
DATED:  3/31/97
      ----------------------

      Pursuant to the  requirements  of the Securities and Exchange Act of 1934,
this report has been signed by the following  persons in the  capacities  and on
the dates indicated.

      Name                    Title                              Date
      ----                    -----                              ----

/s/ David F. Holland          President and Chief                3/31/97
----------------------        Executive Officer
David F. Holland              and Chairman of the Board


/s/ David P. Conley           Director, Executive                3/31/97
----------------------        Vice President,
David P. Conley               Assistant Treasurer
                              and Assistant Secretary


/s/ John A. Simas             Senior Vice President,             3/31/97
----------------------        Treasurer, Corporate
John A. Simas                 Secretary and Chief Financial
                              Officer (Principal
                              Accounting Officer)


/s/ Edward P. Callahan        Director                           3/31/97
----------------------
Edward P. Callahan


/s/ Richard J. Dennis, Sr.    Director                           3/31/97
----------------------
Richard J. Dennis, Sr.


/s/ Charles R. Kent           Director                           3/31/97
----------------------
Charles R. Kent


/s/ W. Robert Mill            Director                           3/31/97
----------------------
W. Robert Mill


/s/ Irwin W. Sizer            Director                           3/31/97
----------------------
Irwin W. Sizer



                                      43