1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended DECEMBER 31, 1999

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

Commission File No.: 1-13936

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

DELAWARE 52-1940834
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)

17 NEW ENGLAND EXECUTIVE PARK, BURLINGTON, MASSACHUSETTS 01803
(Address of principal executive offices)

Registrant's telephone number, including area code: (781) 273-0300

Securities registered pursuant to Section 12(b) of the Act:

Title of Class Name of Exchange on Which Registered

COMMON STOCK PAR VALUE $0.01 PER SHARE THE AMERICAN STOCK EXCHANGE

Indicate by check mark whether 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.

(1) Yes X No (2) 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.

The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant, i.e., persons other than directors and
executive officers of the registrant is $57.8 million and is based upon the last
sales price as quoted on the American Stock Exchange for March 3, 2000.

The number of shares of Common Stock outstanding as of March 3, 2000 is
4,907,481.

DOCUMENTS INCORPORATED BY REFERENCE

PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED
DECEMBER 31, 1999 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.
2
PORTIONS OF THE PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.

INDEX

PAGE
----

PART I

Item 1. Business .......................................... 3

Item 2. Properties ........................................ 38

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

Item 4. Submission of Matters to a Vote of Security Holders 39

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters .............................. 39

Item 6. Selected Financial Data ........................... 39

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............... 39

Item 7A. Quantitative and Qualitative Disclosure About
Market Risks ...................................... 39

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

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

PART III

Item 10. Directors and Executive Officers of the Registrant 40

Item 11. Executive Compensation ............................ 40

Item 12. Security Ownership of Certain Beneficial Owners
and Management .................................... 40

Item 13. Certain Relationships and Related Transactions .... 40

PART IV

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

SIGNATURES

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PART I

ITEM 1. BUSINESS.

GENERAL

BostonFed Bancorp, Inc. (also referred to as the "Company "or
"Registrant") was incorporated under Delaware law on July 11, 1995, and
subsequently became the holding company for Boston Federal Savings Bank ("BFS").
On October 24, 1995, BFS completed its conversion from a mutual savings bank to
a stock form of ownership, while simultaneously, the Company issued 6,589,617
shares of common stock utilizing a portion of the proceeds to acquire all of the
stock of BFS. On February 7, 1997, the Company acquired Broadway National Bank
("BNB"), using the purchase method of accounting, at a cost of approximately $22
million. On August 4, 1999, the Company entered into a Purchase and Sale
Agreement by and among the Company, Diversified Ventures, Inc. d/b/a Forward
Financial Company ("Forward Financial"), Ellsmere Insurance Agency, Inc.
("Ellsmere") and Gene J. DeFeudis, pursuant to which BFS purchased all of the
outstanding capital stock of Forward Financial and BNB purchased all of the
outstanding capital stock of Ellsmere in a cash transaction for approximately
$38.3 million. The transaction was consummated at the close of business on
December 6, 1999.

The Company's business is conducted primarily through its ownership of
BFS and BNB (collectively, the "Banks"). BFS' administrative and banking office
is located in Burlington, Massachusetts and its seven other banking offices are
located in Arlington, Bedford, Billerica, Boston, Lexington, Peabody and
Wellesley, all of which are in the greater Boston metropolitan area. BFS'
subsidiary, Forward Financial, maintains its headquarters in Northboro,
Massachusetts and operates in approximately twenty states across the United
States. BNB has two banking offices located in Chelsea and Revere, also in the
greater Boston metropolitan area. As a result of the acquisition of BNB, a
nationally chartered commercial bank, the Company became a multi-bank holding
company subject to regulation by the Federal Reserve Board ("FRB"). Prior to its
acquisition of BNB, the Company was a savings and loan holding company regulated
by the Office of Thrift Supervision ("OTS"). As a bank holding company, the
Company is subject to certain restrictions and requirements imposed by the FRB
on the activities in which the Company may engage and the assets in which the
Company may invest. See "Regulation and Supervision-Holding Company Regulation."

The Company's principal business has been and continues to be
attracting retail deposits from the general public in the areas surrounding its
banking offices and investing those deposits, together with funds generated from
operations, loan sales and borrowings, primarily in one- to four-family
residential mortgage loans. To a lesser extent, the Company invests in
commercial real estate, construction and land, multi-family mortgage, equity
lines of credit, business and consumer loans. The Company originates mortgage
loans for investment and for sale in the secondary market, generally retaining
the servicing rights for loans sold. Through Forward Financial, the Company also
originates consumer loans primarily with customers purchasing or refinancing
manufactured homes, recreational vehicles, marine and leased equipment and
subsequently sells substantially all of such loans. Loan sales are made from
loans held in the Company's portfolio designated as being held for sale or
originated for sale during the period. The Company's revenues are derived
principally from interest on its mortgage loans, gain on sale of loans, and to a
lesser extent, interest and dividends on its investment and mortgage-backed
securities, fees and loan servicing income. The Company's primary sources of
funds are retail deposits, wholesale brokered deposits, principal and interest
payments on loans, investments and mortgage-backed securities, Federal Home Loan
Bank Boston ("FHLB") advances, repurchase agreements, other borrowings and
proceeds from the sale of loans.

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MARKET AREA AND COMPETITION

The Company has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
products and services to meet the needs of the communities it serves. The
Company's deposit gathering is concentrated in the communities surrounding its
offices while its lending base extends throughout eastern Massachusetts and, to
a lesser extent, other areas of New England. Forward Financial provides its
consumer lending services in approximately twenty states throughout the United
States.

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

LENDING ACTIVITIES

LOAN PORTFOLIO COMPOSITION. The Company's loan portfolio consists
primarily of first mortgage loans secured by one- to four-family residences. At
December 31, 1999, the Company had total loans outstanding, including mortgage
loans held for sale, of $1,087.6 million, of which $846.7 million were one- to
four-family, residential mortgage loans, or 77.9% of the Company's total loans.
At such date, the remainder of the loan portfolio consisted of: $22.0 million of
multi-family residential loans, or 2.0% of total loans; $76.0 million of
commercial real estate loans, or 7.0% of total loans; $77.1 million of
construction and land loans, or 7.1% of total loans; and other loans, primarily
home equity lines of credit and business loans, of $65.8 million or 6.1% of
total loans. The Company had $16.2 million of mortgage loans held for sale at
December 31, 1999 consisting of one- to four-family fixed and variable-rate
mortgage loans. At that same date, 66.0% of the Company's mortgage loans had
adjustable interest rates, most of which, at the first adjustment date, are
indexed to the one-year Constant Maturity Treasury ("CMT") Index.

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

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

AT DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- -------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)

Mortgage Loans:
Residential:
One- to four-family(1). $ 846,739 77.85% $ 829,572 84.27% $ 702,102 86.11%
Multi-family .......... 22,017 2.02 22,889 2.33 18,874 2.32
Commercial real estate .. 75,999 6.99 48,951 4.97 36,400 4.46
Construction and land ... 77,079 7.09 41,608 4.23 20,497 2.51
Other loans(2)............. 65,767 6.05 41,308 4.20 37,465 4.60
--------- ------ ------- ------ ------- ------
Total loans ......... 1,087,601 100.00% 984,328 100.00% 815,338 100.00%
====== ====== ======

Less:
Allowance for loan losses (10,654) (8,500) (6,600)
Construction loans in
process ............... (30,372) (17,133) (8,527)
Net unearned premium
(discount) on loans
purchased ........... (7) (5) (114)
Deferred loan origination
(fees) costs .......... 2,200 1,980 1,448
----------- ---------- ----------
Loans, net and mortgage
loans held for sale $ 1,048,768 $ 960,670 $ 801,545
=========== ========== ==========

AT DECEMBER 31,
-------------------------------------------------
1996 1995
----------------------- -----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)

Mortgage Loans:
Residential:
One- to four-family(1). $ 607,792 88.00% $ 447,033 85.44%
Multi-family .......... 21,381 3.10 27,986 5.35
Commercial real estate .. 28,136 4.07 26,412 5.05
Construction and land ... 12,532 1.81 3,435 .66
Other loans(2)............. 20,850 3.02 18,343 3.50
------- ------ ------- ------
Total loans ......... 690,691 100.00% 523,209 100.00%
====== ======

Less:
Allowance for loan losses (4,400) (4,275)
Construction loans in
process ............... (6,936) (805)
Net unearned premium
(discount) on loans
purchased ........... (163) (262)
Deferred loan origination
(fees) costs .......... 1,448 560
---------- ----------
Loans, net and mortgage
loans held for sale $ 680,640 $ 518,427
========== ==========

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

(1) Includes mortgage loans held for sale of $16.2 million, $17.0 million, $9.8
million, $4.0 million and $8.9 million at December 31, 1999, 1998, 1997,
1996 and 1995, respectively.

(2) These loans primarily consist of one- to four-family lines of credit secured
by mostly second mortgages which amounted to $43.7 million, $32.1 million,
$28.1 million,$17.4 million and $14.9 million at December 31, 1999, 1998,
1997, 1996 and 1995, respectively and business loans which amounted to $17.8
million, $3.6 million, $3.5 million, $724,000 and $664,000 at December 31,
1999, 1998, 1997, 1996 and 1995, respectively.

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LOAN MATURITY. The following table shows the remaining contractual
maturity of the Company's loans at December 31, 1999. There were $16.2 million
of mortgage loans held for sale at December 31, 1999. The table does not include
the effect of future principal prepayments. Principal prepayments on total loans
were $203.3 million, $316.4 million and $167.2 million for the years ended
December 31, 1999, 1998 and 1997, respectively.

AT DECEMBER 31, 1999
--------------------------------------------------------------------------------
ONE- TO
FOUR- MULTI- COMMERCIAL CONSTRUCTION OTHER TOTAL
FAMILY FAMILY REAL ESTATE AND LAND LOANS LOANS
----------- --------- ----------- --------- --------- -----------
(IN THOUSANDS)

Amounts due:
One year or less ........................ $ 1,212 $ 3 $ 2,090 $ 45,135 $ 9,041 $ 57,481

After one year:
More than one year to three years ....... 4,640 200 2,315 29,604 6,609 43,368
More than three years to five years .. 11,603 117 3,262 2,198 3,483 20,663
More than five years to 10 years ..... 103,295 3,477 7,105 47 44,754 158,678
More than 10 years to 20 years ....... 182,756 13,176 33,966 45 1,288 231,231
More than 20 years ................... 543,233 5,044 27,261 50 592 576,180
----------- --------- --------- --------- --------- -----------

Total due after one year ............. 845,527 22,014 73,909 31,944 56,726 1,030,120
----------- --------- --------- --------- --------- -----------
Total amount due ..................... $ 846,739 $ 22,017 $ 75,999 $ 77,079 $ 65,767 $ 1,087,601
=========== ========= ========= ========= =========
Less:
Allowance for loan losses ...... (10,654)
Construction loans in process .. (30,372)
Net unearned discount on
loans purchased ............. (7)
Deferred loan origination costs 2,200
-----------
Loans, net, and mortgage
loans held for sale ............... 1,048,768
Mortgage loans held for sale ......... (16,174)
-----------

Loans, net ........................... $ 1,032,594
===========

The following table sets forth at December 31, 1999 the dollar amount
of loans contractually due after December 31, 2000, and whether such loans have
fixed interest rates or adjustable interest rates.

DUE AFTER DECEMBER 31, 2000
----------------------------------------
FIXED ADJUSTABLE TOTAL
---------- ---------- ----------
(IN THOUSANDS)

Mortgage loans:
Residential:
One- to four-family $ 321,503 $ 524,024 $ 845,527
Multi-family ....... 6,332 15,682 22,014
Commercial real estate 22,948 50,961 73,909
Construction and land 70 31,874 31,944
Other loans ............. 9,272 47,454 56,726
---------- ---------- ----------
Total loans ...... $ 360,125 $ 669,995 $1,030,120
========== ========== ==========

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ORIGINATION, SALE, SERVICING AND PURCHASE OF LOANS. The Company's
mortgage and consumer finance lending activities are conducted primarily by its
commissioned loan personnel, through its offices, and through wholesale brokers
and other financial institutions approved by the Company. All loans originated
by the Company, either through internal sources or through wholesale brokers or
other correspondent financial institutions are underwritten by the Company,
pursuant to the Company's policies and procedures. The Company originates both
adjustable-rate and fixed-rate loans. The Company's ability to originate loans
is dependent upon the relative customer demand for fixed-rate or adjustable-rate
loans, which is affected by the current and expected future level of interest
rates, economic conditions, and competition. The general policy of the Company
is to sell a substantial majority of the one- to four-family fixed-rate mortgage
loans it originates with maturities of fifteen years or over and to retain
adjustable-rate and fixed-rate loans with maturities of under fifteen years
sufficient to meet portfolio needs and selling the balance. The Company retains
the servicing of mortgage loans sold in most cases. At December 31, 1999, the
Company serviced $784.6 million of loans for others. The Company recognizes, at
the time of sale, the cash gain or loss on the sale of the loans based on the
difference between the net cash proceeds received and the carrying value of the
loans sold, adjusted for the value of originated mortgage servicing rights. See
"--Loan Servicing." The Company recognizes a gain on sale of consumer finance
loans at Forward Financial when it collects its fee upon the sale of the loan to
client lenders. At December 31, 1999, the Company had $16.2 million of mortgage
loans held for sale consisting of fixed and adjustable-rate one- to four-family
loans. The Company has, in the past, from time to time, purchased loans or
participations of loans, primarily one- to four-family mortgage loans, and had
$6.4 million of purchased loans at December 31, 1999. With the exception of
purchases of loans from correspondent financial institutions, which are
underwritten pursuant to the Company's policies and closed in the name of the
correspondent financial institution but immediately purchased by the Company for
its mortgage banking activities, and loans that qualify for Community
Reinvestment Act ("CRA") purposes, the Company generally does not purchase loans
or participate in loans.

The Company engages in certain hedging activities to facilitate the
sale of its originated and purchased mortgage loans in an attempt to minimize
interest rate risk from the time the loan commitments are made to the time until
the loans are securitized or packaged and sold. The Company currently utilizes
forward loan sale commitment contracts with Fannie Mae ("FNMA"), Freddie Mac
("FHLMC"), and other approved investors as its method of hedging loan sales in
an attempt to protect the Company from fluctuations in market interest rates.
Generally, the Company will enter into contracts to deliver loans or agency
mortgage-backed securities to purchasers at a future date for a specified price
while the Company simultaneously processes and closes loans, thereby protecting
the price of currently processed loans from interest rate fluctuations that may
occur from the time the interest rate on the loan is fixed to the time of sale.
As loans are closed and funded, they may also be pooled to create
mortgage-backed securities that can be delivered to fulfill the forward
commitment contracts. The amount of forward coverage of the "pipeline"of
mortgages is set on a day-to-day basis by an operating officer, within policy
guidelines, based on the Company's assessment of the general direction of
interest rates and levels of mortgage-origination activity. For the year ended
December 31, 1999, the Company had $3.0 million in net gains attributable to the
sale of loans.

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

FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS)

Net loans:
Beginning balance ................................. $ 943,662 $ 791,728 $ 676,670
Loans originated:
One- to four-family ........................ 507,569 773,655 321,039
Multi-family ............................... 2,821 7,911 869
Commercial real estate ..................... 30,160 25,363 7,294
Construction and land ...................... 50,946 32,348 16,870
Other(1).................................... 70,198 37,055 34,055
----------- ----------- -----------
Total loans originated ..................... 661,694 876,332 380,127
Loans purchased(2)............................. 41,996 25,042 17,013
Loans from BNB acquisition .................... -- -- 66,093
Loans from Forward acquisition ................ 11,345 -- --
----------- ----------- -----------
Total .................................. 1,658,697 1,693,102 1,139,903
Less:
Principal repayments and other, net ........... (307,906) (382,475) (226,143)
Loan (charge-offs) recoveries, net ............ 358 258 (116)
Sale of mortgage loans ........................ (302,298) (350,215) (111,566)
Transfer of mortgage loans to real estate owned (83) -- (533)
----------- ----------- -----------
Loans, net and mortgage loans held for sale ... 1,048,768 960,670 801,545
Mortgage loans held for sale .................. (16,174) (17,008) (9,817)
----------- ----------- -----------
Loans, net ........................................ $ 1,032,594 $ 943,662 $ 791,728
=========== =========== ===========

- ---------------------------
(1) Other loans primarily consist of one- to four-family lines of credit
secured by mortgages and business loans. The amounts indicated primarily
include new amounts drawn on such home-equity lines of credit, business
loans and/or lines of credit during the periods presented.
(2) Includes loans purchased from correspondent financial institutions which
are underwritten pursuant to the Company's policies and closed in the name
of the financial institution but immediately purchased by the Company for
its mortgage banking activities or for CRA purposes.

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

At December 31, 1999, the Company's total loans outstanding were
$1,087.6 million, of which $846.7 million, or 77.9%, were one- to four-family
residential mortgage loans, most of which were primarily owner-occupied
properties. Of the one- to four-family residential mortgage loans outstanding at
that date, 38.0% were fixed-rate loans, and 62.0% were adjustable-rate mortgage
loans. The interest rates for the

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majority of the Company's adjustable-rate mortgage loans are indexed to the CMT
Index. The Company currently offers fixed-rate mortgage loans with amortization
periods of five to thirty years. The Company currently offers a number of
adjustable-rate mortgage loan programs with interest rates which adjust annually
with amortization schedules of ten to thirty years. The Company's
adjustable-rate mortgage loans are originated with interest rates which are
fixed for an initial period of one, three, five or seven years and at the end of
such period will adjust thereafter either annually or a greater period according
to their terms. The Company's one- to four-family adjustable-rate loan products
generally reprice based on a margin, currently 287 to 325 basis points, over the
CMT Index for the Treasury security of a maturity which is comparable to the
interest adjustment period for the loan. Generally, all of the Company's
adjustable-rate mortgage loans provide for periodic (generally 2%) and overall
caps (generally 6%) on the increase or decrease in interest rate at any
adjustment date and over the life of the loan.

The Company generally originates one- to four-family residential
mortgage loans in amounts up to 80% of the lower of the appraised value or the
selling price of the property securing the loan and up to 95% of the appraised
value or selling price if private mortgage insurance is obtained on the portion
of the loan in excess of 75% of the lesser of the appraised value or selling
price. However, the Company may originate single-family owner-occupied mortgage
loans in amounts up to 90% of the lesser of the appraised value or selling price
without private mortgage insurance. Mortgage loans originated by the Company
generally include due-on-sale clauses which provide the Company with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without the Company's consent.
Due-on-sale clauses are an important means of adjusting the rates and
maintaining quality on the Company's fixed-rate mortgage loan portfolio and the
Company has generally exercised its rights under these clauses.

MULTI-FAMILY MORTGAGE LENDING. The Company originates multi-family
mortgage loans generally secured by five to 120 unit apartment buildings located
in the Company's primary market area. The Company currently originates
multi-family loans on a limited and selective basis. In reaching its decision on
whether to make a multi-family loan, the Company considers the value of the
underlying property as well as the qualifications of the 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
coverage ratio (the ratio of earnings before debt service to debt service); and
the ratio of loan amount to appraised value. The Company generally requires a
debt service ratio of 115% or greater. Pursuant to the Company's current
underwriting policies, a multi-family mortgage loan may generally be made in an
amount up to 85% of the appraised value of the underlying property to a maximum
loan to one borrower amount of $7.5 million. However, most loans are granted at
or below 80% of the appraised value. Generally, all multi-family loans made to
corporations, partnerships and other business entities require personal
guarantees by the principal borrowers. On an exception basis, the Company may
not require a personal guarantee, or may require limited recourse on such loans
depending on the creditworthiness of the borrower and amount of the down
payment.

When evaluating the qualifications of the borrower for a multi-family
loan, the Company considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar property, and
the Company's lending experience with the borrower. The Company's underwriting
guidelines require that the borrower be able to demonstrate strong management
skills and the ability to maintain the property from current rental income. The
borrower is required to present evidence of the ability to repay the mortgage
and a history of making mortgage payments on a timely basis. In making its
assessment of the creditworthiness of the borrower, the Company generally
reviews the financial statements and pro- forma cash-flow statement on the
property and the employment and credit history of the guarantor, as well as
other related documentation. The Company's multi-family loan portfolio at
December 31, 1999, totalled $22.0 million or 2.0% of total loans. The Company's
largest multi-family loan at December 31, 1999, was a $2.6 million performing
loan secured by a 118 unit apartment complex located in Malden, Massachusetts.

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

COMMERCIAL REAL ESTATE LENDING. The Company originates commercial real
estate loans that are secured by properties generally used for business purposes
such as office buildings or retail facilities located in the Company's primary
market area. The Company's underwriting procedures provide that commercial real
estate loans may be made in amounts up to the lesser of 85% of the appraised
value of the property, or the Company's current loan to one borrower limit which
is $7.5 million. However, generally loans are not granted which exceed 80% of
the appraised value. The Company currently originates commercial real estate
loans with terms of up to twenty-five years the majority of which contain
adjustable-rates and are indexed to the CMT Index. The Company's underwriting
standards and procedures are similar to those applicable to its multi-family
loans, whereby the Company considers the net operating income of the property
and the borrower's expertise, credit history and profitability. The Company has
generally required that the properties securing commercial real estate loans
have debt service coverage ratios of at least 115%. Generally, all commercial
real estate loans made to corporations, partnerships and other business entities
require personal guarantees by the principal borrowers. On an exception basis,
the Company may not require a personal guarantee, or may require limited
recourse on such loans depending on the creditworthiness of the borrowers and
the amount of the down payment. The Company's commercial real estate loan
portfolio at December 31, 1999 was $76.0 million, or 7.0% of total loans. The
largest commercial real estate loan in the Company's portfolio at December 31,
1999 was a $3.4 million performing loan secured by an office building located in
Cambridge, Massachusetts.

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 the successful operation or management of the
properties, repayment of such loans may be subject to a greater extent to the
then prevailing conditions in the real estate market or the economy. The Company
seeks to minimize these risks through its underwriting standards.

CONSTRUCTION AND LAND LENDING. The Company originates loans for the
acquisition and development of property to licensed and experienced contractors
in its primary market area. The majority of the Company's construction loans
have been made to finance the construction of one- to four-family, residential
properties. While the Company originates loans secured by land, the Company
generally does not originate such loans unless the borrower has also secured
sub-division approval and financing with the Company for the construction of
structures on the property. These loans are primarily adjustable-rate loans with
maturities of less than two years. Construction and land mortgage loans are
originated in amounts up to 75% of the lesser of the appraised value of the
property, as improved, or sales price, unless such loan is for the construction
of a residential property which cannot exceed an 80% loan to value ("LTV")
ratio. Proceeds of such loans are dispersed as phases of the construction are
completed. Generally, if the borrower is a corporation, partnership or other
business entity, personal guarantees by the principal borrowers are required.
However, personal guarantees may not be required, or limited recourse may be
required on such loans depending on the creditworthiness of the borrower and
amount of the down payment. The Company's current loan to one borrower limit is
$7.5 million. The Company's largest construction and land loan at December 31,
1999 was a performing loan of $7.4 million with an outstanding loan-in-process
balance of $4.9 million and secured by an office/warehouse building located in
Marlboro and Southboro, Massachusetts. At December 31, 1999, the Company had
$77.1 million of construction and land loans which amounted to 7.1% of the
Company's total

10
11
loan portfolio. Working with experienced land developers in the local community,
the Company will continue to expand this area of its lending business.

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

OTHER LENDING. Other loans at December 31, 1999, amounting to $65.8
million or 6.1% of the Company's total loan portfolio, consisted primarily of
home equity, business loans, and improvement loans, and, to a significantly
lesser extent, consumer loans, and loans secured by savings accounts. Such loans
are generally originated in the Company's primary market area and generally are
secured by real estate, personal property, savings accounts, automobiles and
business assets such as accounts receivable, inventory and machinery. These
loans are shorter term and generally contain higher interest rates than
residential mortgage loans.

Substantially all of the Company's home equity lines of credit are
primarily secured by second mortgages on one- to two-family residences located
in the Company's primary market area.At December 31, 1999, these loans totalled
$43.7 million, or 4.0% of the Company's total loans and 66.4% of other loans.
Generally, under the terms of the Company's home equity lines of credit,
borrowers have the ability to draw on such lines of credit and repay outstanding
principal and interest on a monthly basis on a certain percentage of the
outstanding principal over a period of up to ten years and, thereafter, the
outstanding balance drawn on such lines of credit is converted to an
adjustable-rate loan with terms of up to ten years for BFS and up to five years
for BNB. The underwriting standards employed by the Company for these loans
include a determination of the applicant's credit history and an assessment of
the applicant's ability to meet existing obligations and payments on the
proposed loan and the value of the collateral securing the loan. The stability
of the applicant's monthly income may be determined by verification of gross
monthly income from primary employment and, additionally, from any verifiable
secondary income. Creditworthiness of the applicant is of primary consideration.

The Company began originating loans to businesses and corporations in
1998. These loans, amounting to $17.8 million at December 31, 1999, are
generally secured by the assets of the borrowing entity. The most typical type
of loans generated for the Company are term loans and lines of credit. These
loans generally require the personal guaranty of the principals of the Company.
However, in some circumstances where the borrower is extremely strong or the
loan to value ratio is low, the personal guaranty may be waived or be limited in
recourse. The Company has separate lending guidelines and underwriting standards
for this type of lending. These guidelines currently limit the loan to one
borrower to $7.5 million. The largest business loan in the Company's portfolio
as of December 31, 1999 was a $4.3 million performing loan secured by the
business assets of a company located in Attleboro, Massachusetts.

Loans secured by rapidly depreciable assets such as equipment,
machinery, automobiles, etc., 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. The consumer finance loans originated
by Forward Financial are substantially all sold without recourse and servicing
released. Finally, the application of various federal and state laws, including
federal and state

11
12
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans in the event of a default.

LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors
establishes the lending policies and loan approval limits of the Bank. Such
limits are included in a matrix with the corresponding level of authority
requirements. At BFS, Board of Directors' approval is required on all one- to
four-family loans in excess of $2.5 million, on all commercial real estate,
multi-family and non-owner occupied construction loans in excess of $5.0
million, and on all business loans in excess of $4.5 million. At BNB, a similar
matrix has been established and Board of Directors' approval is required on all
loans in excess of $500,000.

Pursuant to OTS and Office of the Comptroller of the Currency ("OCC")
regulations, loans to one borrower cannot, subject to certain exceptions, exceed
15% of the Bank's unimpaired capital and surplus. At December 31, 1999, the
loans to one borrower limit was $10.4 million and $1.4 million for BFS and BNB,
respectively.

LOAN SERVICING. The Company also services mortgage loans for others.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections as required of mortgaged premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain insurance and
tax payments on behalf of the borrowers and generally administering the loans.
All of the loans currently being serviced for others are loans which have been
sold by the Company. At December 31, 1999, the Company was servicing $784.6
million of loans for others. The gross servicing fee income from loans sold is
generally 0.25% to 0.38% of the total balance of the loan serviced. The Company
has not purchased servicing rights related to mortgage loans originated by other
institutions. The Company recognizes the present value of the servicing income,
net of servicing expenses, attributable to servicing rights upon sale of the
loan. The Company amortizes the capitalized mortgage servicing rights using a
method which approximates the level yield method in proportion to, and over the
period of, estimated net servicing income. The Company reviews prepayment
activity on its serviced loans at least quarterly and adjusts its capitalized
mortgage servicing rights amortization schedule accordingly. As of December 31,
1999, the Company had $5.1 million of capitalized mortgage servicing rights,
representing 65 basis points of loans serviced for others.

NONPERFORMING AND PROBLEM ASSETS

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

12
13
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.

BFS' and BNB's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the OTS and OCC,
respectively, which can order the establishment of additional general or
specific loss allowances. The OTS and OCC, in conjunction with the other federal
banking agencies, have adopted an interagency policy statement on the allowance
for loan and lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation guidelines. Generally,
the policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. As a result of the declines in local and regional real
estate market values and the significant losses experienced by many financial
institutions just a few years ago, there has been a greater level of scrutiny by
regulatory authorities of the loan portfolios of financial institutions
undertaken as part of the examination of institutions by the OTS, OCC and the
Federal Deposit Insurance Corporation ("FDIC"). While the Company believes that
it has established an adequate allowance for loan losses, there can be no
assurance that regulators, in reviewing the Company's loan portfolio, will not
request the Company to materially increase its allowance for loan losses,
thereby negatively affecting the Company's financial condition and earnings at
that time. Although management believes that, based on information currently
available to it, 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.

BFS' Asset Classification Committee reviews and classifies assets on a
quarterly basis and reports the results of its review to the Board of Directors.
BNB's assets are reviewed by a non-lending officer who reports classifications
to the BNB Board on a quarterly basis. The Company classifies assets in
accordance with the management guidelines described above. At December 31, 1999,
the Company had, on a consolidated basis, $4.5 million of assets designated as
"Special Mention," $3.6 million of assets designated as "Substandard," $35,000
of assets designated as "Doubtful" and $679,000 of assets designated as "Loss."
All assets classified as "Loss" have been charged off for financial statement
purposes. Included in these amounts was $746,000 in non-performing loans at
December 31, 1999. In the opinion of management, the remaining "Special Mention"
and "Substandard" loans of $7.4 million evidence one or more weaknesses or
potential weaknesses and, depending on the regional economy and other factors,
may become non-performing assets in future periods.

13
14
The following table sets forth delinquencies in the Company's loan
portfolio as of the dates indicated:

AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
---------------------------------------------- ----------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
--------------------- --------------------- --------------------- ---------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Residential:
One- to four-family ..... 10 $1,568 6 $ 721 16 $1,625 12 $ 618
Multi-family ............ -- -- -- -- -- -- -- --
Commercial real estate ....... 2 287 -- -- -- -- -- --
Construction and land ........ -- -- -- -- -- -- -- --
Other loans .................. 2 245 -- -- 4 121 -- --
------ ------ ------ ------ ------ ------ ------ ------
Total ................. 14 $2,100 6 $ 721 20 $1,746 12 $ 618
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to loans, net
and mortgage loans
held for sale ........... 0.20% 0.07% 0.18% 0.06%

AT DECEMBER 31, 1997
-----------------------------------------------
60-89 DAYS 90 DAYS OR MORE
---------------------- ---------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Residential:
One- to four-family ..... 36 $3,313 14 $ 865
Multi-family ............ -- -- -- --
Commercial real estate ....... -- -- 3 21
Construction and land ........ -- -- -- --
Other loans .................. 6 139 3 6
------ ------ ------ ------
Total ................... 42 $3,452 20 $ 892
====== ====== ====== ======
Delinquent loans to loans, net
and mortgage loans
held for sale ........... 0.43% 0.11%

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15
NON-PERFORMING ASSETS AND RESTRUCTURED LOANS. The following table sets
forth information regarding non-accrual loans, restructured loans and real
estate owned ("REO"). At December 31, 1999, restructured loans totalled
$210,000, consisting of one loan. REO, net, totalled $376,000, consisting of two
properties. It is the policy of the Company to cease accruing interest on loans
90 days or more past due and charging off all accrued interest. For the years
ended December 31, 1999, 1998, 1997, 1996 and 1995, the amount of additional
interest income that would have been recognized on non-accrual loans if such
loans had continued to perform in accordance with their contractual terms was
$(2,000), $33,000, $149,000, $103,000 and $303,000, respectively. For the same
periods, the difference between the amount of interest income that would have
been recognized on impaired loans if such loans were performing in accordance
with their regular terms and amounts recognized was $2,000, $1,000, $1,000,
$73,000 and $77,000, respectively.

AT DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Non-accrual loans:
Residential real estate:
One- to four-family .............. $ 721 $ 784 $ 941 $1,463 $1,195
Multi-family ..................... -- -- -- -- 745
Commercial real estate ............. 25 25 458 25 3,312
Other loans ........................ -- -- 6 14 --
------ ------ ------ ------ ------
Total(l)....................... 746 809 1,405 1,502 5,252
Real estate owned, net(1)............. 376 47 195 2,668 971
------ ------ ------ ------ ------
Total non-performing assets ... 1,122 856 1,600 4,170 6,223
Restructured loans ................... 210 213 369 2,489 2,941
------ ------ ------ ------ ------
Total risk elements .................. $1,332 $1,069 $1,969 $6,659 $9,164
====== ====== ====== ====== ======
Allowance for loan losses as a percent
of loans(2)......................... 1.01% 0.88% 0.82% 0.64% 0.82%
Allowance for loan losses as a percent
of non-performing loans(3)........... 1,428.15 1,029.06 469.75 293.02 81.40
Non-performing loans as a percent
of loans(2), (3)..................... 0.07 0.09 0.17 0.22 1.00
Non-performing assets as a percent
of total assets(4)................... 0.09 0.08 0.16 0.51 0.97

(1) Loans includes loans, net and mortgage loans held for sale, excluding
allowance for loan losses.
(2) Non-performing loans consist of all 90 days or more past due and other
loans which have been identified by the Company as presenting uncertainty
with respect to the collectability of interest or principal.
(3) REO balances are shown net of related valuation allowances.
(4) Non-performing assets consist of non-performing loans and REO.

15
16
At December 31, 1999, loans which were characterized as impaired
pursuant to Statement of Accounting Standards ("SFAS") 114 and 118 totalled
$235,000. All of the impaired loans have been measured using the discounted cash
flow method or the fair value of the collateral method if the loan is collateral
dependent. During the year ended December 31, 1999, the average recorded value
of impaired loans was $335,000, interest income of $15,000 was recognized, all
of which was recorded on a cash basis, and $17,000 of interest income would have
been recognized under original terms.

AT DECEMBER 31,
-------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)

Impaired loans:
Multi-family real estate $ -- $245 $281
Commercial real estate . 235 238 217
---- ---- ----
Total ............. $235 $483 $498
==== ==== ====

ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information currently known to management. Amounts provided for fiscal
years 1999, 1998, 1997, 1996 and 1995 were $1.6 million, $1.6 million, $1.7
million, $1.3 million and $3.6 million, respectively. During the year ended
December 31, 1999, there were recoveries of $414,000 and charge-offs of $56,000
made against this allowance. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to make additional provisions for
estimated loan losses based upon judgments different from those of management.
As of December 31, 1999, the Company's allowance for loan losses was 1.01% of
total loans as compared to 0.88% as of December 31, 1998. Management believes
this increased coverage ratio is prudent due to the balance increase in the
combined total of construction and land, commercial real estate, multi-family,
home equity and improvement, and business loans. These combined total balances
increased from $149.2 million at December 31, 1998 to $236.6 million at December
31, 1999, an increase of 58.6%. The Company had non-accrual loans of $746,000
and $809,000 at December 31, 1999 and December 31, 1998, respectively. The
Company will continue to monitor and modify its allowance for loan losses as
conditions dictate. While management believes the Company's allowance for loan
losses is sufficient to cover losses inherent in its loan portfolio at this
time, no assurances can be given that the Company's level of allowance for loan
losses will be sufficient to cover future loan losses incurred by the Company or
that future adjustments to the allowance for loan losses will not be necessary
if economic and other conditions differ substantially from the economic and
other conditions used by management to determine the current level of the
allowance for loan losses.

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17
The following table sets forth activity in the Company's allowance for
loan losses for the periods set forth in the following table.

AT OR FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)

Balance at beginning of period .......... $ 8,500 $ 6,600 $ 4,400 $ 4,275 $ 3,700
BNB allowance for loan losses
at acquisition date .................. -- -- 620 -- --
Forward Financial allowance for loan
losses at acquisition date ........... 170 -- -- -- --
Provision for loan losses ............... 1,626 1,642 1,696 1,294 3,614
Charge-offs:
Real estate loans:
Residential:
One- to four-family ................. 19 51 370 387 550
Multi-family ........................ 1 2 84 263 483
Commercial ............................ -- 75 45 664 2,297
Other ................................. 36 131 16 198 194
-------- -------- -------- -------- --------
Total .............................. 56 259 515 1,512 3,524
Recoveries .............................. 414 517 399 343 485
-------- -------- -------- -------- --------
Balance at end of period ................ $ 10,654 $ 8,500 $ 6,600 $ 4,400 $ 4,275
======== ======== ======== ======== ========
Ratio of net charge-offs (net recoveries)
during the period to average loans
outstanding during the period ........ (0.04)% (0.03)% 0.02% 0.19% 0.60%
======== ======== ======== ======== ========

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18
The following tables set forth the Company's percent of allowance for
loan losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.

AT DECEMBER 31,
------------------------------------------------------------------------------------
1999 1998
---------------------------------------- ---------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN
TO TOTAL EACH CATEGORY TO TOTAL EACH CATEGORY
AMOUNT ALLOWANCE TO TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS
------- --------- -------------- ------- --------- --------------
(DOLLARS IN THOUSANDS)

Residential:
One- to four-family $ 2,872 26.96% 77.85% $ 2,186 25.72% 84.27%
Multi-family ....... 209 1.96 2.02 214 2.52 2.33
Commercial real estate 2,090 19.62 6.99 615 7.24 4.97
Construction and land 1,285 12.06 7.09 3 0.03 4.23
Other loans .......... 1,029 9.66 6.05 731 8.60 4.20
Unallocated .......... 3,169 29.74 -- 4,751 55.89 --
------- ------ ------ ------- ------ ------
Total allowance
for loan losses $10,654 100.00% 100.00% $ 8,500 100.00% 100.00%
======= ====== ====== ======= ====== ======

AT DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF LOANS OF OF LOANS OF OF LOANS
ALLOWANCE IN EACH ALLOWANCE IN EACH ALLOWANCE IN EACH
TO CATEGORY TO CATEGORY TO CATEGORY
TOTAL TO TOTAL TOTAL TO TOTAL TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- ------- ------ --------- -------- ------ --------- --------
(DOLLARS IN THOUSANDS)

Residential:
One- to four-family $1,997 30.26% 86.11% $1,899 43.16% 88.00% $1,974 46.18% 85.44%
Multi-family ...... 206 3.12 2.32 274 6.23 3.10 373 8.72 5.35
Commercial real
estate ........... 369 5.59 4.46 451 10.25 4.07 1,285 30.06 5.05
Construction
and land ......... 152 2.30 2.51 463 10.52 1.81 580 13.57 0.66
Other loans ......... 266 4.03 4.60 61 1.39 3.02 47 1.10 3.50
Unallocated ......... 3,610 54.70 -- 1,252 28.45 -- 16 0.37 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan losses $6,600 100.00% 100.00% $4,400 100.00% 100.00% $4,275 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======

18
19
REAL ESTATE OWNED

At December 31, 1999, the Company had $376,000 of real estate owned,
net of valuation allowances. When the Company acquires property through
foreclosure or deed in lieu of foreclosure, it is initially recorded at the
lower of the recorded investment in the corresponding loan or the fair value of
the related assets at the date of foreclosure, less costs to sell. Thereafter,
if there is a further deterioration in value, the Company provides for a
specific valuation allowance and charges operations for the diminution in value.
It is the policy of the Company to have obtained an appraisal on all real estate
subject to foreclosure proceedings prior to the time of foreclosure. It is the
Company's policy to require appraisals on a periodic basis on foreclosed
properties and conduct periodic inspections on foreclosed properties.

INVESTMENT ACTIVITIES

The investment policy of the Company, as approved by the Board of
Directors, requires management to maintain adequate liquidity, generate a
favorable return on investments without incurring undue interest rate and credit
risk and to complement the Company's lending activities. Generally, the
Company's investment policy is more restrictive than the OTS and OCC regulations
allow and, accordingly, the Company has invested primarily in U.S. Government
and Agency securities, mutual funds which qualify as liquid assets under the OTS
regulations, federal funds and U.S. government sponsored agency issued
mortgage-backed securities. As required by SFAS 115, the Company has established
an investment portfolio of securities that are categorized as held to maturity,
available for sale or held for trading. The Company does not currently maintain
a portfolio of securities categorized as held for trading. The Company's
investment and mortgage-backed securities purchased for the held to maturity
portfolio totalled $16.2 million, or 1.3% of assets. At December 31, 1999, the
available for sale portfolio totalled $68.7 million or 5.5% of the Company's
assets. The investment policy provides different management levels of approval,
from the investment officer up to and including the Board of Directors,
depending on the size of purchase or sale and monthly cumulative purchase or
sale amounts. Generally, pursuant to the Company's policies, the Board must
provide prior approval for all individual securities investments over $10.0
million and approval for all monthly purchases which aggregate $25.0 million or
more. The Company's Board, BFS' Investment Committee and BNB's Board are
provided with activity reports at their respective meetings and summaries of the
held to maturity and available for sale investment portfolios of the Company,
BFS and BNB, respectively, on a quarterly basis.

At December 31, 1999, the Company had invested $29.5 million in
mortgage-backed securities, or 2.4% of total assets, which were guaranteed by
Ginnie Mae ("GNMA"), insured by either FNMA or FHLMC or privately issued. Of the
$29.5 million, $13.2 million were GNMA securities, of which $11.3 million were
adjustable-rate with 1.5% maximum annual rate adjustments and lifetime maximum
interest rates of 12.5%. Investments in mortgage-backed securities involve a
risk that actual prepayments will be greater than estimated prepayments over the
life of the security, which may require adjustments to the amortization of any
premium or accretion of any discount relating to such instruments thereby
reducing or increasing the net yield on such securities. There is also
reinvestment risk associated with the cash flows from such securities or in the
event such securities are redeemed by the issuer. In addition, the market value
of such securities may be adversely affected by changes in interest rates. At
December 31, 1999, mortgage-backed securities available for sale and
held-to-maturity amounted to $15.5 million and $14.0 million, respectively.

19
20
The following table sets forth the composition of the Company's
mortgage-backed securities portfolio in dollar amounts and in percentages of the
respective portfolios at the dates indicated.

AT DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)

Mortgage-backed securities:
GNMA(1), (2) ............................ $13,201 44.78% $22,627 51.49% $33,106 57.60%
FHLMC(3), (4) ........................... 5,965 20.23 5,684 12.94 9,544 16.60
FNMA(5) ................................. 3,263 11.07 428 0.97 894 1.56
Privately issued collateralized
mortgage obligations(6), (7) .......... 7,052 23.92 15,203 34.60 13,931 24.24
------- ----- ------- ----- ------- -----
Total mortgage-backed securities ...... 29,481 100.00% 43,942 100.00% 57,475 100.00%
====== ====== ======
Less:
Mortgage-backed securities available for
sale - GNMA(2) ........................ -- 5,982 10,681
Mortgage-backed securities available
for sale - FHLMC(4) ................... 5,484 5,002 8,444
Mortgage-backed securities available for
sale - FNMA .......................... 3,004 -- --
Privately issued collateralized mortgage
obligations(7) ....................... 7,052 10,045 --
------- ------- -------
Mortgage-backed securities
held to maturity ...................... $13,941 $22,913 $38,350
======= ======= =======

- -------------------
(1) Includes $78,000, $151,000 and $213,000 of unamortized premiums related to
GNMA securities as of December 31, 1999, 1998 and 1997, respectively.
(2) Is net of unrealized gain of $0, $65,000, and $128,000 at December 31,
1999, 1998 and 1997, respectively.
(3) Includes $66,000, $104,000 and $144,000 of unamortized premiums related to
FHLMC securities as of December 31, 1999, 1998 and 1997, respectively.
(4) Is net of unrealized loss of $75,000 at December 31, 1999, an unrealized
gain of $6,000 at December 31, 1998 and an unrealized loss of $10,000 at
December 31, 1997.
(5) Includes $4,000 of unamortized premiums related to FNMA.
(6) Includes $81,000 of unamortized discounts related to privately issued
collateralized mortgage obligations at December 31, 1999.
(7) Is net of unrealized loss of $266,000 at December 31, 1999 and unrealized
gain of $22,000 at December 31, 1998.

20
21
The following tables set forth the Company's mortgage-backed securities
activities for the periods indicated:

FOR THE YEAR
ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)

Beginning balance ........................ $ 43,942 $ 57,475 $ 66,612
Mortgage-backed securities purchased:
Available for sale .................. 5,005 10,856 --
Less:
Sale of mortgage-backed securities
available for sale ................ (4,062) -- (1,084)
Principal repayments ................ (14,892) (24,275) (8,448)
Change in unrealized gains (losses) . (435) (24) 440
Accretion of premium, net of discount (77) (90) (45)
-------- -------- --------
Ending balance ........................... $ 29,481 $ 43,942 $ 57,475
======== ======== ========

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

AT DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)

Mortgage-backed securities:
Held to maturity:
GNMA .......................... $13,201 $13,297 $16,645 $16,991 $22,425 $22,858
FNMA .......................... 259 252 428 438 894 902
FHLMC ......................... 481 481 682 695 1,100 1,108
Privately issued collateralized
mortgage obligations ....... -- -- 5,158 5,209 13,931 14,035
------- ------- ------- ------- ------- -------
Total held to maturity ........ 13,941 14,030 22,913 23,333 38,350 38,903
------- ------- ------- ------- ------- -------
Available for sale:
GNMA .......................... -- -- 5,982 5,982 10,681 10,681
FNMA .......................... 3,004 3,004 -- -- -- --
FHLMC ......................... 5,484 5,484 5,002 5,002 8,444 8,444
Privately issued collateralized
mortgage obligations ....... 7,052 7,052 10,045 10,045 -- --
------- ------- ------- ------- ------- -------
Total available for sale ... 15,540 15,540 21,029 21,029 19,125 19,125
------- ------- ------- ------- ------- -------
Total mortgage-backed
securities .............. $29,481 $29,570 $43,942 $44,362 $57,475 $58,028
======= ======= ======= ======= ======= =======

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22
The following table sets forth certain information regarding the
carrying amount and fair values of the Company's short-term investments and
investment securities at the dates indicated:

Daily federal funds sold and
short-term investments ................ $ 2,815 $ 2,815 $18,068 $18,068 $ 3,448 $ 3,448
Investment securities:
Held to maturity:
U.S. Government obligations, federal
agency obligations, and other
obligations ..................... 2,304 2,275 7,302 7,371 20,630 20,630
------- ------- ------- ------- ------- -------
Total held to maturity ................... 2,304 2,275 7,302 7,371 20,630 20,630
------- ------- ------- ------- ------- -------
Available for sale:
U.S. Government obligations, federal
agency obligations, and other
obligations ..................... 33,641 33,641 29,356 29,356 30,617 30,617
Mortgage-Related Mutual Funds ...... 16,193 16,193 16,031 16,031 -- --
Other Mutual funds(1) .............. 1,960 1,960 1,974 1,974 1,150 1,150
Marketable Equity Securities--
Common Stock ...................... 1,409 1,409 1,776 1,776 -- --
------- ------- ------- ------- ------- -------
Total available for sale ........ 53,203 53,203 49,137 49,137 31,767 31,767
------- ------- ------- ------- ------- -------
Total investment securities .............. $58,322 $58,293 $74,507 $74,576 $55,845 $55,845
======= ======= ======= ======= ======= =======

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

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23
The table below sets forth certain information regarding the carrying
amount, weighted average yields and contractual maturities of the Company's
short-term investments, investment securities and mortgage-backed securities as
of December 31, 1999.

AT DECEMBER 31, 1999
--------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)

Daily federal funds sold and short-term investments ...... $ 2,796 4.16% $ 19 4.88% $ -- --%

Investment Securities:
Held to maturity:
U.S. Government obligations, federal agency
obligations, and other obligations ............... 4 5.46 2,300 6.34 -- --
------- ------- -------
Total held to maturity .......................... 4 5.46 2,300 6.34 -- --
------- ------- -------
Available for sale:
U.S. Government obligations, federal agency
obligations, and other obligations .............. 4,997 6.50 12,187 6.11 5,740 5.28
Mortgage-Related Mutual Funds ....................... 16,193 6.44 -- -- -- --
Other Mutual Funds .................................. 1,960 4.91 -- -- -- --
Equity Investments .................................. 1,409 N/A -- -- -- --
------- ------- -------
Total available for sale ........................ 24,559 6.32 12,187 6.11 5,740 5.28
------- ------- -------
Total investment securities .............................. $27,359 6.09 $14,506 6.14 $ 5,740 5.28
======= ======= =======
Mortgage-backed securities:
Held to maturity:
FNMA ................................................ $ -- -- $ 259 7.00 $ -- --
GNMA ................................................ -- -- 99 7.49 1,810 8.23
FHLMC ............................................... -- -- 481 7.00 -- --
------- ------- -------
Total held to maturity .......................... -- -- 839 7.06 1,810 8.23

Held for sale:
FHLMC ............................................... -- -- 3,185 6.42 1,981 7.01
FNMA ................................................ -- -- -- -- -- --
Privately issued collateralized mortgage obligation . -- -- -- -- -- --
------- ------- -------
Total held for sale ............................... -- -- 3,185 6.42 1,981 7.01
------- ------- -------
Total mortgage-backed securities ................ $ -- --% $ 4,024 6.55% $ 3,791 7.59%
======= ======= =======

AT DECEMBER 31, 1999
---------------------------------------------

MORE THAN TEN YEARS TOTAL
-------------------- ---------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
AMOUNT YIELD AMOUNT YIELD
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)

Daily federal funds sold and short-term investments ...... $ -- --% $ 2,815 4.16%

Investment Securities:
Held to maturity:
U.S. Government obligations, federal agency
obligations, and other obligations ............... -- -- 2,304 6.34
------- -------
Total held to maturity .......................... -- -- 2,304 6.34
------- -------
Available for sale:
U.S. Government obligations, federal agency
obligations, and other obligations .............. 10,717 5.91 33,641 5.96
Mortgage-Related Mutual Funds ....................... -- -- 16,193 6.44
Other Mutual Funds .................................. -- -- 1,960 4.91
Equity Investments .................................. -- -- 1,409 N/A
------- -------
Total available for sale ........................ 10,717 5.91 53,203 6.07
------- -------
Total investment securities .............................. $10,717 5.91 $58,322 5.99
======= =======
Mortgage-backed securities:
Held to maturity:
FNMA ................................................ $ -- -- $ 259 7.00
GNMA ................................................ 11,292 7.02 13,201 7.19
FHLMC ............................................... -- -- 481 7.00
------- -------
Total held to maturity .......................... 11,292 7.02 13,941 7.18
------- ---- -------
Held for sale:
FHLMC ............................................... 318 6.00 5,484 6.61
FNMA ................................................ 3,004 8.04 3,004 8.04
Privately issued collateralized mortgage obligation . 7,052 6.32 7,052 6.32
------- -------
Total held for sale ............................... 10,374 6.81 15,540 6.75
------- -------
Total mortgage-backed securities ................ $21,666 6.92% $29,481 6.95%
======= =======

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24
SOURCES OF FUNDS

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

DEPOSITS. The Company offers a variety of deposit accounts with a range
of interest rates and terms. The Company's deposits consist of savings, NOW
accounts, checking accounts, money market accounts and certificate accounts. For
the year ended December 31, 1999, core deposits represented 50.4% 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 Company's deposits are obtained predominantly from the
areas in which its branch offices are located. The Company relies primarily on
customer service and long-standing relationships with customers to attract and
retain these deposits; however, market interest rates and rates offered by
competing financial institutions, mutual funds and equity markets significantly
affect the Company's ability to attract and retain deposits. The Company uses
traditional means of advertising its deposit products, including radio and print
media and generally does not solicit deposits from outside its market area
except through the use of wholesale brokered deposits which provided $53.7
million and $7.7 million of deposits during 1999 and 1998, respectively, for
terms of two to five years.

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

FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------- ------- --------
(IN THOUSANDS)

Net deposits (withdrawals)................................... $37,033 $63,456 $ 47,355
Interest credited on deposit accounts........................ 25,872 23,867 18,626
Deposits acquired from BNB acquisition....................... -- -- 125,022
------- ------- --------
Total increase (decrease) in deposit accounts................ $62,905 $87,323 $191,003
======= ======= ========

At December 31, 1999, the Company had $38.6 million in certificate
accounts in amounts of $100,000 or more (excluding wholesale deposits) maturing
as follows:

WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- --------------------------------------------------- ------- ------------
(DOLLARS IN THOUSANDS)

Three months or less............................... $11,675 4.88%
Over 3 through 6 months............................ 5,416 4.87
Over 6 through 12 months........................... 8,866 5.06
Over 12 months..................................... 12,644 5.73
-------
Total.............................................. $38,601 5.20%
======= ====

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25
The following table sets forth the distribution of the Company's
average deposit accounts for the periods indicated and the average cost on each
category of deposits presented.

FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ---------------------------- -----------------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS COST BALANCE DEPOSITS COST BALANCE DEPOSITS COST
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)

Money market deposit
accounts..................... $ 59,279 8.24% 2.86% $ 62,739 9.56% 2.93% $ 61,800 11.18% 2.95%
Savings accounts............. 142,399 19.81 2.48 121,092 18.45 2.48 116,247 21.03 2.43
NOW accounts................. 110,684 15.39 0.80 104,532 15.94 1.11 96,590 17.47 1.11
Non-interest-bearing accounts 49,944 6.95 -- 54,808 8.36 -- 41,017 7.42 --
-------- ------ -------- ------ -------- ------
Total................... 362,306 50.39 1.69 343,171 52.31 1.75 315,654 57.10 1.81
-------- ------ -------- ------ -------- ------
Certificate accounts:
Less than six months...... 25,657 3.57 4.17 29,423 4.49 4.99 33,573 6.07 5.16
Over six through 12 months 39,741 5.53 3.63 42,483 6.48 5.42 54,876 9.93 5.41
Over 12 through 36 months. 241,689 33.62 6.00 187,285 28.55 6.02 94,157 17.04 5.99
Over 36 months............ 4,236 0.59 5.82 5,442 0.83 5.67 6,859 1.24 5.43
IRA/KEOGH................. 45,345 6.31 5.49 48,177 7.34 5.73 47,650 8.62 5.78
-------- ------ -------- ------ -------- ------
Total certificate accounts 356,668 49.61 5.54 312,810 47.69 5.79 237,115 42.90 5.68
-------- ------ -------- ------ -------- ------
Total average deposits $718,974 100.00% 3.60% $655,981 100.00% 3.68% $552,769 100.00% 3.47%
======== ====== ======== ====== ======== ======

The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1999.

PERIOD TO MATURITY FROM DECEMBER 31, 1999 AT DECEMBER 31,
------------------------------------------------------------ ---------------------------------
LESS
THAN TWO TO FOUR TO
ONE ONE TO THREE THREE TO FIVE
YEAR TWO YEARS YEARS FOUR YEARS YEARS 1999 1998 1997
-------- --------- --------- ---------- -------- -------- -------- --------
(IN THOUSANDS)

Certificate accounts:
0 to 4.00% .......... $ 2,636 $ -- $ -- $ -- $ -- $ 2,636 $ 1,447 $ 1,367
4.01 to 5.00% ....... 78,980 16,468 4,809 692 909 101,858 46,814 1,885
5.01 to 6.00% ....... 90,729 62,957 2,165 1,479 1,067 158,397 255,263 203,481
6.01 to 7.00% ....... 71,716 23,988 7,306 9,395 24,092 136,497 35,135 76,802
7.01 to 8.00% ....... -- -- -- -- -- -- -- 94
-------- -------- -------- -------- -------- -------- -------- --------

Total ............ $244,061 $103,413 $ 14,280 $ 11,566 $ 26,068 $399,388 $338,659 $283,629
======== ======== ======== ======== ======== ======== ======== ========

BORROWINGS. The Company utilizes advances from the FHLB as an
alternative to retail deposits to fund its operations and may do so in the
future as part of its operating strategy. These FHLB advances are collateralized
primarily by certain of the Company's mortgage loans and mortgage-backed
securities and secondarily by the Company's investment in capital stock of the
FHLB. FHLB advances are made pursuant to several different credit programs, each
of which has its own interest rate and range of maturities. The maximum amount
that the FHLB will advance to member institutions, fluctuates from time to time
in accordance with the policies of the OTS, OCC and the FHLB. During the year
ended December 31, 1999, the Company increased its net borrowings from the FHLB
by $47.0 million. At December 31, 1999, the Company had $384.5 million in
outstanding advances from the FHLB.

25
26
The following tables set forth certain information regarding the
Company's borrowed funds and repurchase agreements at or for the periods ended
on the dates indicated:

AT OR FOR THE YEAR
ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
(DOLLARS IN THOUSANDS)

FHLB advances:
Average balance outstanding............................. $367,484 $306,575 $287,128
Maximum amount outstanding at
any month-end during the period...................... 390,500 337,500 310,792
Balance outstanding at end of period.................... 384,500 337,500 256,500
Weighted average interest rate
during the period.................................... 5.77% 5.94% 6.00%
Weighted average interest rate at end 5.80% 5.69% 5.96%
of period...........................................

AT OR FOR THE YEAR
ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
------- ------- --------
(DOLLARS IN THOUSANDS)

Other Borrowed Money:
Average balance outstanding............................. $ 365 $ 1,616 $ 11,948
Maximum amount outstanding at
any month-end during the period...................... 3,054 7,140 21,861
Balance outstanding at end of period.................... 3,054 0 7,140
Weighted average interest rate
during the period.................................... 9.21% 6.05% 5.62%
Weighted average interest rate at end
of period........................................... 9.25% N/A 5.98%

SUBSIDIARY ACTIVITIES

Leader Corporation ("Leader Corp.") incorporated under Massachusetts
law, is a wholly owned subsidiary of BFS.

In 1994, BFS, through Leader Corp., permitted Liberty Financial, a
third party securities broker, to offer various uninsured investment products to
BFS' customers. Leader Corp. entered into a contract with such third party
brokerage concern to perform brokerage services in segregated areas of BFS'
branches. Under this contract, Liberty Financial leases space from BFS at BFS'
branch locations, pays rent and a percentage of sales to Leader Corp. Leader
Corp. had net income of $33,000 and $25,000, respectively, for the years ended
December 31, 1999 and 1998.

Forward Financial was acquired by BFS at the close of business December
6, 1999. Forward Financial is incorporated under Massachusetts law and operates
as a subsidiary of BFS. It originates loans, primarily direct with consumers
purchasing or refinancing manufactured housing, recreational vehicles, marine
and leased equipment. Forward Financial operates in approximately twenty states
from its headquarters in Northboro Massachusetts and five other offices. It
sells the vast majority of the loans it originates to third party client
lenders.

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27
Ellsmere Insurance Agency, Inc. was acquired by BNB at the close of
business December 6, 1999. It is incorporated under Massachusetts law and has
limited operations as a subsidiary of BNB. It earns finder fees for customer
referrals.

PERSONNEL

As of December 31, 1999, the Company had 320 authorized full-time
employee positions and 70 authorized part-time employee positions, for a total
of approximately 350 full time equivalents. The employees are not represented by
a collective bargaining unit and the Company considers its relationship with its
employees to be good.

REGULATION AND SUPERVISION

GENERAL

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

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

FEDERAL HOME LOAN BANK SYSTEM

Both BFS and BNB are members of the Federal Home Loan Bank System,
which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan
Bank provides a central credit facility primarily for member institutions. The
Banks, as members of the Federal Home Loan Bank, are required to acquire and
hold shares of capital stock in that Federal Home Loan Bank in an amount at
least equal to 1.0% of the

27
28
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the Federal Home Loan Bank, whichever is greater. BFS and BNB were in
compliance with this requirement with investments in Federal Home Loan Bank
stock at December 31, 1999 of $19.2 million and $1.1 million, respectively.

The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Banks' net interest income would
likely also be reduced. Recent legislation has changed the structure of the
Federal Home Loan Banks funding obligations for insolvent thrifts, revised the
capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict the
effect that these changes may have with respect to its Federal Home Loan Bank
membership.

HOLDING COMPANY REGULATION

FEDERAL REGULATION. Due to its control of BNB, the Company is subject
to examination, regulation, and periodic reporting under the BHCA, as
administered by the FRB.

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

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

Bank holding companies are generally required to give the FRB prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the Company's
consolidated net worth. The FRB may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe and unsound practice,

28
29
or would violate any law, regulation, FRB order or directive, or any condition
imposed by, or written agreement with, the FRB. There is an exception to this
approval requirement for well-capitalized bank holding companies that meet
certain other conditions.

The FRB has issued a policy statement regarding the payment of
dividends by bank holding companies. In general, the FRB's policies provide that
dividends should be paid only out of current earnings and only if the
prospective rate of earnings retention by the Bank holding company appears
consistent with the organization's capital needs, asset quality, and overall
financial condition. The FRB's policies also require that a bank holding company
serve as a source of financial strength to its subsidiary banks by standing
ready to use available resources to provide adequate capital funds to those
banks during periods of financial stress or adversity and by maintaining the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks where necessary. These regulatory
policies could affect the ability of the Company to pay dividends or otherwise
engage in capital distributions.

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

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

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

RECENT LEGISLATION. The Gramm-Leach-Bliley Act of 1999 authorizes a
bank holding company that meets specified conditions, including being "well
capitalized" and "well managed," to opt to become a "financial holding company"
and thereby engage in a broader array of financial activities than previously
permitted. Such activities can include insurance underwriting and investment
banking. The Gramm-Leach-Bliley Act also authorizes banks to engage through
"financial subsidiaries" in certain of the activities permitted for financial
holding companies. Financial subsidiaries are generally treated as an affiliates
for purposes of restrictions on a bank's transactions with affiliates.

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

ACQUISITION OF THE HOLDING COMPANY

FEDERAL REGULATION. Under the Federal Change in Bank Control Act
("CIBCA"), a notice must be submitted to the FRB if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of the
Company's outstanding voting stock, unless the FRB has found that the
acquisition will not result in a change in control of the Company. Under the
CIBCA, the FRB has 60 days from the filing of a

29
30
complete notice to act, taking into consideration certain factors, including the
financial and managerial resources of the acquirer and the anti-trust effects of
the acquisition.

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

FEDERAL BANKING REGULATIONS

CAPITAL REQUIREMENTS. The OTS capital regulations effectively require
savings institutions to meet four minimum capital standards: a 2% tangible
capital ratio, a 4% leverage (core) capital ratio (3% for the most highly rated
institutions), a 4% risk-based Tier I capital ratio and 8% risk-based total
capital ratio. The OTS regulations also require that, in meeting the tangible,
leverage (core) and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as a
principle not permissible for a national bank.

The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 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 believed inherent in the type of asset. Core (or Tier 1) 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
components of supplementary capital include, among other items, cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and the allowance
for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.

National Banks are required by OCC regulation to maintain a leverage
(core) capital at least equal to 4% of assets, net of certain exclusions, (3%
for institutions receiving the highest examination rating), a risk- based Tier I
capital ratio of 4% and an 8% risk-based capital ratio. Both the OTS and the OCC
have the discretion to establish higher capital requirements on a case-by-case
basis where deemed appropriate in the circumstances of a particular institution.

The Company is subject to consolidated capital requirements pursuant to
the regulations of the FRB. Generally, a bank holding company must have a
consolidated ratio of core (Tier 1) capital to total assets of at least 3% if it
receives the FRB's highest examination rating and 4% otherwise. A bank holding
company also must maintain a total capital to risk-based assets ratio of at
least 8% and a Tier 1 (core) capital to risk-based assets ratio of at least 4%.
As a condition for approving the acquisition of Forward Financial, the FRB
required the Company and BFS to remain "well capitalized" as defined in the
regulations, for a period of one year following the date of the acquisition. The
Company and BFS have to date complied with this requirement.

The following table presents BFS' and BNB's capital position at
December 31, 1999 relative to regulatory requirements.

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31

FOR CAPITAL
ADEQUACY TO BE WELL
ACTUAL PURPOSES CAPITALIZED
----------------- ------------------ -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)

As of December 31, 1999
Risk-based Total Capital:
BFS....................... $67,862 10.0% $54,064 8.0% $67,581 10.0%
BNB....................... 9,436 13.6 5,537 8.0 6,921 10.0
Core Capital:
BFS....................... 59,396 5.4 43,906 4.0 54,882 5.0
BNB....................... 8,694 6.3 5,521 4.0 6,901 5.0
Risk-based Tier I Capital:
BFS....................... 59,396 8.8 27,032 4.0 40,548 6.0
BNB....................... 8,694 12.6 2,769 4.0 4,153 6.0
Tangible Capital:
BFS ..................... 59,396 5.4 21,953 2.0 54,882 5.0
As of December 31, 1998:
Risk-based Total Capital:
BFS ...................... $57,944 10.2% $45,538 8.0% $56,923 10.0%
BNB ...................... 10,131 15.3 5,291 8.0 6,614 10.0
Core Capital:
BFS ...................... 50,820 5.1 39,533 4.0 49,417 5.0
BNB ...................... 9,492 7.4 5,167 4.0 6,459 5.0
Risk-based Tier I Capital:
BFS ...................... 50,820 8.9 22,769 4.0 34,154 6.0
BNB ...................... 9,492 14.4 2,645 4.0 3,968 6.0
Tangible Capital:
BFS ...................... 50,820 5.1 19,767 2.0 49,417 5.0

The Company's regulatory capital ratios at December 31, 1999 were 5.5%,
8.9% and 10.2% for Tier 1 leverage ratio, Tier 1 capital ratios and total
capital ratios, respectively, and 7.1%, 12.6% and 13.8%, respectively, at
December 31, 1998.

PROMPT CORRECTIVE REGULATORY ACTION. The OTS and OCC are required to
take certain supervisory actions against undercapitalized institutions under
their jurisdiction, the severity of which depends upon the institution's degree
of undercapitalization. Generally, an institution that has a ratio of total
capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core)
capital to risk-weighted assets of less than 4% or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." An institution that
has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of
less than 3% or a leverage ratio that is less than 3% is considered to be
"significantly undercapitalized" and an institution that has a tangible capital
to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS and OCC are 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 or OCC within 45 days of

31
32
the date an institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS and OCC 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 BFS and BNB are presently
insured by the FDIC through the SAIF and BIF, respectively. The FDIC maintains a
risk-based assessment system by which institutions are assigned to one of three
categories based on their capitalization and one of three subcategories based on
examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates for SAIF member institutions are determined semiannually by the FDIC and
currently range from zero basis points for the healthiest institutions to 27
basis points for the riskiest.

In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999,
FICO payments for SAIF members approximated 6.1 basis points, while Bank
Insurance Fund members paid 1.2 basis points. By law, there is equal sharing of
FICO payments between SAIF and BIF members beginning on January 1, 2000.

BFS' assessment rate for fiscal 1999 was approximately 6 basis points
and the premium paid for this period was $355,000. BNB's assessment rate was 1.2
basis points and the premium paid was $14,000 for 1999. A significant increase
in FDIC insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Company.

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

LOANS TO ONE BORROWER. Federal law provides that savings institutions
are generally subject to the limits on loans to one borrower applicable to
national banks. Generally, savings institutions may not make a loan or extend
credit to a single or related group of borrowers in excess of 15% of its
unimpaired capital, surplus, and allowable general valuation allowance. An
additional amount may be lent, equal to 10% of unimpaired capital and surplus,
if such loan is secured by readily-marketable collateral, which is defined to
include certain financial instruments and bullion. National banks are generally
subject to similar loan to one borrower limits. At December 31, 1999, BFS' limit
on loans to one borrower was $10.4 million and BNB's limit was $1.4 million. At
December 31, 1999, BFS' largest aggregate outstanding balance of loans to one
borrower was $7.5 million and BNB's largest aggregate outstanding balance of
loans to one borrower was $731,000.

QTL TEST. The HOLA requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or 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

32
33
conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
securities) in at least 9 months out of each 12 month period.

A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of December 31, 1999, BFS maintained approximately 90% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."

National banks such as BNB are not subject to the QTL test.

LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective in the first
quarter of 1999 established three tiers of institutions based primarily on an
institution's capital level. An institution that exceeded all capital
requirements before and after a proposed capital distribution ("Tier 1 Bank")
and had not been advised by the OTS that it was in need of more than normal
supervision, could, after prior notice but without obtaining approval of the
OTS, make capital distributions during the 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 the excess capital over its 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 required prior
regulatory approval. Effective April 1, 1999, the OTS's capital distribution
regulation changed. Under the new regulation, an application to and the prior
approval of the OTS is required prior to any capital distribution if the
institution does not meet the criteria for "expedited treatment" of applications
under OTS regulations (i.e., generally, examination ratings in the two top
categories), the total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with OTS. 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. At December 31, 1999, BFS was a Tier 1 Bank.

National banks may not pay dividends out of their permanent capital and
may not, without OCC approval, pay dividends in excess of the total of the
Bank's retained net income for the year combined with retained net income for
the prior two years. A national bank may not pay a dividend that would cause it
to fall below regulatory capital standards. At December 31, 1999, BNB met all
applicable regulatory capital standards.

LIQUIDITY. BFS 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 4% 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. Monetary penalties may
be imposed for failure to meet these liquidity requirements. BFS' liquidity
ratio for December 31, 1999 was 6.85%, which exceeded the applicable
requirement. BFS has never been subjected to monetary penalties for failure to
meet its liquidity requirements. BNB, under OCC regulations, is not subject to
separate regulatory liquidity requirements.

33
34
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 BFS' latest quarterly thrift
financial report. The assessments paid by BFS for the fiscal year ended December
31, 1999 totalled $180,000.

National banks pay semi-annual assessments to the OCC to fund its
operations based on asset size. Such assessments for BNB amounted to $46,000 for
the year ended December 31, 1999.

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

National banks are authorized to establish branches within the state in
which they are headquartered to the extent state law allows branching by state
banks. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Act") provides for interstate branching for national banks. Under the Act,
interstate branching by merger was authorized on June 1, 1997 unless the state
in which the Bank is to branch has enacted a law opting out of interstate
branching. Massachusetts did not enact any law opting out of interstate
branching. De novo interstate branching is permitted by the Act to the extent
the state into which BFS is to branch has enacted a law authorizing out-of-state
banks to establish de novo branches.

TRANSACTIONS WITH RELATED PARTIES. The authority of a depository
institution to engage in transactions with related parties or "affiliates"
(e.g., any company that controls or is under common control with an institution,
including the Company) is limited by Sections 23A and 23B of the Federal Reserve
Act ("FRA"). Section 23A limits the aggregate amount of covered transactions
with any individual affiliate to 10% of the capital and surplus of the
depository institution. The aggregate amount of covered transactions with all
affiliates is limited to 20% of the depository institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions like BFS 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. Certain
transaction between sister institutions in a holding company are exempt from
these requirements.

The authority of BFS and BNB 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. There is an exception to this
requirement for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. Regulation O also places individual
and aggregate limits on the amount of loans that institutions may make to
insiders based, in part, on the institution's capital position and requires
certain board approval procedures to be followed. Both banks have complied with
Regulation O requirements.

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35
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions, the OCC has primary enforcement
authority over national banks and both agencies have the authority to bring
actions against the respective institutions and all institution-affiliated
parties, including stockholders, and any attorneys, appraisers and accountants
who knowingly or recklessly participate in wrongful action likely to have an
adverse effect on an insured institution. Formal enforcement action may range
from the issuance of a capital directive or cease and desist order to removal of
officers and/or directors to institution of receivership, conservatorship or
termination of deposit insurance. Civil penalties cover a wide range of
violations and can amount to $25,000 per day, or even $1 million per day in
especially egregious cases. Under the FDI Act, the FDIC has the authority to
recommend to OTS that enforcement action be taken with respect to a particular
savings institution or the OCC with respect to a national bank. If action is not
taken by the agency, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations. The FRB has similar enforcement authority with respect to the
Company. Neither the Company nor the Bank are under any enforcement action.

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; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final rule establishes
deadlines for the submission and review of such safety and soundness compliance
plans when such plans are required.

FEDERAL RESERVE SYSTEM

The FRB regulations require savings institutions to maintain
non-interest earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The regulations generally provide that reserves
be maintained against aggregate transaction accounts as follows: for accounts
aggregating $44.3 million or less (subject to adjustment by the FRB) the reserve
requirement is 3%; and for accounts aggregating greater than $44.3 million, the
reserve requirement is $1,329 million plus 10% (subject to adjustment by the FRB
between 8% and 14%) against that portion of total transaction accounts in excess
of $44.3 million. The first $5.0 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve Board) are exempted from the
reserve requirements. BFS and BNB are also in compliance with these
requirements.

FEDERAL SECURITIES LAWS

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

Shares of the common stock purchased by persons who are not affiliates
of the Company may be resold without registration. Shares purchased by an
affiliate of the Company will be subject to the resale restrictions of Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"). If the
Company meets the

35
36
current public information requirements of Rule 144 under the Securities Act,
each affiliate of the Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed in any three-month period the
greater of (i) 1% of the outstanding shares of the Company or (ii) the average
weekly volume of trading in such shares during the preceding four calendar
weeks. Provisions may be made in the future by the Company to permit affiliates
to have their shares registered for sale under the Securities Act under certain
circumstances.

FEDERAL AND STATE TAXATION

FEDERAL TAXATION

GENERAL. The Company and the Banks report their federal income on a
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly BFS' reserve for bad debts discussed below.
BNB also reports its income on a consolidated basis with the Company and BFS
effective February 8, 1997. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of the
tax rules applicable to the Banks or the Company. BFS was audited by the IRS
during 1996, and covered the tax years 1991, 1992 and 1993. For its 1999 taxable
year, the Company is subject to a maximum federal income tax rate of 35%.

BAD DEBT RESERVES. For fiscal years beginning prior to December 31,
1995, thrift institutions which qualified under certain definitional tests and
other conditions of the Internal Revenue Code of 1986 (the "Code") were
permitted to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. Under the Small
Business Job Protection Act of 1996 (the "1996 Act"), for its current and future
taxable years, BFS is not permitted to make additions to its tax bad debt
reserves. In addition, BFS is required to recapture (i.e., take into income)
over a six year period the excess of the balance of its tax bad debt reserves as
of December 31, 1995 other than its supplemental reserve for losses on loans, if
any, over the balance of such reserves as of December 31, 1987. The Company has
previously recorded a deferred tax liability equal to the bad debt recapture and
as such, the new rules will have no effect on net income or income tax expense.

DISTRIBUTIONS. Under the 1996 Act, if BFS makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from BFS' unrecaptured tax bad debt reserves (including the balance of
its reserves as of December 31, 1987) to the extent thereof, and then from its
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 BFS' income. Non-dividend distributions include
distributions in excess of BFS' 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 BFS' current or accumulated earnings and profits will not be so included in
BFS' 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 BFS 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 35% federal
corporate income tax rate. BFS does not intend to pay dividends that would

36
37
result in a recapture of any portion of its bad debt reserves. The bad debt
reserves subject to recapture amount to $13.3 million for which no deferred
taxes have been provided.

STATE AND LOCAL TAXATION

COMMONWEALTH OF MASSACHUSETTS. Financial institutions are subject to a
tax on their apportioned income to Massachusetts at the rate of 10.5% The
Company's two bank subsidiaries each own a security corporation and a real
estate investment trust ("REIT"). The security corporations, which don't qualify
as "bank holding company" are taxed at 1.32%. The REITs pay no tax, provided
they distribute 100% of their income to their respective stockholders.
Subsidiary corporations of BFS and BNB conducting business in Massachusetts must
file separate Massachusetts state tax returns and are taxed as financial
institutions.

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

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.

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ITEM 2. PROPERTIES.

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

ORIGINAL NET BOOK VALUE OF
YEAR PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1999
- ---------- ---------- ---------- ---------------- ---------------------
(In thousands)

ADMINISTRATIVE/BRANCH/HOME
OFFICE:

17 New England Executive Park Leased 1988 November, 2008 1,250
Burlington, MA 01803

BRANCH OFFICES:

980 Massachusetts Avenue Owned 1976 -- 463
Arlington, MA 02174

60 The Great Road Owned 1971 -- 395
Bedford, MA 01730

459 Boston Road Owned 1972 -- 338
Billerica, MA 01821

75 Federal Street Leased 1988 August, 2003 74
Boston, MA 02110

457 Broadway Owned 1969 -- 707
Chelsea, MA 02150

1840 Massachusetts Avenue Owned 1960 -- 1,136
Lexington, MA 02173

31 Cross Street Owned 1971 -- 485
Peabody, MA 01960

411 Broadway Owned 1977 -- 1,166
Revere, MA 02150

200 Linden Street Leased 1973 November, 2003 149
Wellesley, MA 02181

Construction in Progress - New Billerica Branch 909

Construction in Progress - New Woburn Branch 923

Forward Financial Co. Leased with various terms and locations.
360 Church Street
Northboro, MA 01532 217
------
Total $8,212
======

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ITEM 3. LEGAL PROCEEDINGS.

Except as described below, the Company is not involved in any pending
material legal proceedings other than routine legal proceedings occurring in the
ordinary course of business. Such routine legal proceedings, in the aggregate,
are believed by management to be immaterial to the Company's financial condition
or results of operations. BNB, a national bank subsidiary of the Company, was
named a defendant in the Superior Court for Suffolk County, Massachusetts, civil
action No. SUCV 99-018F served on April 12, 1999 in a matter captioned "Glyptal,
Inc. v. John Hetherton, Jr., Fleet Bank, NA and Broadway National Bank of
Chelsea." The suit alleges that an officer of the Plaintiff, Glyptal, embezzled
funds from Plaintiff, by making unauthorized transfers from Plaintiff's
corporate accounts and subsequently deposited checks drawn on such account into
an account at BNB. Plaintiff alleges that BNB knew or should have known of the
alleged fraudulent actions of Plaintiff's officer, and that BNB owed a duty to
Plaintiff to investigate the transactions and protect Plaintiff from the alleged
fraudulent actions. The Plaintiff is seeking damages for the alleged breach of
duty by the defendants. BNB intends to deny the allegations that it owed or
breached any duty to Plaintiff or that it is liable for any losses incurred by
Plaintiff. BNB intends to vigorously defend the action and believes the action
is not likely to result in any material loss or adverse effect on the financial
condition of the Company.

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 the Company's common equity and
related stockholder matters appears under "Shareholder Information" in the
Company's 1999 Annual Report to Stockholders on page 71 and is incorporated
herein by reference. Information relating to dividend restrictions for the
Company's common stock appears under "Regulation and Supervision."

ITEM 6. SELECTED FINANCIAL DATA.

The above-captioned information appears under "Selected Financial Data"
of the Company in the Company's 1999 Annual Report to Stockholders on pages 4
through 5 is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The above-captioned information appears under "Management Discussion and
Analysis of Financial Condition and Results of Operation" in the Company's 1999
Annual Report to Stockholders on pages 8 through 24 and is incorporated herein
by reference.

ITEMS 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.

The above-captioned information appears under the heading "Market Risk
and Management of Interest Rate Risk" in the Company's 1999 Annual Report to
Stockholders on pages 10 through 13 and is incorporated herein by reference.

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40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Consolidated Financial Statements of BostonFed Bancorp, Inc. and its
subsidiaries, together with the report thereon by KPMG LLP appears in the
Company's 1999 Annual Report to Stockholders on pages 25 through 70 and are
incorporated herein by reference.

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

None.
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information relating to Directors and Executive Officers of the
Company is incorporated herein by reference to the Company's Proxy Statement for
the Annual Meeting of Stockholders to be held on April 26, 2000 at pages 3
through 6.

ITEM 11. EXECUTIVE COMPENSATION.

The information relating to executive compensation is incorporated
herein by reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 26, 2000 at pages 8 through 17.

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 Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26, 2000,
at pages 3 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 Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26, 2000,
at page 17.

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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 1999 Annual Report to Stockholders:

PAGE

Independent Auditors' Report .......................................... 25

Consolidated Balance Sheets as of
December 31, 1999 and 1998 .......................................... 26

Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 .................................... 27

Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1999, 1998 and 1997 .................... 28-30

Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997 .............................. 31-32

Notes to Consolidated Financial Statements ............................ 33-70

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

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

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(3) Exhibits

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

3.1 Restated Certificate of Incorporation of BostonFed
Bancorp, Inc.(1)

3.2 BostonFed Bancorp, Inc. Amended and Restated Bylaws as
of February 23, 2000, (filed herewith)

4.0 Stock Certificate of BostonFed Bancorp, Inc.(1)

10.1 Employment Agreement between BFS and David F. Holland
and Employment Agreement between the Company and David
F. Holland (filed herewith)

10.2 Employment Agreement between BFS and David P. Conley
and Employment Agreement between the Company and David
P. Conley(2)

10.3 Employment Agreement between BSF and John A. Simas and
Employment Agreement between the Company and John A.
Simas(2)

10.4 Change of Control Agreement between BFS and Dennis J.
Furey and Change in Control Agreement Between the
Company and Dennis J. Furey (filed herewith)

10.5 Boston Federal Savings Bank Employee Severance
Compensation Plan(1)

10.6 Employee Stock Ownership Plan and Trust(1)

10.7 BostonFed Bancorp, Inc. 1996 Stock-Based Incentive
Plan(3)

10.8 BostonFed Bancorp, Inc. 1997 Stock Option Plan(4)

10.10 Boston Federal Savings Bank Defined Benefit Restoration
Plan (filed herewith)

10.11 Boston Federal Savings Bank Defined Contribution
Restoration Plan (filed herewith)

10.12 Change in Control Agreement Between BFS and Marylea R.
Oates and Change in Control Agreement Between the
Company and Marylea R. Oates(2)

11.0 Computation of earnings per share (see Consolidated
Statements of Income on page located on page 27 of the
1999 Annual Report)

13.0 1999 Annual Report to Stockholders (filed herewith)

21.0 Subsidiaries of the Registrant (filed herewith)

23.0 Consent of Independent Accountant (filed herewith)

27.0 Financial Data Schedule (filed herewith)

99.0 Proxy Statement for 2000 Annual Meeting previously
filed on March 27, 2000 is herein incorporated by
reference

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

(1) Incorporated herein by reference into this document
from the Exhibits 3.1, 4.0 and 10.5 to the Form S-1,
Registration Statement, and any amendments thereto,
originally filed on July 21, 1995, as amended and
declared effective on September 11, 1995. Registration
No. 333-94860.

(2) BFS and the Company have entered into employment or
change in control agreements with each of the Executive
Officers as well as certain other officers of BFS and
the Company. The employment agreements for Messrs.
Conley and Simas are not filed as part of this report.
Rather, the Exhibits for Messrs. Conley and Simas
incorporate by reference the agreements filed with this
report for Mr. Holland and describe the differences
between the agreements for the Named Executive
Officers. The change in control agreements for Ms.
Oates is also not filed as part of this report. Rather,
the Exhibit for Ms. Oates incorporates by reference the
agreements filed with this report for Mr. Furey and
describe any differences in the agreements for the
Named Executive Officers.

(3) Incorporated herein by reference into this document
from the Proxy Statement for the 1996 Annual Meeting of
Stockholders dated March 20, 1996.

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43
4. Incorporated herein by reference into this document
from the Proxy Statement for the 1997 Annual Meeting of
Stockholders dated March 28, 1997.

(b) Reports on Form 8-K.

The Company filed a Report on Form 8-K on August 6, 1999, announcing
the fact that the Company entered into a Purchase and Sale Agreement by and
among the Company, Diversified Ventures, Inc., d/b/a Forward Financial Company,
Ellsmere Insurance Agency, Inc. and Gene J. DeFeudis. The 8-K also included the
Company's Press Release issued on August 4, 1999.

The Company filed a Report on Form 8-K on December 21, 1999, announcing
that the Company had on December 6, 1999, completed its acquisition of
Diversified Ventures, Inc., d/b/a Forward Financial Company and Ellsmere
Insurance Agency, Inc.
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SIGNATURES

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

BOSTONFED BANCORP, INC.

By: /s/ David F. Holland
David F. Holland
President and Chief Executive Officer
DATED: March 30, 2000

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

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

/s/ David F. Holland President and Chief Executive March 30, 2000
- --------------------------------------- Officer and Chairman of the Board
David F. Holland

/s/ David P. Conley Director, Executive Vice President, March 30, 2000
- --------------------------------------- Assistant Treasurer and Assistant Secretary
David P. Conley

/s/ John A. Simas Executive Vice President, March 30, 2000
- --------------------------------------- Corporate Secretary and Chief Financial
John A. Simas Officer (Principal financial and accounting officer)

/s/ Edward P. Callahan Director March 30, 2000
- ---------------------------------------
Edward P. Callahan

/s/ Gene J. DeFeudis Director March 30, 2000
- ---------------------------------------
Gene J. DeFeudis

/s/ Richard J. Dennis, Sr. Director March 30, 2000
- ---------------------------------------
Richard J. Dennis, Sr.

/s/ Richard J. Fahey Director March 30, 2000
- ---------------------------------------
Richard J. Fahey

/s/ Patricia M. Flynn Director March 30, 2000
- ---------------------------------------
Patricia M. Flynn

/s/ Charles R. Kent Director March 30, 2000
- ---------------------------------------
Charles R. Kent

/s/ W. Robert Mill Director March 30, 2000
- ---------------------------------------
W. Robert Mill

/s/ Irwin W. Sizer Director March 30, 2000
- ---------------------------------------
Irwin W. Sizer