<PAGE>
 
                      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 MARCH 31, 1997

                         Commission File No.: 1-12305

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

           DELAWARE                                             04-3331237
  (State or other jurisdiction                     (IRS Employer Identification)
of incorporation or organization)

            ONE NORTH MAIN STREET, FALL RIVER,MASSACHUSETTS  02720
                      (Address of principal executive offices)

       Registrant's telephone number, including area code: (508) 679-8181
           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 $126.4 million and is based upon the last sales price as  listed
on The American Stock Exchange for June 11, 1997.

     The number of shares of Common Stock outstanding as of June 11, 1997 is
8,707,152.

                      DOCUMENTS INCORPORATED BY REFERENCE

     PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED
MARCH 31, 1997 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.

     PORTIONS OF THE PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF SHAREHOLDERS
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
<PAGE>
 
<TABLE>
<CAPTION>
                                        INDEX
                                                                                                       PAGE
<S>                                                                                                    <C>
PART I ................................................................................................  1
     Item 1.  Business ................................................................................  1
     Additional Item. Executive Officers of the Registrant ............................................ 41
     Item 2.  Properties .............................................................................. 42
     Item 3.  Legal Proceedings ....................................................................... 43
     Item 4.  Submission of Matters to a Vote of Security Holders ..................................... 44
                                                                                                    
PART II ............................................................................................... 44
     Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.................... 44
     Item 6.  Selected Financial Data ................................................................. 44
     Item 7.  Management's Discussion and Analysis of Financial Condition and                       
                    Results of Operations ............................................................. 44
     Item 8.  Financial Statements and Supplementary Data ............................................. 44
     Item 9.  Change In and Disagreements with Accountants on Accounting and                        
                    Financial Disclosure .............................................................. 44
                                                                                                    
PART III .............................................................................................. 45
     Item 10.  Directors and Executive Officers of the Registrant ..................................... 45
     Item 11.  Executive Compensation ................................................................. 45
     Item 12.  Security Ownership of Certain Beneficial Owners and Management ......................... 45
     Item 13.  Certain Relationships and Related Transactions ......................................... 45
                                                                                                    
PART IV ............................................................................................... 46
     Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....................... 46
                                                                                                    
SIGNATURES ............................................................................................ 49
</TABLE> 
 
<PAGE>
 
                                    PART I

ITEM 1.  BUSINESS.
------------------


GENERAL


     FIRSTFED AMERICA BANCORP, INC. (also referred to as the "Company" or
"Registrant") was organized by the Board of Directors of First Federal Savings
Bank of America (the "Bank") for the purpose of acquiring all of the capital
stock of the Bank issued in connection with the Bank's conversion from mutual to
stock form, which was completed on January 15, 1997.  At March 31, 1997, the
Company had consolidated total assets of $979.7 million and total
stockholders' equity of $122.2 million.  The Company was incorporated under
Delaware law and is a savings and loan holding company subject to regulation by
the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance
Corporation ("FDIC") and the Securities and Exchange Commission ("SEC").

     The Bank was originally organized in 1946 and operated as First Federal
Savings and Loan Association of Fall River. In 1982, the Bank merged with First
Federal Savings and Loan Association of Attleboro, which was originally
organized in 1854 and became a federally-chartered savings and loan association
in 1959. In 1983, the Bank became a federally-chartered savings bank, changing
its name to First Federal Savings Bank of America. In 1984, the Bank added
mortgage banking activities to its operations. The Bank conducts business from
its administrative/branch and operations offices located in Fall River,
Massachusetts and its 12 other branch offices located in the municipalities of
Fall River, Attleboro, New Bedford, Seekonk, Somerset and Taunton, Massachusetts
and Pawtucket, East Providence and Warwick, Rhode Island, and the Bank's five
loan origination centers located in Yarmouth, Auburn, Agawam and Burlington,
Massachusetts and East Greenwich, Rhode Island.

     The Bank'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 adjustable-rate and shorter-term fixed-
rate one- to four-family residential mortgage loans. Through its 13 branch
offices and five loan origination offices, the Bank originates loans for
investment and loans for sale in the secondary market, generally retaining the
servicing rights to all loans sold. To a lesser extent, the Bank invests in
multi-family, commercial real estate, construction and land, commercial and
consumer loans. Loan sales are made from loans designated as being held for sale
or originated for sale during the period. The Bank'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 and loan
servicing income. The Bank's primary sources of funds are deposits, principal
and interest payments on loans and mortgage-backed securities, Federal Home Loan
Bank ("FHLB") advances and proceeds from the sale of loans. The Company's Board
of Directors has also authorized management to establish a trust services
department to provide future trust services to customers. The establishment of
additional branch offices and trust services by the Company would result in
additional capital expenditures and other costs associated with the
establishment of such branch offices and services which the Company has not yet
currently estimated.

     The Company's and Bank's executive offices are located at One North Main
Street, Fall River, Massachusetts 02720. The telephone number is (508) 679-8181.

     Information required by Guide 3 to be contained in the description of 
business which is not contained in Item 1 is incorporated by reference from Item
7 herein.


                                       1
<PAGE>
 
MARKET AREA AND COMPETITION

     The Bank is a community-oriented savings institution offering a variety of
financial products and services to meet the needs of the communities it serves.
The Bank's deposit gathering is concentrated in the communities surrounding its
13 full service branch offices located in the Southeastern Massachusetts
municipalities of Fall River, Attleboro, New Bedford, Seekonk, Somerset and
Taunton and the Rhode Island municipalities of Pawtucket, East Providence and
Warwick.  The Bank also maintains loan origination centers in the municipalities
of Yarmouth, Auburn, Agawam and Burlington, Massachusetts and East Greenwich,
Rhode Island.  The Bank primarily invests in loans secured by first or second
mortgages on properties located in Southeastern Massachusetts and Rhode Island
and, to a lesser extent, other areas of Massachusetts and Connecticut.

     The Bank's main office is located in Fall River, Massachusetts. Fall River
is located in the Southeastern region of Massachusetts and is adjacent to Rhode
Island. All of the Bank's 13 branch offices are located within 30 miles of Fall
River. The Southeastern Massachusetts and Rhode Island suburbs are generally low
to middle income residential communities with individuals employed primarily in
Fall River and New Bedford, Massachusetts and Providence, Rhode Island and areas
along Interstates 195, 95 and 495 and Route 24.

     Southeastern New England has generally lagged behind the rest of the nation
in coming out of the recession of the early 1990s and unemployment rates in Fall
River and New Bedford are currently higher than the national average. Small
businesses, service firms and tourism form the backbone of the region's economy.
Cuts to the defense industry, changes in the costume jewelry industry and
uncertainty in the technology industry have resulted in decreased employment
opportunities in the region. However, many manufacturers, such as The Acushnet
Company, Textron, American Power Conversion, Globe Manufacturing, Electric Boat
and Hasbro are still located in the region.

     With the economic downturn experienced during the late 1980s and early
1990s, the market value of many one- to four-family residences declined
throughout the region. Loan demand diminished and competition for such loans
increased. During and subsequent to the recession of the late 1980s and early
1990s, a number of bank closings and mergers also occurred. These events also
served to raise regional unemployment, principally in Fall River and New
Bedford, Massachusetts. Nonetheless, the region's economy has stabilized and a
number of recent initiatives to improve the region's economy have been
introduced, including proposed improvements to the rail transportation system.

     The Bank faces significant competition both in generating loans and in
attracting deposits.  The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, 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 Bank.  The Bank's
competition for loans comes principally from commercial banks, savings banks,
credit unions, mortgage brokers, mortgage banking companies and insurance
companies.  Its most direct competition for deposits has historically come from
savings, cooperative and commercial banks and credit unions, particularly in
Fall River and New Bedford.  In addition, the Bank 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.  In the areas of Fall River and Rhode Island, the
Bank has experienced significant competition from credit unions which have a
competitive advantage as they do not pay state or federal income taxes. 

                                       2
<PAGE>
 
Such competitive advantage has placed increased pressure on the Bank with
respect to its loan and deposit pricing.

     From the mid-1980s through the early 1990s, the Bank's operating strategy
was to control growth while building its loan servicing portfolio and the
resultant fee income. As part of this strategy, the Bank increased market share
through its mortgage banking activities. Interest rate risk was managed by
generally retaining all adjustable rate one- to four-family loans and selling
all longer term fixed-rate one- to four-family loans in the secondary market on
a servicing retained basis. Beginning in 1993, the Bank began to focus more
heavily on building its loan and deposit franchise and increasing its level of
interest-earning assets and retail deposits. At that time, the Bank began to
expand its franchise in its existing market area and other areas in Southeastern
Massachusetts and Rhode Island through the establishment of de novo branch
                                                            -------
offices and new loan origination facilities. In this regard, since 1994, the
Bank has opened five new branch offices in Seekonk and New Bedford,
Massachusetts and East Providence, Pawtucket and Warwick, Rhode Island and one
new loan origination office in Burlington, Massachusetts. In addition, the Bank
plans to open a new centralized administrative and operations center and branch
office in late 1997 in Swansea, Massachusetts. Pursuant to this expansion
strategy, the Bank is currently seeking new branches within its primary market
areas as well as considering sites for loan production offices within its
existing market area and Connecticut.


LENDING ACTIVITIES

     Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
     ---------------------------
first mortgage loans secured by one- to four-family residences. At March 31,
1997, loans receivable, net totaled $796.4 million, of which $666.9 million were
one- to four-family residential mortgage loans, or 82.1% of the Bank's total
loans receivable. At such date, the remainder of the loan portfolio consisted
of: $4.4 million of multi-family residential loans, or 0.5% of total loans
receivable; $33.1 million of commercial real estate loans, or 4.1% of total
loans receivable; $23.9 million of construction and land loans, or 3.0% of total
loans receivable; $20.1 million of commercial loans, or 2.5% of total loans
receivable; and $64.1 million of consumer loans, or 7.9% of total loans
receivable, consisting of $25.0 million of home equity lines of credit, $32.1
million of second mortgages and $7.0 million of other consumer loans. The Bank
had $23.3 million of mortgage loans held for sale at March 31, 1997 consisting
of one- to four-family fixed-rate mortgage loans. At that same date, 50.9% of
the Bank's residential mortgage loans and construction and land loans, excluding
mortgage loans held for sale, had adjustable interest rates, most of which are
indexed to the one-year Constant Maturity Treasury ("CMT") Index.

     The types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank 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.

                                       3
<PAGE>
 
The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and as a percentage of the portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                               AT MARCH 31,
                                           -----------------------------------------------------------------------------------------
                                                 1997                   1996                  1995                     1994
                                           -----------------    -------------------    -----------------        --------------------
                                                        PERCENT              PERCENT              PERCENT                   PERCENT
                                          AMOUNT        OF TOTAL   AMOUNT    OF TOTAL    AMOUNT   OF TOTAL      AMOUNT      OF TOTAL
                                          -------       --------   ------    --------    ------   --------      ------      --------
                                                                        (DOLLARS IN THOUSANDS)
<S>                                       <C>           <C>        <C>       <C>         <C>      <C>           <C>         <C>
MORTGAGE LOANS:
 Residential:
   One- to four-family..................  $666,942        82.08%    $531,849     81.63%   $405,747    79.20%    $335,374     78.84%
   Multi-family.........................     4,416          .54        4,703       .72       5,157     1.00        5,257      1.24 
 Commercial real estate.................    33,057         4.07       23,368      3.59      19,968     3.90       14,849      3.49 
 Construction and land..................    23,919         2.95       25,297      3.88      26,337     5.14       20,142      4.73 
                                          --------       ------     --------    ------    --------   ------     --------   ------- 
    Total mortgage loans................   728,334        89.64      585,217     89.82     457,209    89.24      375,622     88.30 
                                          --------       ------     --------    ------    --------   ------     --------   ------- 
COMMERCIAL..............................    20,062         2.47       14,473      2.22      12,756     2.49       10,269      2.41 
                                          --------       ------     --------    ------    --------   ------     --------   ------- 
CONSUMER LOANS:                                                                                                                    
   Home equity lines....................    25,021         3.08       27,995      4.30      29,373     5.73       30,409      7.15 
   Second mortgages.....................    32,122         3.95       18,064      2.77       9,111     1.78        5,438      1.28 
   Other consumer loans.................     6,985          .86        5,813       .89       3,874      .76        3,672       .86 
                                          --------       ------     --------    ------    --------   ------     --------   ------- 
     Total consumer loans...............    64,128         7.89       51,872      7.96      42,358     8.27       39,519      9.29 
                                          --------       ------     --------    ------    --------   ------     --------   ------- 
Total loans receivable..................   812,524       100.00%     651,562    100.00%    512,323   100.00%     425,410    100.00%
                                                         ======                 ======               ======                =======  
Less:                                                                                                                             
   Allowance for loan losses............    (8,788)                   (5,607)               (4,239)               (3,964)         
   Undisbursed proceeds of                                                                                                        
    construction mortgages in process...    (5,274)                   (6,568)               (5,511)               (6,758)         
Deferred loan origination fees,                                                                                                   
    net.................................    (2,107)                   (1,795)               (2,596)               (2,915)         
                                          --------                  --------              --------              --------          
Loans receivable, net...................   796,355                   637,592               499,977               411,773          
Mortgage loans held for sale............    23,331                    17,747                 6,816                15,779          
                                          --------                  --------              --------              --------          
 Loans receivable, net and                                                                                                        
  mortgage loans held for sale..........  $819,686                  $655,339              $506,793              $427,552          
                                          ========                  ========              ========              ========          

<CAPTION>
                                       ----------------------
                                               1993
                                       ----------------------
                                                     PERCENT
                                       AMOUNT        OF TOTAL
                                       ------        --------
                                       <S>           <C>
MORTGAGE LOANS:
 Residential:
   One- to four-family...............  $263,911      76.42%
   Multi-family......................     3,948       1.14
 Commercial real estate..............    11,932       3.46
 Construction and land...............    13,091       3.79
                                       --------    ------- 
     Total mortgage loans............   292,882      84.81
                                       --------    ------- 
COMMERCIAL...........................     7,396       2.14
                                       --------    ------- 
CONSUMER LOANS:
   Home equity lines.................    33,492       9.70
   Second mortgages..................     7,371       2.13
   Other consumer loans..............     4,215       1.22
                                       --------    -------  
     Total consumer loans............    45,078      13.05
                                       --------    ------- 

 Total loans receivable..............   345,356     100.00%
                                                   =======
 Less:
   Allowance for loan losses.........    (3,524)
   Undisbursed proceeds of
     construction mortgages in
     process.........................      (810)
 Deferred loan origination
    fees, net........................    (2,854)
                                       -------- 
 Loans receivable, net...............   338,168
 Mortgage loans held for sale........    20,253
                                       --------
  Loans receivable, net and
  mortgage loans held for
    sale.............................  $358,421
                                       ========
</TABLE> 

                                       4
<PAGE>
 
     Loan Maturity. The following table shows the remaining contractual maturity
     -------------     
of the Bank's loans at March 31, 1997. The table does not include the effect of
future principal prepayments.

<TABLE>
<CAPTION>
                                                                              AT MARCH 31, 1997                              
                                                  ----------------------------------------------------------------------------- 
                                                   ONE- TO                                                                     
                                                   FOUR-     MULTI-    COMMERCIAL   CONSTRUCTION                         TOTAL  
                                                   FAMILY    FAMILY    REAL ESTATE    AND LAND   COMMERCIAL  CONSUMER    LOANS  
                                                  ---------  -------   ------------ ------------ ----------- ---------  -------
                                                                                   (IN THOUSANDS)                          
<S>                                               <C>        <C>       <C>          <C>          <C>         <C>       <C> 
Amounts due:                                                                                                            
      One year or less..........................    $  383    $    2      $ 2,842       $ 7,933     $ 8,380   $28,128  $ 47,668
                                                  --------    ------      -------       -------     -------   -------  --------
                                                                                                                              
      After one year:                                                                                                         
        More than one year to three years.......     2,812        65        6,007            10       3,266     3,984    16,144
        More than three years to five Years ....     6,732        54       19,992            44       5,479     6,700    39,001
        More than five years to 10 years........   102,407       764        2,092           439       2,644    16,585   124,931
        More than 10 years to 20 years..........   204,359     2,187        1,540         8,473         293     8,700   225,552
        More than 20 years......................   350,249     1,344          584         7,020           -        31   359,228
                                                  --------    ------      -------       -------     -------   -------  --------
        Total due after one year................   666,559     4,414       30,215        15,986      11,682    36,000   764,856
                                                  --------    ------      -------       -------     -------   -------  -------- 
                                                                                                                              
        Total amount due........................  $666,942    $4,416      $33,057       $23,919     $20,062   $64,128   812,524
                                                  ========    ======      =======       =======     =======   =======          
 
           Less:
              Allowance for loan losses.............................................................................     (8,788)
              Undisbursed proceeds of construction mortgages in process.............................................     (5,274)
              Deferred loan origination fees, net...................................................................     (2,107) 
                                                                                                                        --------  

        Loans receivable, net.......................................................................................    $796,355
                                                                                                                        ========
</TABLE>

                                       5
<PAGE>
 
     The following table sets forth, at March 31, 1997, the dollar amount of
loans, excluding mortgage loans held for sale, contractually due after March 31,
1998, and whether such loans have fixed interest rates or adjustable interest
rates.

<TABLE>
<CAPTION>                                                                   
                                                                            
                                                 DUE AFTER MARCH 31, 1998   
                                            -------------------------------- 
                                               FIXED    ADJUSTABLE   TOTAL  
                                            ---------- -----------  --------
                                                      (IN THOUSANDS)        
     <S>                                      <C>         <C>       <C>   
     Mortgage loans:                                                        
      One- to four-family..................   $334,273    $332,286  $666,559
      Multi-family.........................        395       4,019     4,414
      Commercial real estate...............     22,970       7,245    30,215
      Construction and land................        789      15,197    15,986
                                              --------    --------  --------
       Total mortgage loans................    358,427     358,747   717,174
     Commercial loans......................      6,210       5,472    11,682
     Consumer loans........................     36,000           -    36,000
                                              --------    --------  --------
         Total loans                          $400,637    $364,219  $764,856
                                              ========    ========  ======== 
</TABLE>

     Origination, Sale and Servicing of Loans. The Bank's mortgage lending
     ----------------------------------------
activities are conducted primarily by its loan personnel operating at its 13
branch offices and five loan origination centers and through a network of
approximately 65 active loan correspondents, wholesale loan brokers and other
financial institutions approved by the Bank. All loans originated by the Bank,
either through internal sources or through loan correspondents are underwritten
by the Bank pursuant to the Bank's policies and procedures. For the fiscal year
ended March 31, 1997, the Bank's loan correspondents originated $274.9 million
in loans. The Bank originates both adjustable-rate and fixed-rate loans. The
Bank's ability to originate fixed- or adjustable-rate loans is dependent upon
the relative customer demand for such loans, which is affected by the current
and expected future level of interest rates.

     Generally, all loans originated by the Bank are originated for investment
with the exception of longer-term fixed-rate one- to four-family mortgage loans.
While the Bank has in the past, from time to time, retained fixed-rate one- to
four-family loans and sold adjustable-rate one-to four-family loans, it is the
general policy of the Bank to sell substantially all of the one- to four-family
fixed-rate mortgage loans with maturities over 12 years that it originates and
to retain substantially all fixed-rate loans with maturities of up to 12 years
and all adjustable-rate one- to four-family mortgage loans which it originates.
The one- to four-family loan products currently originated for sale by the Bank
include a variety of mortgage loans which conform to the underwriting standards
specified by the Federal National Mortgage Association ("FNMA") and Federal Home
Loan Mortgage Corporation ("FHLMC") ("conforming loans") and, to a lesser
extent, loans which do not conform to FNMA or FHLMC standards due to loan
amounts ("jumbo loans"), or due to the substandard credit quality of the
borrowers ("B and C loans"). The Bank also sells all mortgage loans insured by
FHA and VA. All one- to four-family loans sold by the Bank are sold pursuant to
master commitments negotiated with FNMA, FHLMC and other investors to purchase
loans meeting such investors' defined criteria. Although the Bank has entered
into such master commitment contracts, such contracts generally do not require
the purchasers to buy or the Bank to deliver a specific amount of mortgage
loans. The Bank currently sells all longer-term fixed-rate conforming mortgage
loans it originates to FNMA and FHLMC. Sales of loans are made without recourse
to the Bank in the event of default by the borrower, except, in the case of VA
loans, which are subject to limitations on the VA's loan guarantees. The Bank

                                       6
<PAGE>
 
generally retains the servicing rights on the mortgage loans sold to FNMA and
FHLMC but generally sells all VA, FHA, jumbo loans and B and C loans to
institutional investors on a servicing released basis.

     Between the time the Bank issues loan commitments and the time such loans
or the securities into which they are converted are sold, the Bank is exposed to
movements in the market price due to changes in market interest rates. The Bank
attempts to manage this risk by utilizing forward cash sales of loans or
mortgage-backed securities primarily to FNMA and FHLMC (such forward sales of
loans or mortgage-backed securities are collectively referred to as "forward
sale commitments"). Generally, the Bank attempts to cover between 70% and 100%
of the principal amount of the loans that it has committed to fund at specified
interest rates with forward sale commitments. However, the type, amount and
delivery date of forward sale commitments the Bank will enter into is based upon
anticipated movements in market interest rates, bond market conditions and
management's estimates as to closing volumes and the length of the origination
or purchase commitments. Differences between the volume and timing of actual
loan originations and purchases and management's estimates can expose the Bank
to losses. If the Bank is not able to deliver the mortgage loans or mortgage-
backed securities during the appropriate delivery period called for by the
forward sale commitment, the Bank may be required to pay a non-delivery fee,
repurchase the delivery commitments at current market prices or purchase whole
loans at a premium for delivery. The above activity is managed continually;
however, there can be no assurances that the Bank will be successful in its
efforts to eliminate the risk of interest rate fluctuation between the time
origination or purchase commitments are issued and the ultimate sale of the
loan. At March 31, 1997, the Bank had $17.2 million of forward sale commitments.

     At March 31, 1997, the Bank was servicing its portfolio of $819.7 million
of loans receivable, net and mortgage loans held for sale and $1.2 billion of
loans for others, primarily consisting of conforming fixed-rate loans sold by
the Bank. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, 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. All of the loans currently being serviced
for others are loans which have been sold by the Bank. The gross servicing fee
income from loans originated and purchased is generally .25% to .38% of the
total balance of the loan serviced.

     During the fiscal years ended March 31, 1997 and March 31, 1996, the Bank
originated $421.1 million and $375.1 million of fixed-rate and adjustable-rate
one- to four-family loans, respectively, of which $203.5 million and $190.9
million, respectively, were retained by the Bank. The fixed-rate loans retained
by the Bank consisted primarily of loans with terms of 12 years or less. The
Bank 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. On April 1, 1996, the Bank implemented
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS No. 122") pursuant to which the value of
servicing rights are recognized as an asset of the Bank. The book value of this
asset at March 31, 1997, net of amortization, was $1.6 million. Management has
determined that the fair value of the rights exceeds their carrying value and,
therefore, no valuation allowance was established.

     The Bank has, in the past, from time to time, purchased loans or
participations in loans, primarily one- to four-family mortgage loans, and had
$8.0 million of purchased loans at March 31, 1997. Purchases of loans from
correspondent financial institutions are underwritten pursuant to the Bank's
policies and are closed in the name of the correspondent financial institution
but immediately purchased by the Bank for its mortgage banking activities. At
March 31, 1997, the Bank had $23.3 million in mortgage loans held for sale
consisting of fixed-rate one- to four-family loans.

                                       7
<PAGE>
 
     The following table sets forth the Bank's loan originations, purchases,
participations, sales and principal repayments for the periods indicated:

<TABLE>
<CAPTION>
                                                                                      FOR THE YEAR ENDED
                                                                                           MARCH 31,
                                                                                --------------------------------------
                                                                                   1997          1996         1995
                                                                                ----------     ---------    ----------
                                                                                             (IN THOUSANDS)
<S>                                                                             <C>            <C>          <C>
Beginning balance(1) ..........................................                 $  655,339     $ 506,793    $ 427,552
  Loans originated:
    Mortgage  loans:
       One- to four-family ....................................                    421,088       375,063      230,433
       Multi-family ...........................................                        189            40           68
       Commercial real estate .................................                     17,809         6,839        8,408
       Construction and land ..................................                     27,316        29,519       33,270
                                                                                ----------     ---------    ----------
           Total mortgage loans ...............................                    466,402       411,461      272,179
                                                                                ----------     ---------    ----------
    Commercial ................................................                     11,316         8,660        8,289
                                                                                ----------     ---------    ----------
    Consumer loans:
      Home equity lines .......................................                      5,516        10,695        8,253
      Second mortgages ........................................                     21,636        13,868        6,252
      Other consumer loans ....................................                      2,956         2,688        1,085
                                                                                ----------     ---------    ----------
           Total consumer loans ...............................                     30,108        27,251       15,590
                                                                                ----------     ---------    ----------
    Total loans originated ....................................                    507,826       447,372      296,058
                                                                                ----------     ---------    ----------
            Total .............................................                  1,163,165       954,165      723,610
Less:
    Principal repayments and other, net .......................                   (124,482)     (112,546)     (73,931)
    Loan charge-offs, net .....................................                       (569)       (1,258)        (378)
    Proceeds from sale of mortgage loans ......................                   (217,591)     (184,207)    (141,043)
    Transfer of mortgage loans to REO .........................                       (837)         (815)      (1,465)
                                                                                ----------     ---------    ----------
Loans receivable, net and mortgage loans held for sale ........                    819,686       655,339      506,793
   Mortgage loans held for sale ...............................                    (23,331)      (17,747)      (6,816)
                                                                                ----------     ---------    ----------
Ending balance, loans receivable, net .........................                 $  796,355     $ 637,592    $ 499,977
                                                                                ==========     =========   ===========
</TABLE>

______________
(1)  Includes mortgage loans held for sale.

                                       8
<PAGE>
 
     One- to Four-Family Mortgage Lending. The Bank offers both fixed-rate and
     -------------------------------------
adjustable-rate mortgage ("ARM") loans secured by one- to four-family residences
with maturities of up to 30 years. Substantially all of such loans are secured
by property located in the Bank's primary market area. Loan originations are
generally obtained from the Bank'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 March 31, 1997, residential one- to four-family
mortgage loans totaled $666.9 million, or 82.1% of the Bank's total loans
receivable. Of the Bank's mortgage loans secured by residential mortgage loans
and construction and land loans, $339.0 million, or 49.1%, were fixed-rate loans
and $351.8 million, or 50.9%, were adjustable-rate loans.

     The Bank's fixed-rate mortgage loans currently are made for terms from 
seven to 30 years. The Bank sells substantially all fixed-rate residential
mortgage loans that it originates with maturities greater than 12 years and
retains the servicing on all loans sold to FNMA and FHLMC. The Bank generally
retains for its portfolio shorter-term, fixed-rate loans with maturities of 12
years or less and all adjustable-rate one- to four-family loans.

     The Bank currently offers a number of ARM loan programs with interest rates
which are fixed for a period of one, three, four, five or seven years and adjust
annually thereafter. The Bank's ARM loans generally provide for periodic (not
more than 2%) and overall (not more than 6%) caps on the increase or decrease in
the interest rate at any adjustment date and over the life of the loan,
respectively. The interest rate adjustment on these loans is indexed to the one-
year U.S. Treasury CMT Index.

     The Bank's policy is to originate 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 with the exception of
FHA and VA loans. Mortgage loans originated by the Bank include due-on-sale
clauses which provide the Bank with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of the
property without the Bank's consent. Due-on-sale clauses are an important means
of adjusting the rates on the Bank's fixed-rate mortgage loan portfolio and the
Bank has generally exercised its rights under these clauses.

     The origination of adjustable-rate residential mortgage loans, as opposed 
to fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
help to reduce the credit risk associated with its adjustable-rate loans but
also limit the interest rate sensitivity of its adjustable-rate mortgage loans.

     In an effort to provide financing for first-time and moderate income home
buyers, the Bank offers FHA and VA loans and also has its own first-time home
buyer program. These programs offer single-family residential mortgage loans to
qualified individuals. These loans are offered with terms of up to 30 years.
Such loans must be secured by a one- to four-family owner-occupied unit. These
loans are originated using modified underwriting guidelines with reduced down
payments and loan fees. Such loans are originated in amounts up to 97% of the
lower of the property's appraised value or the sale price. Private mortgage
insurance is normally required. With respect to loans originated under the first
time home buying program, because the Bank typically charges a lower rate of
interest, lower mortgage origination fees or a discount on closing costs on such
loan programs, the Bank expects to achieve a lower rate of return on such loans,
as compared to other residential mortgage loans.

                                       9
<PAGE>
 
     Commercial Real Estate Lending. The Bank originates commercial real estate
     -------------------------------
loans that are generally secured by owner-occupied properties used for business
purposes such as light manufacturing, small office buildings or retail
facilities located in the Bank's primary market area. The Bank's commercial real
estate underwriting policy provides that commercial real estate loans may be
made in amounts up to 80% of the appraised value of the property. Commercial
real estate lending is limited by the regulatory loans-to-one borrower limit
which at March 31, 1997 was $18.3 million. The Bank currently originates
commercial real estate loans, generally with terms of up to five years and
amortizations of 20 years with the outstanding balance due and payable at the
end of the loan term. The Bank's adjustable-rate loans generally have interest
rates that adjust daily and are indexed to the Bank's prime rate of interest. In
reaching its decision on whether to make a commercial real estate loan, the Bank
considers the net operating income of the property, the borrower's expertise,
credit history and profitability and the value of the underlying property. The
Bank has generally required that the properties securing commercial real estate
loans have debt service coverage ratios (the ratio of earnings before debt
service to debt service) of at least 1.25x. In addition, environmental impact
surveys are generally required for all commercial real estate loans in excess of
$500,000. Generally, all commercial real estate loans made to corporations,
partnerships and other business entities require personal guarantees by the
principals. On an exception basis, the Bank may not require a personal guarantee
on such loans depending on the creditworthiness of the borrower and the amount
of the down payment and other mitigating circumstances. The Bank's commercial
real estate loan portfolio at March 31, 1997 was $33.1 million, or 4.1% of total
loans receivable. At March 31, 1997, the largest commercial real estate loan in
the Bank's portfolio had an outstanding principal balance of $1.2 million.

     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 greater extent to the then
prevailing conditions in the real estate market or the economy. The Bank seeks
to minimize these risks through its underwriting standards.

     Commercial Lending. The Bank also originates commercial loans to businesses
     -------------------    
operating in the Bank's primary market area. Such loans are generally secured by
equipment, leases, inventory and accounts receivable. The Bank offers commercial
loans in the form of term loans and lines of credit. Term loans are generally
offered with either fixed or adjustable rates of interest and terms of up to ten
years. All term loans fully amortize during the term of such loan. Business
lines of credit generally have terms of one-year and are indexed to the Bank's
prime rate of interest or the prime rate as published in the Wall Street
                                                             ------------
Journal. These lines of credit are renewable annually.
--------
  
     In making commercial loans, the Bank considers primarily the financial
resources of the borrower, the borrower's ability to repay the loan out of net
operating income, the Bank's lending history with the borrower and the value of
the collateral. Generally, if the borrower is a corporation, partnership or
other business entity, personal guarantees by the principals are required.
However, personal guarantees may not be required on such loans depending on the
creditworthiness of the borrower and other mitigating circumstances. The Bank's
largest commercial loan at March 31, 1997 was a $2.0 million line of credit of
which no funds were advanced at March 31, 1997. At such date, the Bank had $9.4
million of unadvanced commercial lines of credit. At March 31, 1997, the Bank
had $20.1 million of commercial loans which amounted to 2.5% of the Bank's total
loans receivable.

     Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other income,
and which are secured by real property whose value tends to be more easily
ascertainable, commercial loans are of higher risk and typically are made on the
basis

                                       10
<PAGE>
 
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
loans may be substantially dependent on the success of the business itself.
Further, any collateral securing such loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the
business.

     Multi-Family Lending.  The Bank originates adjustable-rate multi-family
     ---------------------
mortgage loans generally secured by five to 12 unit residential apartment
buildings located in the Bank's primary market area. Such loans adjust annually,
have a 25 year term and are indexed to the one year FHLB advance rate. As a
result of uncertain market conditions in its primary market area, the Bank
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 Bank
considers the value of the underlying property as well as the qualifications of
the 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; and the ratio of the loan amount to
appraised value. Pursuant to the Bank's current underwriting policies, a multi-
family mortgage loan may only be made in an amount up to 60% of the appraised
value of the underlying property. The maximum amount of a multi-family loan is
limited by the Bank's loans-to-one borrower limit which, at March 31, 1997, was
$18.3 million.

     When evaluating the qualifications of the borrower for a multi-family loan,
the Bank considers the financial resources and income level of the borrower, the
borrower's experience in owning or managing similar property, and the Bank's
lending experience with the borrower. The Bank'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 Bank generally reviews the financial
statements, employment and credit history of the borrower, as well as other
related documentation. All multi-family loans made to corporations, partnerships
and other business entities require personal guarantees by the principal
borrowers. The Bank's multi-family loan portfolio at March 31, 1997, totaled
$4.4 million, or 0.5% of total loans receivable. At March 31, 1997, the Bank had
no multi-family loans with an outstanding carrying balance in excess of
$250,000.

     Loans secured by apartment buildings and other multi-family residential
properties generally 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 Bank
seeks to minimize these risks through its underwriting policies.

     Construction and Land Lending.  The Bank originates construction and land
     ------------------------------
loans primarily for the development of single-family residences. Such loans are
made principally to individuals building their primary residence and, to a
lesser extent, to licensed and experienced developers known to the Bank in its
primary market area for the construction of single-family developments. The Bank
generally does not originate loans secured by raw land. In the case of
construction and land mortgage loans to individuals building their primary
residence, such loans are originated in amounts up to 90% of the appraised value
of the property, as improved. Construction and land loans to commercial
developers are originated in amounts up to 70% of the lesser of the appraised
value of the property, as improved, or the sales price. Proceeds of construction
and land loans are disbursed as phases of the construction are completed.
Generally, if the borrower is a corporation, partnership or other business
entity, personal guarantees by the principals are required. The Bank's largest
construction and land loan at March 31, 1997 was a performing loan with a

                                       11
<PAGE>
 
$480,000 carrying balance secured by a home located in Harvard, Massachusetts.
At March 31, 1997, the Bank had $23.9 million of construction and land loans
which amounted to 3.0% of the Bank's total loans receivable.

     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 Bank may
be confronted with a project, when completed, having a value which is
insufficient to assure full repayment.

     Consumer Lending.  Consumer loans at March 31, 1997 amounted to $64.1
     -----------------
million, or 7.9% of the Bank's total loans receivable, and consisted primarily
of home equity lines of credit and second mortgage loans, and, to a
significantly lesser extent, secured and unsecured personal loans and new and
used automobile loans. Such loans are generally originated in the Bank's primary
market area and generally are secured by real estate, deposit accounts, personal
property and automobiles. These loans are typically shorter term and generally
have higher interest rates than one-to four-family mortgage loans.

     The Bank offers "open-end line of credit" and "second mortgage" home equity
loans. Substantially all of the Bank's home equity loans are secured by second
mortgages on one- to four-family residences located in the Bank's primary market
area. At March 31, 1997, these loans totaled $57.1 million, or 7.0% of the
Bank's total loans and 89.1% of consumer loans. Home equity lines of credit
generally have variable rates of interest which adjust on a monthly basis. The
interest rate on such loans is indexed to the prime rate as reported in the 
Wall Street Journal. Adjustable-rate home equity loans generally have an 18%
--------------------
lifetime limit on interest rates. Generally, the maximum combined loans-to-value
ratio ("LTV") on home equity loans is 80%; however, with respect to second
mortgage loans up to $25,000, the Bank will allow an LTV of up to 100% if the
Bank holds the first mortgage lien on the property and other underwriting
criteria are satisfied. At March 31, 1997, the Bank had $50.0 million of home
equity lines of credit of which $25.0 million, or 3.1% of total loans
receivable, was drawn upon such loans at such date. Second mortgage loans are
generally offered with terms of up to 15 years and only with fixed-rates of
interest which rates will vary depending on the amortization period chosen by
the borrower. At March 31, 1997, second mortgage loans totaled $32.1 million, or
4.0% of the Bank's total loans receivable and 50.1% of consumer loans. The
underwriting standards employed by the Bank for home equity lines and second
mortgage 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.

     The Bank also originates other types of consumer loans consisting of
secured and unsecured personal loans and new and used automobile loans. Secured
personal loans are generally secured by deposit accounts, stocks or bonds.
Personal loans are secured by deposits or readily marketable collateral.
Unsecured personal loans generally have a maximum borrowing limitation of
$10,000 and generally allow a maximum debt ratio (the ratio of debt service to
net earnings) of 40%. Automobile loans have a maximum borrowing limitation of
95% of the sale price of a new automobile and 80% of the lesser of the purchase
price or fair market value of a used automobile. At March 31, 1997, personal
loans totaled $4.0 million, or 0.5% of the Bank's total loans receivable and
6.2% of consumer loans; and automobile loans totaled $3.0 million, or 0.4% of
total loans receivable and 4.7% of consumer loans.

                                       12
<PAGE>
 
     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 March 31, 1997, consumer
loans 90 days or more delinquent totaled $278,000.

     Loan Approval Procedures and Authority.  The Board of Directors establishes
     ---------------------------------------
the lending policies and loan approval limits of the Bank. 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:
owner-occupied mortgages that meet the general underwriting standards of FNMA
and FHLMC, with an 80% or lower LTV ratio and which do not exceed FNMA and FHLMC
maximum limits, may be approved by the Bank's underwriters; all other mortgage
loans in amounts up to $300,000 must be approved by the Bank's Director of
Residential Loan Production. The Senior Vice President of the Mortgage Banking
Group or Senior Vice President of Banking Group must approve mortgage loans in
excess of $300,000 and up to $500,000. The Bank's Retail Loan Committee must
approve loans in excess of $500,000 and up to $750,000. Approval of the Board of
Directors' Executive Committee is required for any loan in excess of $750,000.

     With respect to multi-family and construction and land loans, the Board of
Directors has authorized the following persons and committees to approve loans
up to the amounts indicated: mortgage loans in amounts up to $250,000 must be
approved by the Bank's Director of Residential Loan Production; mortgage loans
in excess of $250,000 and up to $400,000 require the approval of either the
Bank's Senior Vice President of Mortgage Banking Group or Senior Vice President
of Banking Group; mortgage loans in excess of $400,000 and up to $500,000
require the approval of the Bank's Retail Loan Committee; loans in excess of
$500,000 require the approval of the Board of Directors' Executive Committee.

     In connection with consumer loans, the Board of Directors authorized the
following persons and committees to approve loans up to the amounts indicated:
consumer loans up to $100,000 and which meet certain lending criteria may be
approved by the Bank's Consumer Loan Manager; any consumer loan up to $250,000
may be approved by either the Bank's Senior Vice President of Mortgage Banking
Group, Senior Vice President of Banking Group, Director of Residential Loan
Production or Director of Commercial Services; loans in excess of $250,000 and
up to $400,000 must be approved by the Bank's Retail Loan Committee; and loans
in excess of $400,000 must be approved by the Board of Directors' Executive
Committee.

     With respect to commercial and commercial real estate loans to borrowers
with total credit exposure of up to $500,000, the Board of Directors has
authorized the approval of these loans by various employees of the Bank with
progressively higher levels of responsibility as the amount of aggregate credit
exposure increases. Loans to borrowers with total credit exposure in excess of
$500,000 and up to $800,000 require the approval of the Commercial Loan
Committee and loans to borrowers with total credit exposure in excess of
$800,000 require the approval of the Board of Directors' Executive Committee.

     Pursuant to OTS regulations, loans to one borrower cannot, subject to
certain exceptions, exceed 15% of the Bank's unimpaired capital and surplus. At
March 31, 1997, the loans to one borrower limit was $18.3 million.

                                       13
<PAGE>
 
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED

     Delinquencies and Classified Assets.  Reports listing all delinquent
     ------------------------------------
accounts are generated and reviewed by management on a monthly basis and
the Board of Directors performs a monthly review of all loans or lending
relationships delinquent 90 days or more and all real estate owned ("REO").
The procedures taken by the Bank with respect to delinquencies vary
depending on the nature of the loan, period and cause of delinquency and
whether the borrower is habitually delinquent.  When a borrower fails to
make a required payment on a loan, the Bank takes a number of steps to have
the borrower cure the delinquency and restore the loan to current status.
The Bank generally sends the borrower a written notice of non-payment after
the loan is first past due.  The Bank's guidelines provide that telephone,
written correspondence and/or face-to-face contact will be attempted to
ascertain the reasons for delinquency and the prospects of repayment.  When
contact is made with the borrower at any time prior to foreclosure, the
Bank will attempt to obtain full payment, offer to provide budget and
finance counseling services, work out a repayment schedule with the
borrower to avoid foreclosure or, in some instances, accept a deed in lieu
of foreclosure.  In the event payment is not then received or the loan not
otherwise satisfied, additional letters and telephone calls generally are
made.  If the loan is still not brought current or satisfied and it becomes
necessary for the Bank to take legal action, which typically occurs after a
loan is 90 days or more delinquent, the Bank will commence foreclosure
proceedings against any real property that secures the loan.  If a
foreclosure action is instituted and the loan is not brought current, paid
in full, or refinanced before the foreclosure sale, the property securing
the loan generally is sold at foreclosure and, if purchased by the Bank,
becomes REO.

     Federal regulations and the Bank's Asset Classification Policy require
that the Bank utilize an internal asset classification system as a means of 
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system. 
The Bank currently classifies problem and potential 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 designed "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

                                       14
<PAGE>
 
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. 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 Bank's Asset Classification Committee reviews and classifies the Bank's
assets on a quarterly basis and the Board of Directors reviews the results of
the reports on a quarterly basis. The Bank classifies assets in accordance with
the management guidelines described above. At March 31, 1997, the Bank had $3.7
million of loans designated as Substandard. At that same date the Bank had
$927,000 of loans designated as Loss, which were offset by specific reserves
equal to the amount of the Loss classification. As of March 31, 1997, the Bank
had four loans totaling $216,000, designated as Special Mention. These loans are
designated as Special Mention because such loans were originated to facilitate
the sale of REO. At March 31, 1997, the largest loan designated as Special
Mention had a carrying balance of $108,000, and was secured by a one- to four-
family home. In addition, at March 31, 1997, the Bank had $2.6 million of
commercial real estate and commercial loans on its "Watch List." Loans on this
list require close attention due to such weaknesses as delinquency, untimely
receipt of financial statements or collateral dissipation.

                                       15
<PAGE> 

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

<TABLE>
<CAPTION>
                                       AT MARCH  31, 1997                                       AT MARCH  31, 1996                
                          ---------------------------------------------------   ---------------------------------------------------
                                60-89 DAYS              90 DAYS OR MORE              60-89 DAYS                 90 DAYS OR MORE   
                          ------------------------  -------------------------   --------------------------  -----------------------
                                        PRINCIPAL                  PRINCIPAL                    PRINCIPAL                PRINCIPAL
                            NUMBER       BALANCE       NUMBER       BALANCE        NUMBER        BALANCE      NUMBER      BALANCE 
                            OF LOANS    OF LOANS       OF LOANS    OF LOANS        OF LOANS     OF LOANS      OF LOANS   OF LOANS 
                          -----------  -----------  ------------  -----------   ------------   -----------  ----------- ----------- 
                                                                              (DOLLARS IN THOUSANDS)     
<S>                       <C>          <C>          <C>           <C>           <C>            <C>          <C>         <C>       
MORTGAGE LOANS:                                                                                                                   
  One- to four-family....      12       $  525          33         $1,908            24          $1,589         31         $2,469
  Multi-family...........       1          202           2            268             -               -          3            334
  Commercial real estate.       -            -           1            976             1             231          -              -
  Construction and land..       -            -           2            232             1              37          -              -
                               --       ------          --         ------            --          ------         --         ------
   Total mortgage loans..      13          727          38          3,384            26           1,857         34          2,803
                               --       ------          --         ------            --          ------         --         ------
COMMERCIAL LOANS.........       1           23           -              -             -               -          1             87
                               --       ------          --         ------            --          ------         --         ------
CONSUMER LOANS:                                                                                                                  
  Home equity lines......       6          180           4            114            16             231         12            956
  Second mortgages.......       3           34           3             95             -               -         12            196
  Other consumer loans...      10           57           9             69             4              12          4              3
                               --       ------          --         ------            --          ------         --         ------
   Total consumer loans..      19          271          16            278            20             243         28          1,155
                               --       ------          --         ------            --          ------         --         ------
Total loans..............      33       $1,021          54         $3,662            46          $2,100         63         $4,045
                               ==       ======          ==         ======            ==          ======         ==         ======
Delinquent loans to                      
loans receivable, net....                 0.13%                      0.46%                         0.33%                     0.63%

<CAPTION> 
                                        AT MARCH  31, 1996                                                            
                             --------------------------------------------------      
                                 60-89 DAYS                 90 DAYS OR MORE          
                             -------------------------  -----------------------      
                                            PRINCIPAL                PRINCIPAL       
                               NUMBER        BALANCE      NUMBER      BALANCE        
                               OF LOANS     OF LOANS      OF LOANS   OF LOANS                                          
                             -----------   ----------    ---------- -----------
<S>                          <C>           <C>           <C>        <C>    
MORTGAGE LOANS:            
  One- to four-family....       20           $1,044          29      $2,501 
  Multi-family...........        1               76           1          51 
  Commercial real estate.        -                -           1          85
  Construction and land..        -                -           -           -
                                --           ------          --      ------  
   Total mortgage loans..       21            1,120          31       2,637
                                --           ------          --      ------
COMMERCIAL LOANS.........        1                3           -           -
                                --           ------          --      ------ 
CONSUMER LOANS:            
  Home equity lines......       11              354          12         386
  Second mortgages.......        2               46           -           -
  Other consumer loans...        4               12           5          10 
                                --           ------          --      ------  
   Total consumer loans..       17              412          17         396 
                                --           ------          --      ------  
Total loans..............       39           $1,535          48      $3.033
                                ==           ======          ==      ======
Delinquent loans to loans         
 receivable, net.........                      0.31%                   0.61%
</TABLE> 

                                       16
<PAGE>
 
     Non-Performing Assets. The following table sets forth information regarding
     ---------------------
non-accrual loans and REO. At March 31, 1997, REO totaled $665,000 consisting of
seven one- to four-family properties. It is the policy of the Bank to cease
accruing interest on loans 90 days or more past due and to reverse all accrued
interest.

<TABLE> 
<CAPTION> 
                                                                              AT MARCH 31,
                                                ------------------------------------------------------------------------

                                                    1997           1996           1995           1994           1993
                                                ------------   ------------   ------------   ------------   ------------
                                                                     (DOLLARS IN THOUSANDS)
<S>                                             <C>            <C>            <C>            <C>            <C>
Non-accrual loans:
 Mortgage loans:
  One- to four-family.......................       $ 1,908        $ 2,469        $ 2,501         $3,649          $4,345           
  Multi-family..............................           268            334             51              -               -           
  Commercial real estate(1).................           976              -             85              -             277           
  Construction and land.....................           232              -              -             26               -           
                                                   -------        -------        -------         ------          ------           
        Total mortgage loans................         3,384          2,803          2,637          3,675           4,622           
                                                   -------        -------        -------         ------          ------           
 Commercial loans...........................             -             87              -             15               1           
                                                   -------        -------        -------         ------          ------           
 Consumer loans:                                                                                                                  
  Home equity lines.........................           114            956            386            483             262           
  Second mortgages..........................            95            196              -             34             120           
  Other consumer loans......................            69              3             10             14               -           
                                                   -------        -------        -------         ------          ------           
        Total consumer loans................           278          1,155            396            531             382           
                                                   -------        -------        -------         ------          ------           
        Total nonaccrual loans..............         3,662          4,045          3,033          4,221           5,005           
Real estate owned, net(2)...................           665            643            296            939             464           
                                                   -------        -------        -------         ------          ------           
  Total non-performing assets...............       $ 4,327        $ 4,688        $ 3,329         $5,160          $5,469           
                                                   =======        =======        =======         ======          ======           
Allowance for loan losses as a percent of                                                                                         
 loans(3)...................................          1.09%          0.87%          0.84%          0.95%           1.03%          
Allowance for loan losses as a percent                                                                                            
 of non-performing loans(4).................        239.98%        138.62%        139.76%         93.91%          70.41%          
Non-performing loans as a percent of                                                                                              
 loans(3)(4)................................          0.45%          0.63%          0.60%          1.02%           1.46%          
Non-performing assets as a percent of                                                                                             
 total assets(5)............................          0.44%          0.65%          0.59%          1.10%           1.37%           
</TABLE>

___________________

(1)  Consists of one restructured commercial real estate loan at March 31, 1997.
(2)  REO balances are shown net of related valuation allowances.
(3)  Loans includes loans receivable, net, excluding allowance for loan losses.
(4)  Non-performing loans consist of those loans 90 days or more past due and
     other loans which have been identified by the Bank as presenting
     uncertainty with respect to the collectability of interest or principal.
(5)  Non-performing assets consist of non-performing loans and REO.

                                       17
<PAGE>
 
     Impaired Loans.  The Bank adopted a new accounting method for measuring
     --------------
loan impairment on April 1, 1995. Adoption of this accounting standard did not
have a material effect on the comparability of the above tables. Impaired loans
are commercial and commercial real estate loans for which it is probable that
the Bank will not be able to collect all amounts due according to the
contractual terms of the loan agreement. The definition of "impaired loans" is
not the same definition of "nonaccrual loans," although the two categories
overlap. Nonaccrual loans include impaired loans and are those on which the
accrual of interest is discontinued when collectibility of principal or interest
is uncertain or payments of principal or interest have been contractually past
due 90 days. The Bank may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility, while not classifying the loan
as impaired, if (i) it is not probable that the Bank will collect all amounts
due in accordance with the contractual terms of the loan or (ii) the loan is not
a commercial or a commercial real estate loan. Factors considered by management
in determining impairment include payment status and collateral value. The
amount of impairment for these types of impaired loans is determined by the
difference between the present value of the expected cash flows related to the
loan, using the original contractual interest rate, and its recorded value, or,
as a practical expendient in the case of collateralized loans, the difference
between the fair value of the collateral and the recorded amount of the loan.
When foreclosure is probable, impairment is measured based on the fair value of
the collateral. Residential mortgage and consumer loans are measured for
impairment collectively. Loans that experience insignificant payment delays and
insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record and the
amount of the shortfall in relation to the principal and interest owed.

     At March 31, 1997 and March 31, 1996, total impaired loans were $1.5
million and $991,000, respectively. At March 31, 1997, impaired loans of $1.3
million required an impairment allowance of $762,000. At March 31, 1997,
impaired loans of $164,000 did not require an impairment allowance. All impaired
loans are commercial real estate loans which have been measured using the fair
value of the collateral method. During the fiscal year ended March 31, 1997, the
average recorded value of impaired loans was $1.0 million. For these loans,
$112,000 of interest income was recognized while $232,000 of interest income
would have been recognized under the original terms.

     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. 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 Bank's
allowance for loan losses. Such agencies may require the Bank to make additional
provisions for estimated loan losses based upon judgments different from those
of management. As of March 31, 1997, the Bank's allowance for loan losses was
1.09% of total loans receivable as compared to 0.87% as of March 31, 1996. The
Bank had non-accrual loans of $3.7 million and $4.0 million at March 31, 1997
and March 31, 1996, respectively. The Bank will continue to monitor and modify
its allowances for loan losses as conditions dictate. While management believes
the Bank'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 Bank's
level of allowance for loan losses will be sufficient to cover future loan
losses incurred by the Bank 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.

                                       18
<PAGE>
 
The following table sets forth activity in the Bank's allowance for loan losses
for the years set forth in the following table.

<TABLE>
<CAPTION>
                                                                  AT OR FOR THE YEAR ENDED MARCH 31,
                                                  ------------------------------------------------------------------------
  
                                                      1997           1996           1995           1994           1993
                                                  ------------   ------------   ------------   ------------   ------------
                                                                (DOLLARS IN THOUSANDS)
<S>                                               <C>            <C>            <C>            <C>            <C>    
Balance at beginning of year................         $5,607         $4,239          $3,964         $3,524         $1,795   
Provision for loan losses...................          3,750          2,626             653          1,035          2,102   
Charge-offs:                                                                                                               
     Mortgage loans:                                                                                                       
      One- to four-family...................            331            218             168            324            240   
      Multi-family..........................             82              -               -             55              -   
      Commercial real estate................              -            967              25            121             18   
      Construction and land.................              -              -               -             25             10   
     Commercial loans.......................             87              -              15             38             40   
     Consumer loans:                                                                                                       
      Home equity lines.....................            116             68             113             20             31   
      Second mortgages......................             10              -               -              -              -   
      Other consumer loans..................             11             35              79             45             69   
                                                     ------         ------          ------         ------         ------   
         Total..............................            637          1,288             400            628            408   
Recoveries..................................             68             30              22             33             35   
                                                     ------         ------          ------         ------         ------   
Balance at end of year......................         $8,788         $5,607          $4,239         $3,964         $3,524   
                                                     ======         ======          ======         ======         ======   
Ratio of net charge-offs during                                                                                            
  the year  to average loans                                                                                               
  outstanding during the year...............           0.07%          0.23%           0.08%          0.14%          0.11%  
                                                       ====           ====            ====           ====           ====
</TABLE>

                                       19
<PAGE>
 
  The following tables set forth the Bank'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 MARCH 31,
                           -------------------------------------------------------------------------------------------------
                                             1997                         1996                             1995          
                                  -------------------------  ----------------------------   --------------------------------
                                                   PERCENT                       PERCENT                         PERCENT 
                                                   OF LOANS                      OF LOANS                        OF LOANS
                                      PERCENT OF   IN EACH           PERCENT OF  IN EACH            PERCENT OF   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>       
Mortgages:                                                                                                               
  Residential ............    $2,769    31.51%     85.57%    $2,175   38.79%      86.23%    $1,223   28.85%      85.34%  
  Commercial .............     2,239    25.48       4.07      1,195   21.31        3.59      1,265   29.84        3.90   
                              ------   ------     ------     ------  ------      ------     ------  ------      ------   
    Total ................     5,008    56.99      89.64      3,370   60.10       89.82      2,488   58.69       89.24   
Commercial ...............       932    10.60       2.47        621   11.08        2.22        600   14.16        2.49   
Consumer .................     1,151    13.10       7.89        829   14.79        7.96        473   11.16        8.27   
Unallocated ..............     1,697    19.31          -        787   14.03           -        678   15.99           -   
                              ------   ------     ------     ------  ------      ------     ------  ------      ------   
    Total allowance for       
      loan losses ........    $8,788   100.00%    100.00%    $5,607  100.00%     100.00%    $4,239  100.00%     100.00%  
                              ======   ======     ======     ======  ======      ======     ======  ======      ======    

 
<CAPTION> 
                                                     
                              -------------------------------------------------------------
                                         1994                           1993        
                              ----------------------------   ------------------------------
                                                                                     
                                                  PERCENT                         PERCENT  
                                                  OF LOANS                        OF LOANS 
                                      PERCENT OF  IN EACH            PERCENT OF   IN EACH  
                                      ALLOWANCE   CATEGORY           ALLOWANCE   CATEGORY  
                                       TO TOTAL   TO TOTAL            TO TOTAL    TO TOTAL 
                              AMOUNT  ALLOWANCE    LOANS     AMOUNT  ALLOWANCE    LOANS     
                              ------  ----------  --------   ------  ----------  ---------  
                                                  (DOLLARS IN THOUSANDS)
<S>                           <C>     <C>         <C>        <C>     <C>         <C>       
Mortgages:                                                                                 
  Residential ............    $1,144      28.86%    84.81%   $1,149      32.60%     81.35%
  Commercial .............     1,063      26.82      3.49       941      26.70       3.46 
                              ------     ------    ------    ------     ------     ------ 
    Total ................     2,207      55.68     88.30     2,090      59.30      84.81 
Commercial ...............       426      10.75      2.41       383      10.87       2.14 
Consumer .................       454      11.45      9.29       559      15.86      13.05 
Unallocated ..............       877      22.12         -       492      13.97          - 
                              ------     ------    ------    ------     ------     ------ 
    Total allowance for       
      loan losses ........    $3,964     100.00%   100.00%   $3,524     100.00%    100.00%
                              ======     ======    ======    ======     ======     ====== 
</TABLE> 

                                       20
<PAGE>
 
     Real Estate Owned.  At March 31, 1997, the Bank had $665,000 of REO
     -----------------
consisting of seven properties. When the Bank 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 Bank provides for a specific
valuation allowance and charges operations for the diminution in value. It is
the policy of the Bank to obtain an appraisal on all real estate subject to
foreclosure proceedings prior to the time of foreclosure. It is the Bank's
policy to require appraisals on a periodic basis on foreclosed properties and to
conduct inspections on foreclosed properties.

INVESTMENT ACTIVITIES

     Federally-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally-chartered savings
institutions may also invest their assets in commercial paper, investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally-chartered savings institution is otherwise
authorized to make directly. Additionally, the Bank must maintain minimum levels
of investments that qualify as liquid assets under OTS regulations.
Historically, the Bank has maintained liquid assets above the minimum OTS
requirements and at a level considered to be adequate to meet its normal daily
activities.

     The investment policy of the Bank, 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 Bank's lending activities. Generally, the Bank's investment
policy is more restrictive than the OTS regulations allow and, accordingly, the
Bank has invested primarily in U.S. government securities, 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 No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"), the Bank has established an investment portfolio of securities that are
categorized as held to maturity, available for sale, or held for trading. The
Bank generally invests in securities as a method of maintaining liquidity at
levels deemed appropriate by management as well as to deploy conversion proceeds
and to manage interest rate risk. The Bank does not currently maintain a
portfolio of securities categorized as held for trading. Short-term investments,
at March 31, 1997, consisted primarily of overnight deposits totaling $39.4
million or 4.0% of assets. As of the same date, the Bank's investment and
mortgage-backed securities held to maturity portfolio totaled $36.4 million, or
3.7% of assets, and the Bank's investment and mortgage-backed securities
available for sale portfolio totaled $32.6 million, or 3.3% of assets. The
Bank's portfolio of investment securities available for sale totaled $888,000,
which consisted of marketable equity securities. As of March 31, 1997, the
Bank's investment securities held to maturity portfolio consisted of $21.0
million in U.S. Government and related obligations with a weighted average
remaining maturity of 12 months.

     At March 31, 1997, the Bank had invested $47.1 million in mortgage-backed
securities, or 4.8% of total assets, which were insured by either the Government
National Mortgage Association ("GNMA"), FNMA or FHLMC. The portfolio consisted
of $15.4 million, or 32.7% of total mortgage-backed securities, classified as
held to maturity and $31.7 million, or 67.3% of total mortgage-backed
securities, classified as available for sale. Of the $47.1 million, $13.5
million were adjustable-rate with maximum interest rate adjustments of 2%
annually or 6% over the life of the security. The fixed rate mortgage-backed
securities with a fair value of $31.7 million have balloon payments at the end
of seven years. Investments in mortgage-backed securities involve a risk that
actual prepayments will differ from estimated prepayments over the life of the
security. Fixed-rate mortgage-backed securities may require adjustments to the
amortization of any

                                       21
<PAGE>
 
premium or accretion of any discount relating to such instruments thereby
changing 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.


     The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's short-term investments and investment
securities at the dates indicated:

<TABLE>
<CAPTION>
                                                               AT MARCH 31,                                         
                                        ----------------------------------------------------------                    
                                            1997                  1996                1995                          
                                        -------------------  ------------------  -----------------                  
                                         AMORTIZED   FAIR    AMORTIZED   FAIR     AMORTIZED   FAIR                    
                                           COST      VALUE     COST      VALUE     COST      VALUE                  
                                        ----------  -------  ---------  -------  ---------   -----
                                                                (IN THOUSANDS)
<S>                                     <C>         <C>      <C>        <C>      <C>         <C>                  
Short-term investments ...............   $ 39,410   $39,410    $     -  $     -    $     -  $     -
                                         ========   =======    =======  =======    =======  =======
Investment securities:
  Available for sale: (1) ............   $      5   $   888    $    55  $   725    $    55  $   518
                                         --------   -------    -------  -------    -------  -------
  Held to maturity:
     U.S. Government and agency                  
     obligations .....................     20,991    20,958     22,986   23,061     19,988   19,877
    Federal Home Loan Bank note ......          -         -      1,000      999      1,000      974
    Other investment securities ......          -         -          1        1          -        -
                                         --------   -------    -------  -------    -------  -------
     Total held to maturity ..........     20,991    20,958     23,987   24,061     20,988   20,851
                                         --------   -------    -------  -------    -------  -------
  Total investment securities ........   $ 20,996   $21,846    $24,042  $24,786    $21,043  $21,369
                                         ========   =======    =======  =======    =======  =======                                
         
 
</TABLE>

______________

(1) Consists of marketable equity securities.

                                       22
<PAGE>
 
     The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's mortgage-backed securities at the dates     
indicated:

<TABLE>
<CAPTION> 
                                                                                         AT MARCH 31,
                                                           ----------------------------------------------------------------------
                                                                                                                                 
                                                                             1997                              1996              
                                                           ----------------------------------   ---------------------------------
                                                            AMORTIZED        PERCENT     FAIR      AMORTIZED   PERCENT    FAIR   
                                                              COST           OF TOTAL    VALUE       COST      OF TOTAL  VALUE   
                                                           ------------    --------------------   ---------------------- --------
                                                                                     (DOLLARS IN THOUSANDS)            
<S>                                                        <C>             <C>           <C>      <C>          <C>       <C> 
Mortgage-backed securities:                                                                         
Available for sale:                                                                                 
  Fixed-rate:                                                                                       
    FNMA(1)...........................................      $20,200           42.53%    $19,980      $     -         -%  $    -    
    FHLMC(1)..........................................       11,859           24.97      11,752            -         -        -    
                                                            -------           -----     -------       ------    ------   ------    
      Total fixed-rate................................       32,059           67.50      31,732            -         -        -    
                                                            -------           -----     -------       ------    ------   ------    
Total mortgage-backed securities available                   32,059           67.50      31,732            -         -        -    
 for sale.............................................      -------           -----     -------       ------    ------   ------    
                                                                                                                 
                                                                                                                          
Held to maturity:                                                                                                         
  Fixed-rate:                                                                                                             
    GNMA..............................................        1,644            3.46       1,719        1,901     26.23    1,998    
    FHLMC.............................................          309            0.65         324          401      5.53      423    
                                                            -------           -----      ------       ------    ------    ------    
      Total fixed-rate................................        1,953            4.11       2,043        2,302     31.76    2,421    
                                                            -------           -----     -------       ------    ------    ------    

  Adjustable-rate:                                                                                                        
    FHLMC.............................................       13,482           28.39      13,535        4,946     68.24    4,965    
                                                            -------          ------     -------       ------    ------    ------    
Total mortgage-backed securities held                        15,435           32.50      15,578        7,248    100.00    7,386    
 to maturity..........................................      -------           -----      ------        -----    ------    ------
                                                                                                              
Total mortgage-backed securities......................      $47,494          100.00%    $47,310       $7,248    100.00%  $7,386    
                                                            =======          ======     =======       ======    ======   ======    

<CAPTION> 
                                                                 --------------------------------
                                                                             1995
                                                                 --------------------------------
                                                                  AMORTIZED   PERCENT     FAIR
                                                                  COST        OF TOTAL    VALUE
                                                                 ----------- --------- ----------
<S>                                                              <C>         <C>       <C>
Mortgage-backed securities:
Available for sale:
  Fixed-rate:
    FNMA(1)...........................................             $    -           -%    $     -
    FHLMC(1)..........................................                  -           -           -
                                                                   ------      ------      ------
      Total fixed-rate................................                  -           -           -
                                                                   ------      ------      ------
Total mortgage-backed securities available
 for sale.............................................                  -           -           -
                                                                   ------      ------      ------

Held to maturity:
  Fixed-rate:
    GNMA..............................................              2,199          81       2,283
    FHLMC.............................................                522          19         535
                                                                   ------      ------      ------
      Total fixed-rate................................              2,721         100       2,818
                                                                   ------      ------      ------
  Adjustable-rate:
    FHLMC.............................................                  -           -           -
                                                                   ------      ------      ------
Total mortgage-backed securities held
 to maturity..........................................              2,721      100.00       2,818
                                                                   ------      ------      ------

Total mortgage-backed securities......................             $2,721      100.00%     $2,818
                                                                   ======      ======      ======
</TABLE>

__________________
(1) These mortgage-backed securties have a balloon payment at the end of seven 
years.

                                       23
<PAGE>
 
     The following table sets forth the Bank's mortgage-backed securities
activities for the periods indicated.

<TABLE> 
<CAPTION> 
                                                                                                   FOR THE YEAR                 
                                                                                                  ENDED MARCH 31,               
                                                                           ---------------------------------------------------
                                                                                  1997              1996             1995       
                                                                           ---------------   ---------------  ----------------
                                                                                               (IN THOUSANDS)    
<S>                                                                        <C>               <C>              <C>  
Beginning balance.......................................................        $ 7,248           $2,721            $3,437       
  Mortgage-backed securities purchased:                                                                                          
   Held to maturity.....................................................          9,996            4,960                 -       
   Available for sale...................................................         32,061                -                 -       
  Principal repayments of held to maturity securities...................         (1,805)            (433)             (716)      
  Accretion of premium..................................................             (6)               -                 -       
                                                                                -------           ------            ------       
Ending balance..........................................................        $47,494           $7,248            $2,721       
                                                                                =======           ======            ======       
</TABLE>

                                       24
<PAGE>
     The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
investment securities and mortgage-backed securities as of March 31, 1997.

<TABLE>
<CAPTION>
                                                                                AT MARCH 31, 1997
                                             ---------------------------------------------------------------------------------------
                                                                       MORE THAN ONE         MORE THAN FIVE
                                               ONE YEAR  OR LESS      YEAR TO FIVE YEARS   YEARS TO TEN YEARS   MORE THAN TEN  YEARS
                                             -------------------      ------------------   ------------------   --------------------
                                                          WEIGHTED             WEIGHTED              WEIGHTED              WEIGHTED
                                               CARRYING    AVERAGE   CARRYING   AVERAGE   CARRYING    AVERAGE   CARRYING    AVERAGE
                                                VALUE       YIELD     VALUE      YIELD      VALUE      YIELD      VALUE      YIELD
                                             ----------- ---------- ---------- --------- ----------- ---------- ---------- ---------
                                                                                          (DOLLARS IN THOUSANDS)
<S>                                          <C>         <C>        <C>        <C>       <C>         <C>        <C>        <C>
SHORT-TERM INVESTMENTS....................     $39,410      6.38%    $     -          -%    $     -        -%  $       -         -%
                                               =======      ====     =======       ====    ========      ===   =========     =====
INVESTMENT SECURITIES(1):
 Held to maturity:
      U.S. Government and agency
       obligations........................     $10,496      5.71%    $10,495     6.14%     $     -         -%  $       -         -%
                                               -------      ----     -------     ----      -------      ----   ---------     -----
 Total investment securities held  
  to maturity.............................     $10,496      5.71%    $10,495     6.14%     $     -         -%  $       -         -%
                                               =======      ====     =======     ====     ========      ====   =========     =====
MORTGAGE-BACKED SECURITIES:
 Available for sale:
      Fixed rate:
      FNMA................................    $      -         -%    $     -        -%     $19,980      7.00%  $       -         -%
      FHLMC...............................           -         -           -        -       11,752      7.00           -         -
                                              --------    ------     -------     ----      -------      ----     -------     -----
 Total mortgage-backed securities
  available for sale......................           -         -           -        -       31,732      7.00           -         -
                                              --------    ------     -------     ----      -------      ----     -------     -----
 Held to maturity:
      Adjustable-rate:
       FHLMC..............................           -         -           -        -            -         -      13,482      6.58
      Fixed-rate:
       GNMA...............................           -         -          33     8.00          269      8.22       1,342      8.78
       FHLMC..............................           -         -           -        -          205      8.27         104     11.35
                                              --------    ------      ------     ----        -----      ----     -------     -----
          Total fixed-rate................           -         -          33     8.00          474      8.24       1,446      8.96
                                              --------    ------      ------     ----      -------      ----     -------     -----
Total mortgage-backed securities
 held to maturity.........................           -         -          33     8.00          474      8.24      14,928      6.81
                                              --------    ------      ------     ----      -------      ----     -------     -----
 Total mortgage-backed securities.........    $      -         -%   $     33     8.00%     $32,206      7.02%    $14,928      6.81%
                                              ========    ======      ======     ====      =======      ====     =======     =====

<CAPTION>
                                                                        TOTAL
                                                               ------------------------
                                                                             WEIGHTED
                                                                CARRYING     AVERAGE
                                                                 VALUE        YIELD
                                                               ----------   ----------
<S>                                                            <C>          <C>
SHORT-TERM INVESTMENTS......................................    $39,410       6.38%
                                                                =======       ====
INVESTMENT SECURITIES(1):
 Held to maturity:
      U.S. Government and agency obligations................    $20,991        5.92%
                                                                -------        ----
 Total investment securities held to maturity...............    $20,991        5.92%
                                                                =======        ====

MORTGAGE-BACKED SECURITIES
 Available for sale:
      Fixed rate:
      FNMA..................................................    $19,980        7.00%
      FHLMC.................................................     11,752        7.00
                                                                -------        ----
 Total mortgage-backed securities available for sale........     31,732        7.00
                                                                -------        ----

 Held to maturity:
      Adjustable-rate:
       FHLMC................................................     13,482        6.58
      Fixed-rate:
       GNMA.................................................      1,644        8.67
       FHLMC................................................        309        9.31
                                                                 ------       -----
          Total fixed-rate..................................      1,953        8.77
                                                                 ------       -----
Total mortgage-backed securities held to maturity...........     15,435        6.86
                                                                 ------       -----
 Total mortgage-backed securities...........................    $47,167        6.95%
                                                                =======        ====
</TABLE>
______________________       
(1) Does not include $888,000 marketable equity securities available for sale at
fair value at March 31, 1997.
                                                       
                                      25

<PAGE>
 
SOURCES OF FUNDS

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

     Deposits.  The Bank offers a variety of deposit accounts with a range of
     --------                                                                
interest rates and terms.  The Bank's deposits consist of business checking,
money market, savings, NOW and certificate accounts.  For the fiscal year ended
March 31, 1997, core deposits represented 29.4% 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
Bank's deposits are obtained predominantly from the areas in which its branch
offices are located.  The Bank has historically relied 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 Bank's ability to attract and
retain deposits.  The Bank uses traditional means of advertising its deposit
products, including radio and print media and generally does not solicit
deposits from outside its market area.  While the Bank does not actively solicit
certificate accounts in excess of $100,000 or use brokers to obtain deposits,
the Bank will solicit, from time to time, such deposits or utilize brokered
deposits depending upon market conditions.  In recent years, the Bank, in
connection with its growth strategy, has significantly increased its deposit
base by establishing new branch offices in and around its primary market area,
primarily in Rhode Island, and competitively pricing its deposit products to
attract and retain deposit accounts and build its market share of deposits.  The
majority of the recent deposit growth has been in certificate accounts with
maturities of three years or less which generally bear yields higher than the
Bank's core deposits.  As a result, the Bank's certificate accounts increased
from $333.0 million, or 66.3% of total average deposits, at March 31, 1996 to
$453.5 million, or 70.6% of total average deposits, at March 31, 1997.  The
Bank's cost of average interest-bearing deposits increased from 4.96% for the
fiscal year ended March 31, 1996 to 5.01% for the fiscal year ended March 31,
1997.  At March 31, 1997, the weighted average remaining maturity of the Bank's
certificate accounts was 10.7 months.  Further increases in short-term
certificate of deposit accounts, which tend to be more sensitive to movements in
market interest rates than core deposits, may result in the Bank's deposit base
being less stable than if it had a large amount of core deposits which, in turn,
may result in further increases in the Bank's cost of deposits.

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

<TABLE>
<CAPTION>
                                                                     FOR THE YEAR ENDED MARCH 31,
                                                               ----------------------------------------
                                                                  1997          1996            1995
                                                               -----------  ---------------  -----------
                                                                             (IN THOUSANDS)
     <S>                                                        <C>         <C>              <C> 
     Net deposits............................................   $109,952     $120,527         $66,117
     Interest credited on deposit account....................     30,274       23,116          13,897
                                                                --------     --------         -------
     Total increase in deposit accounts......................   $140,226     $143,643         $80,014
                                                                ========     ========         =======
 </TABLE>

                                       26
<PAGE>
 
     At March 31, 1997, the Bank had $57.3 million in certificate accounts in
amounts of $100,000 or more maturing as follows:

<TABLE>
<CAPTION>
                                                                              WEIGHTED
                       MATURITY PERIOD                         AMOUNT         AVERAGE RATE
        -------------------------------------------------     ---------      --------------

                                                                 (DOLLARS IN  THOUSANDS)
        
        <S>                                                   <C>            <C>  
        Three months or less.............................        $12,156           5.48%
                                                                               
        Over 3 through 6 months..........................         14,754           5.43
                                                                               
        Over 6 through 12 months.........................         13,483           5.83
                                                                               
        Over 12 months...................................         16,913           6.28
                                                                 -------       
        Total............................................        $57,306           5.79
                                                                 =======
</TABLE>

                                       27
<PAGE>
 
          The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented.  Averages for the periods
presented utilize average month-end balances.


<TABLE> 
<CAPTION> 
                                                                FOR THE YEAR ENDED MARCH 31,
                                      ----------------------------------------------------------------------------------------------

                                                   1997                           1996                            1995    
                                      --------------------------------  -----------------------------  -----------------------------

                                                  PERCENT                        PERCENT                        PERCENT 
                                                  OF TOTAL   WEIGHTED            OF TOTAL   WEIGHTED            OF TOTAL   WEIGHTED
                                       AVERAGE    AVERAGE     AVERAGE  AVERAGE   AVERAGE    AVERAGE  AVERAGE    AVERAGE     AVERAGE
                                       BALANCE    DEPOSITS      RATE   BALANCE   DEPOSITS   RATE     BALANCE    DEPOSITS     RATE 
                                      --------    --------    -------  -------   --------   -------- -------    --------   -------
                                                                              (Dollars in thousands)
<S>                                    <C>        <C>        <C>       <C>       <C>        <C>      <C>        <C>        <C> 
Business checking accounts...........  $38,428      5.99%        -%    $35,587       7.08%       -%   $28,783     7.23%       -%   
Money market accounts................   28,967      4.51      2.83      27,194       5.41     2.83     33,011     8.30     2.83  
Savings accounts.....................   82,536     12.85      2.50      76,511      15.23     2.50     81,525    20.49     2.50  
NOW accounts.........................   38,801      6.04      1.98      30,088       5.99     1.98     24,154     6.07     1.98  
                                      --------     ------              -------     ------            --------   ------           
     Total...........................  188,732     29.39      1.92     169,380      33.71     1.82    167,473    42.09     2.02  
                                      --------     ------              -------     ------            --------   ------           
Certificate accounts(1):                                                                                                            

 Less than six months................  184,111     28.67      5.62     125,491      24.98     5.66     96,932    24.37     5.16  
 Over six through 12 months..........   94,439     14.71      5.85      64,743      12.89     5.91     40,981    10.30     5.75  
 Over 12 through 36 months...........   84,341     13.13      6.18      61,698      12.28     6.37     27,622     6.94     6.39  
 Over 36 months......................   12,479      1.94      6.45      14,558       2.90     6.74      7,850     1.97     6.78  
 IRA and KEOGH.......................   78,084     12.16      5.91      66,487      13.24     6.17     56,998    14.33     5.12  
                                      --------    ------              --------     ------            ---------  ------          
   Total certificate  accounts.......  453,454     70.61      5.83    $332,977      66.29     5.95    230,383    57.91     5.56  
                                      --------    ------              --------     -------           ---------  ------          
                                                                                                                                  
   Total average deposits............ $642,186    100.00%     4.76%   $502,357     100.00%    4.59%  $397,856   100.00%    4.27% 
                                      ========    =======            =========     ======            ========   ======        
</TABLE> 
   
____________________________________________
(1) Based on remaining contractual maturity of certificates.

 

                                       28
<PAGE>
 
     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 March 31, 1997.

<TABLE>
<CAPTION>
                                            PERIOD TO MATURITY FROM MARCH 31, 1997                     At March 31, 
                            -----------------------------------------------------------------  ----------------------------------
                              LESS THAN     ONE TO      TWO TO      THREE TO       FOUR TO                                      
                              ONE YEAR     TWO YEARS  THREE YEARS   FOUR YEARS   FIVE YEARS      1997         1996        1995    
                            -----------    ---------  -----------   ----------   ----------    --------     --------     -------- 
                                                                 (IN THOUSANDS)                                                   
<S>                         <C>            <C>        <C>           <C>          <C>           <C>          <C>          <C>      
Certificate accounts:                                                                                                               
                            
0 to 4.00%..............      $    260     $      -     $     -      $     -       $    -      $    260     $    253     $ 19,822
4.01 to 5.00%...........        18,556          185           -            -            -        18,741       31,913       74,008 
5.01 to 6.00%...........       325,839       62,135       4,363        1,495        2,451       396,283      178,891       91,477 
6.01 to 7.00%...........        17,246       47,748       9,610        5,671        2,276        82,551      140,863       66,856 
7.01 to 8.00%...........         8,733        6,625       7,400        4,217            -        26,975       40,027       28,198 
8.01 to 9.00%...........             -            -           4            -            -             4            4            4 
Over 9.01% .............             -            -           -            -            -             -            -          169 
                              --------      -------     -------      -------       ------      --------     --------     -------- 
                                                                                                                                  
Total.................        $370,634     $116,693     $21,377      $11,383       $4,727      $524,814     $391,951     $280,534 
                              ========     ========     =======      =======       ======      ========     ========     ======== 
</TABLE>

                                       29
<PAGE>
 
     Borrowings.  The Bank utilizes advances from the FHLB as an alternative to
     ----------
retail deposits to fund its operations as part of its operating strategy. During
the fiscal year ended March 31, 1997, the Bank determined to utilize FHLB
borrowings to a greater extent 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 Bank's mortgage loans and
mortgage-backed securities and secondarily by the Bank'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
Bank, fluctuates from time to time in accordance with the policies of the OTS
and the FHLB. At March 31, 1997, the Bank had $111.1 million in outstanding
advances from the FHLB and had no other borrowings as compared to $75.1 million
at March 31, 1996.


     The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:

<TABLE>
<CAPTION>
                                                                                                AT OR FOR THE YEAR            
                                                                                                  ENDED MARCH 31,             
                                                                                        ----------------------------------
                                                                                           1997       1996         1995        
                                                                                        ----------  ---------    ---------   
                                                                                                 (DOLLARS IN THOUSANDS)        
  <S>                                                                                    <C>          <C>          <C>
  FHLB advances:
    Average balance outstanding....................................................      $131,523     $50,321      $71,005
                                                                                         ========     =======      =======
    Maximum amount outstanding at any month-end during the period..................      $177,580     $75,141      $99,724
                                                                                         ========     =======      =======
    Balance outstanding at end of period...........................................      $111,062     $75,141      $66,592
                                                                                         ========     =======      =======
    Weighted average interest rate during the period...............................          6.25%       6.46%        6.26%
                                                                                             ====        ====         ====
    Weighted average interest rate at end of period................................          6.13%       5.94%        6.96%
                                                                                             ====        ====         ====
</TABLE>

SUBSIDIARY ACTIVITIES

     FIRSTFED MORTGAGE CORPORATION ("FMC"), a Massachusetts corporation, is a
wholly-owned subsidiary of the Bank. FMC does not currently conduct any
activities other than holding a parcel of real estate located in Swansea,
Massachusetts (the "Swansea Property"). The Swansea Property is the primary
asset of FMC and is the site of the Bank's proposed centralized administrative
and operations center and branch office, which is anticipated to open for
operations in late 1997. The Bank has budgeted approximately $10.5 million for
the construction and furniture, fixtures and equipment of the facility and the
branch office, of which $3.1 million has been incurred as of March 31,1997.

     FAB FUNDING CORPORATION ("FAB FUNDING"), a Massachusetts corporation, is a
wholly-owned subsidiary of the Company formed primarily to finance stock
purchases by the Banks Employee Stock Ownership Plan and related trust ("ESOP").
The financing from FAB FUNDING is collateralized by the shares of stock of the
Company purchased by the ESOP, which are released for distribution to eligible
employees of the Bank as payments are made on the loan. Except for the loan to
the ESOP, FAB FUNDING has no significant operations.

                                       30
<PAGE>
 
PERSONNEL

     As of March 31, 1997, the Company had 254 authorized full-time employee
positions and 44 authorized part-time employee positions, for a total of
approximately 276 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

     The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA"). 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 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 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 savings institutions. 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 FDIC or the Congress, could have a material
adverse impact on the Company, the Bank and their operations. Certain of the
regulatory requirements applicable to the 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 and the Company.

HOLDING COMPANY REGULATION

     The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Bank continues to
be a qualified thrift lender ("QTL"). Upon any non-supervisory acquisition by
the Company of another savings institution or savings bank that meets the QTL
test and is deemed to be a savings institution by the OTS, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA limits
the activities of a multiple savings and loan holding company and its non-
insured institution subsidiaries primarily to activities permissible for bank
holding companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC
Act"), subject to the prior approval of the OTS, and certain activities
authorized by OTS regulation and no multiple savings and loan

                                       31
<PAGE>
 
holding company may acquire more than 5% of the voting stock of a company
engaged in impermissible activities.

     The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; or acquiring or retaining control of
a depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.

     The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.

     Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.

FEDERAL SAVINGS INSTITUTION REGULATION

     Capital Requirements.  The OTS capital regulations require savings
     --------------------- 
institutions to meet three minimum capital standards: a 1.5% tangible discussed
below also establish, in effect, a minimum 2% tangible capital standard, a 4%
leverage (core) capital ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution 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 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
principal that are 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 at least 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

                                       32
<PAGE>
 
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.

     The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
       -----
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At March 31, 1997, the Bank
met each of its capital requirements, and it is anticipated that the Bank will
not be subject to the interest rate risk component.
       

     The following table presents the Bank's capital position at March 31,
1997 relative to fully phased-in regulatory requirements.

<TABLE>
<CAPTION>
                                               EXCESS           CAPITAL
                                                         ---------------------
                         ACTUAL   REQUIRED  (DEFICIENCY)   ACTUAL   REQUIRED
                        CAPITAL   CAPITAL      AMOUNT     PERCENT    PERCENT
                      ----------  --------- ------------ ---------  ----------
                                       (DOLLARS IN THOUSANDS)
     <S>              <C>         <C>       <C>          <C>        <C> 
     Tangible ........  $100,924   $14,640      $86,284     10.34%      1.50%

     Core (Leverage) .   100,924    29,280       71,644     10.34       3.00

     Risk-based ......   107,627    42,544       65,083     20.24       8.00
</TABLE>

     Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
     -----------------------------------
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization Generally, a savings 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 OTS to meet a specific
capital level. A savings 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 CAMELS rating). A savings 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." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier I
capital ratio of less than 3% or a leverage ratio

                                       33
<PAGE>
 
that is less than 3% is considered to be "significantly undercapitalized" and a
savings 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 a savings 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 OTS 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. Both the SAIF and the Bank Insurance Fund ("BIF") (the deposit
insurance fund that covers most commercial bank deposits), are statutorily
required to be recapitalized 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 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 premium 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 could have been 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 of the United States 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 $2.9 million on a
pre-tax basis and $1.7 million on an after-tax basis.

     The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits 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 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

                                       34
<PAGE>
 
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 1997 ranged from 6.48 to 23 basis
points, excluding the SAIF special assessment rate of 65.7 basis points, and the
regular premium paid for this period was $1.0 million. A significant increase in
SAIF insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the 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 FDIC or the
OTS. The management of the 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 required that the Department of Treasury
submit a report to Congress 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, under some bills, 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 regulations as applies to state commercial
banks. A more recent bill considered by the House Banking Committee would allow
savings institutions to continue to exercise their current powers after
converting to a bank charter. Holding companies for savings institutions would
become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for savings and loan
holding company activities. The Bank is unable to predict whether such
legislation would be enacted and, if so, the extent to which the legislation
would restrict or disrupt its operations.

     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 and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At March 31, 1997,
the Bank's limit on loans to one borrower was $18.3 million. At March 31, 1997,
the Bank's largest aggregate outstanding balance of loans to one borrower was
$2.1 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

                                       35
<PAGE>
 
of each 12 month period. Recent legislation has expanded the extent to which
education loans, credit card loans and small business loans may be considered
"qualified thrift investments."

     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
March 31, 1997, the Bank maintained 91.9% of its portfolio assets in qualified
thrift investments and, therefore, met 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 I 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 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 March 31, 1997, the Bank was a Tier I
Bank.

     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 March 31,
1997 were 13.4% and 12.4% respectively, which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its 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 March 31, 1997 totaled $156,000.

     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

                                       36
<PAGE>
 
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.

     Transactions with Related Parties. The Bank's authority 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
and its non-savings institution subsidiaries) 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 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 Bank's authority 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 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 the Bank may make to insiders based, in part, on
the Bank'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 and has the authority to bring actions
against the institution 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 the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.

     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 internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality, earnings and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by

                                       37
<PAGE>
 
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 1997, the Federal
Reserve Board regulations generally required that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $49.3
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts aggregating greater than $49.3 million, the
reserve requirement is $1.48 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 $49.3 million. The first $4.4 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.


                          FEDERAL AND STATE TAXATION

FEDERAL TAXATION

     General. The Company and the Bank will report their income on a
     --------
consolidated basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions. 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 last audited by the Internal
Revenue Service ("IRS") in 1983 and has never been audited by the Massachusetts
Department of Revenue ("DOR"). For its 1997 fiscal year, the Bank is subject to
a maximum federal income tax rate of 34%.

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

                                       38
<PAGE>
 
     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 over a six-year period the excess of the balance
of its tax bad debt reserves as of December 31, 1995 over the balance of such
reserves as of December 31, 1987. The Bank has previously accrued taxes for the
"excess" balance of its tax bad debt reserve. Thus, no additional tax liability
has been recorded as a result of the 1996 Act.

     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 levies a 65.7-cent fee on
     ---------------------------------
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment must be 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.

     Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
     ----------------------------------
minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset
by net operating loss carryovers of which the Bank currently has none. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million
is imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid.

                                       39
<PAGE>
 
STATE AND LOCAL TAXATION

     Commonwealth of Massachusetts Taxation. 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 be phased-in over a five year period whereby the rate was 12.13% for
1995 and 11.72% for 1996, and will be 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 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 net operating losses, as defined under the provisions
of the Code. For taxable years beginning on or after January 1, 1999, the
definition of state taxable income is modified to allow a deduction for 95% of
dividends received from stock where the Company owns 15% 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 Company 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 1996. The net worth or tangible property of such grandfathered
subsidiaries is taxed at a rate of 0.26%. Such grandfathered 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 is expected to qualify for this reduced tax rate provided that
it is exclusively engaged in activities of a "securities corporation." The
Company believes that it will qualify as a securities corporation because a
separate subsidiary was formed to make the loan to the Bank's Employee Stock
Ownership Plan and related trust and all of 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% beginning in fiscal 1998 rather than at the phased-in rates.

     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.

                                       40
<PAGE>
 
ADDITIONAL ITEM.  EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------

     The following table sets forth certain information regarding the executive
officers of the Company and the Bank who are not also directors.

<TABLE>
<CAPTION>
                                 AGE AT                   
              NAME            MARCH 31, 1997                POSITION  
     ----------------------  ---------------      ----------------------------
     <S>                     <C>                  <C>                  
     Kevin J. McGillicuddy            57          Senior Vice President of the
                                                   Company and the Bank   
     Frederick R. Sullivan            55          Senior Vice President of the
                                                   Company and the Bank   
     Terrence M. Tyrrell              47          Senior Vice President of the
                                                   Company and the Bank   
     Nelson J. Braga                  38          Vice President of the Bank
     Joseph J. Bustin                 56          Vice President of the Bank
     Philip G. Campbell               48          Vice President of the Bank
     Christine F. Chicca              50          Vice President of the Bank
     Sheila M. Rioux                  56          Vice President of the Bank
     Robert A. Skurka                 45          Vice President of the Bank
     Gary J. Vierra                   36          Vice President of the Bank
     Anthony L. Weatherford           46          Vice President of the Bank
     Cecilia R. Viveiros              34          Corporate Secretary of the
                                                   Company and the Bank      
     </TABLE>

                                       41
<PAGE>
 
ITEM 2. PROPERTIES.
------------------- 

     The Company currently conducts its business through an administrative and
full service branch office and an operations office located in Fall River and 12
other full service branch offices and five loan origination centers, most of
which are located in Southeastern Massachusetts and Rhode Island. In September
1996, the Company began development of the Swansea Property for the purpose of
constructing a new centralized administrative and operations center and branch
office. The development and construction costs for the Swansea Property are
estimated to be approximately $10.5 million, of which $3.1 million has been
incurred as of March 31, 1997. Once this project is completed, in late 1997, the
Company believes that the Company's facilities will be adequate to meet the then
present and immediately foreseeable needs of the Company.

<TABLE>
<CAPTION>
                                                                                    NET BOOK VALUE
                                                  ORIGINAL                          OF PROPERTY OR
                                                    YEAR                               LEASEHOLD
                                      LEASED       LEASED        DATE OF             IMPROVEMENTS
                                        OR           OR           LEASE                   AT
     LOCATION                         OWNED       ACQUIRED     EXPIRATION           MARCH 31, 1997
--------------------------------      -----      ---------    ---------------      -----------------
                                                                                     (IN THOUSANDS)
<S>                                   <C>        <C>          <C>                  <C>
ADMINISTRATIVE/CORPORATE/
BRANCH OFFICE:

 1 North Main Street                  Owned        1956                -                  $   535
 Fall River, MA  02720                                                                            
                                                                                                  
OPERATIONS CENTER:                                                                                
                                                                                                  
 186 South Main Street                Leased       1987      November 1997(1)                   7  
 Fall River, MA  02721                                                                            
                                                                                                  
 Route 118 (Swansea Mall Drive)(2)    Owned        1994                -                    3,535 
 Swansea, MA  02777                                                                               
                                                                                                  
BRANCH OFFICES:                                                                                   
                                                                                                  
 27 Park Street                       Owned        1990                -                    1,751 
 Attleboro, MA  02703                                                                             
                                                                                                  
 33 Sullivan Drive                    Owned        1979                -                      407 
 Fall River, MA  02721                                                                            
                                                                                                  
 1450 Plymouth Avenue                 Owned        1972                -                      365 
 Fall River, MA  02721                                                                            
                                                                                                  
 278 Union Street                     Owned        1972                -                      467 
 New Bedford, MA  02740                                                                           
                                                                                                  
 254 Rockdale Avenue                  Owned        1983                -                       13 
 New Bedford, MA  02740                                                                           
                                                                                                  
 265 Newport Avenue                   Owned        1996                -                      721 
 Pawtucket, RI  02860                                                                             
                                                                                                  
 741 Willett Avenue                   Owned        1995                -                      707 
 East Providence, RI  02915                                                                       
                                                                                                  
 1519 Newman Avenue                   Owned        1994                -                      506  
 Seekonk, MA  02771
</TABLE>

                                       42
<PAGE>
 
<TABLE> 
<CAPTION>                                                                                   
                                                                                                  NET BOOK VALUE        
                                                         ORIGINAL                                  OF PROPERTY OR       
                                                          YEAR                                        LEASEHOLD           
                                      LEASED              LEASED          DATE OF                   IMPROVEMENTS          
                                        OR                  OR              LEASE                        AT              
     LOCATION                         OWNED               ACQUIRED        EXPIRATION                MARCH 31, 1997        
--------------------------------      -----               ---------     ---------------           -----------------      
                                                                                                    (IN THOUSANDS)       
<S>                                   <C>                 <C>             <C>                     <C>                    
 149 Grand Army Highway               Owned                 1963               -                        123             
 Somerset, MA  02725                                                                                           
                                                                                                               
 2 Washington Street                  Owned                 1976               -                        862             
 Taunton, MA  02780                                                                                            
                                                                                                               
 2100 Warwick Avenue                  Owned                 1996               -                        660             
 Warwick, RI  02889                                                                                            
                                                                                                               
 975 Ashley Boulevard (3)             Leased                1996               -                      1,092             
 New Bedford, MA  02745                                                                                        
                                                                                                               
LOAN ORIGINATION CENTERS:                                                                                      
                                                                                                               
 12 White's Path, Unit 7              Leased                1992          October 1998 (4)                -             
 Yarmouth, MA  02664                                                                                           
                                                                                                               
 62 Auburn Street                     Leased                1990             June 1997                    -             
 Auburn, MA  01501                                                                                             
                                                                                                               
 1325 Springfield Street              Leased                1992             June 1997 (4)                -              
 Agawam, MA  01089                                                                                             
                                                                                                               
 10 Wall Street                       Leased                1994         December 1997 (4)                -             
 Burlington, MA  01803                                                                                         
                                                                                                               
 333 Main Street                      Leased                1990         September 1998 (4)               -             
 East Greenwich, RI  02818                                                                          -------             
                                                                                                               
      Total.........................................................................                $11,751             
                                                                                                    =======              
</TABLE>

_____________________________________
(1)  The original lease expires in August, 1997.  The Company and landlord have
     agreed to a three month extension whereby the Company will vacate the
     premises by November, 1997.
(2)  The Company's current expansion plans include the development of a new
     centralized administrative and operations center and branch office on this
     property which is expected to become operational in late 1997. Total
     development and construction costs for the property are estimated to be
     approximately $10.5 million. Net book value includes the $434,000 cost of
     the land and $3.1 million in construction and development costs as of March
     31, 1997.
(3)  In 1996, the Company entered into a lease agreement for the land.  The
     lease has a commencement date of November 1, 1996 and a term of 20 years
     with four five-year renewal options.  Subsequent to entering into the lease
     agreement, the Company constructed a branch office location which structure
     the Company owns.  This branch office opened for business on February 25,
     1997.
(4)  The Company has options to renew this lease which range from 1 to 10 years.

ITEM 3. LEGAL PROCEEDINGS.
------------------------- 

     The Company is not involved in any pending 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.

                                       43
<PAGE>
 
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" opposite the
inside back cover in the Registrant's 1997 Annual Report to Stockholders is
incorporated herein by reference.

ITEM 6.  SELECTED FINANCIAL DATA.
---------------------------------

     The above-captioned information appears under Selected Consolidated
Financial and Other Data of the Company in the Registrant's 1997 Annual Report
to Stockholders on pages 10 and 11 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 "Managements Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1997 Annual Report to Stockholders on pages 13 through 28 and is incorporated
herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-----------------------------------------------------

     The Consolidated Financial Statements of FIRSTFED AMERICA BANCORP, INC. and
its subsidiaries, together with the report thereon by KPMG Peat Marwick LLP
appears in the Registrant's 1997 Annual Report to Stockholders on pages F-1
through F-27 and are incorporated herein by reference.

     Quarterly data is not presented for the fiscal year ended March 31, 1997 as
the Company did not have a full quarter of operations.

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

     None.

                                       44
<PAGE>
 
                                   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 "Additional Item- Executive 
Officers of the Registrant" contained herein and the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on August 5, 1997,
at pages 5 and 6.

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 August 5, 1997, at pages 8 through 16 (excluding the
Compensation Committee Report on Executive Compensation and Stock Performance
Graph).

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 August 5, 1997,
at pages 4 through 6.

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 August 5, 1997, at page 16.

                                       45
<PAGE>
 
                                    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 1997 Annual
               Report to Stockholders:

<TABLE>
<CAPTION>
                                                                                PAGE
     <S>                                                                  <C>   
 
     Independent Auditors' Report.......................................         F-1   
                                                                                       
     Consolidated Balance Sheets as of                                                 
       March 31, 1997 and 1996..........................................         F-2   
                                                                                       
     Consolidated Statements of Operations for the Fiscal Years Ended                  
       March 31, 1997, 1996 and 1995....................................         F-3   
                                                                                       
     Consolidated Statements of Changes in Stockholders' Equity for                    
       the Fiscal Years Ended March 31, 1997, 1996 and 1995.............         F-4   
                                                                                       
     Consolidated Statements of Cash Flows for the Fiscal Years                        
       Ended March 31, 1997, 1996 and 1995..............................         F-5   
                                                                                       
     Notes to Consolidated Financial Statements.........................  F-6 - F-27 
</TABLE>

                                       46
<PAGE>
 
     The remaining information appearing in the 1997 Annual Report to
Stockholders 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  Certificate of Incorporation of FIRSTFED AMERICA 
                        BANCORP, INC.*
                   3.2  Bylaws of FIRSTFED AMERICA BANCORP, INC.*
                   4.0  Stock Certificate of FIRSTFED AMERICA BANCORP, INC.*
                  10.1  Forms of Employment Agreement between Company and
                        Robert F. Stoico and Employment Agreement between the
                        Bank and Robert F. Stoico*
                  10.2  Forms of Employment Agreement between Company and Kevin
                        J. McGillicuddy and Employment Agreement between the
                        Bank and Kevin J. McGillicuddy*
                  10.3  Forms of Employment Agreement between Company and
                        Frederick R. Sullivan and Employment Agreement between
                        the Bank and Frederick R. Sullivan*
                  10.4  Forms of Employment Agreement between Company and
                        Terrence M. Tyrrell and Employment Agreement between the
                        Bank and Terrence M. Tyrrell*
                  10.5  Form of Change in Control Agreement between the Bank and
                        Certain Executive Officers*
                  10.6  First Federal Savings Bank of America Employee Severance
                        Compensation Plan*
                  10.7  First Federal Savings Bank of America Employee Stock
                        Ownership Plan and Trust*
                  10.8  FIRSTFED AMERICA BANCORP, INC. 1997 Stock-Based 
                        Incentive Plan**
                  10.9  First Federal Savings Bank of America 1996 Supplemental
                        Executive Retirement Plan*
                  11.0  Computation of earnings per share (not applicable)***
                  13.0  Portions of the 1997 Annual Report to Stockholders
                        (filed herewith)
                  21.0  Subsidiary information is incorporated herein by
                        reference to "Part I - Subsidiary Activities" and 
                        "Item 1. Business - General"
                  27.0  Financial Data Schedule (filed herewith)
                  99.0  Proxy Statement for 1997 Annual Meeting (filed herewith)



               _____________________________
               *   Incorporated herein by reference into this document from the
                   Exhibits to Form S-1, Registration Statement, and any
                   amendments thereto, filed on September 27, 1996, Registration
                   No. 333-12855.
              **   Incorporated herein by reference into this document from the
                   Proxy Statement for the 1997 Annual Meeting of Stockholders
                   dated June 20, 1997.
             ***   Not applicable as the Company did not have a full quarter of
                   earnings in fiscal 1997.

                                       47
<PAGE>
 
                 (b)  Reports on Form 8-K.

                         None.

                                       48
<PAGE>
 
                                  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.

                                           FIRSTFED AMERICA BANCORP, INC.


                                           By: /s/ Robert F. Stoico
                                               ---------------------
                                               Robert F. Stoico
                                               President and Chief Executive
                                               Officer
  DATED:  June 30, 1997
          -------------

    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.

<TABLE> 
<CAPTION>
    Name                            Title                                                      Date
    ----                            -----                                                      ----
<S>                                 <C>                                                        <C> 
/s/ Robert F. Stoico                President and Chief Executive Officer                      June 30, 1997
------------------------------      and Chairman of the Board                                  -------------
Robert F. Stoico                    (Principal Executive Officer)                              
                                                                                               
 /s/ Terrence M.  Tyrrell           Senior Vice President                                      June 30, 1997
------------------------------                                                                 -------------
Terrence M. Tyrrell                 (Principal Accounting and Financial Officer)               
                                                                                               
/s/ Gilbert C. Oliveira             Director                                                   June 30, 1997
------------------------------                                                                 -------------
Gilbert C. Oliveira                                                                            
                                                                                               
/s/ Thomas A. Rodgers, Jr.          Director                                                   June 30, 1997
------------------------------                                                                 -------------
Thomas A. Rodgers, Jr.                                                                         
                                                                                               
/s/ Richard W. Cederberg            Director                                                   June 30, 1997
------------------------------                                                                 -------------
Richard W. Cederberg                                                                           
                                                                                               
/s/ John S. Holden, Jr.             Director                                                   June 30, 1997
------------------------------                                                                 -------------
John S. Holden, Jr.                                                                            
                                                                                               
/s/ Dr. Paul A. Raymond             Director                                                   June 30, 1997
------------------------------                                                                 -------------
Dr. Paul A. Raymond                                                                            
                                                                                               
/s/ Anthony L. Sylvia               Director                                                   June 30, 1997
------------------------------                                                                 -------------
Anthony L. Sylvia
</TABLE> 

                                       49