BOSTONFED BANCORP INC - 10-Q Quarterly Report

FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934


For Quarter Ended:		June 30, 2002

Commission File Number		1-13936

BOSTONFED BANCORP INC.

(Exact name of registrant as specified in its charter)


Delaware		52-1940834

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


17 New England Executive Park, Burlington, Massachusetts		01803

(Address of principal executive offices)		(Zip Code)

(781) 273-0300

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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.


Yes		No

Number of shares of common stock, par value $.01 per share,
outstanding as of July 31, 2002: 4,482,896.

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION
	Item 1. Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Changes in Stockholders’ Equity
		Consolidated Statements of Cash Flows
		CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		Average Balances and Yields / Costs
	Item 2. MANAGEMENTS’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES

BOSTONFED BANCORP INC.
FORM 10-Q
INDEX


		Page

PART I-FINANCIAL INFORMATION









Item 1. Financial Statements:









	Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001		2









	Consolidated Statements of Operations for the Three and Six Months ended June 30, 2002 and 2001 (unaudited)		3









	Consolidated Statement of Changes in Stockholders’ Equity for the Three and Six Months ended June 30, 2002 (unaudited)		4









	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2002 and 2001 (unaudited)		5 - 6









	Notes to Consolidated Financial Statements		7 - 9









	Average Balances and Yield / Costs		10 - 11









Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12 - 18









Item 3. Quantitative and Qualitative Disclosures About Market Risk			19









PART II-OTHER INFORMATION









Item 1. Legal Proceedings			20









Item 2. Changes in Securities and Use of Proceeds			20









Item 3. Defaults Upon Senior Securities			20









Item 4. Submission of Matters to a Vote of Security Holders			20









Item 5. Other Information			21









Item 6. Exhibits and Reports on Form 8-K			21









Signature Page			22

BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)


				June 30,			December 31,
				2002			2001

				(Unaudited)
Assets




Cash and cash equivalents				$	54,103		$	95,957




Investment securities available for sale (amortized cost of $79,421 at June 30, 2002 and $62,868 at December 31, 2001)					79,792			63,258




Investment securities held to maturity (fair value of $596 at June 30, 2002 and $598 at December 31, 2001)					554			554




Mortgage-backed securities available for sale (amortized cost of $135,370 at June 30, 2002 and $95,139 at December 31, 2001)					136,166			94,922




Mortgage-backed securities held to maturity (fair value of $33,934 at June 30, 2002 and $41,547 at December 31, 2001)					32,823			40,822




Loans held for sale					14,392			24,612




Loans, net of allowance for loan losses of $13,041 and $12,328 at June 30, 2002 and December 31, 2001					1,102,096			1,055,798




Accrued interest receivable					7,249			6,317




Stock in FHLB of Boston and Federal Reserve Bank					24,208			24,208




Premises and equipment					10,605			10,295




Goodwill, net of amortization					17,776			17,776




Other assets					39,677			36,347

			Total assets	$	1,519,441		$	1,470,866

Liabilities and Stockholders’ Equity




Liabilities:




	Deposit accounts			$	915,573		$	884,516




	Federal Home Loan Bank advances and other Borrowed Money				461,877			449,000




	Corporation-obligated mandatorily redeemable capital securities				32,000			32,000




	Advance payments by borrowers for taxes and insurance				2,181			2,614




	Other liabilities				10,247			9,348

			Total liabilities		1,421,878			1,377,478

Commitments and contingencies




Stockholders’ equity;




	Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued				-- --			-- --




	Common stock, $0.01 par value, 17,000,000 shares authorized; 6,589,617 shares issued (4,482,096 and 4,450,653 shares outstanding at June 30, 2002 and December 31, 2001, respectively)				66			66




	Additional paid-in capital				68,773			68,259




	Retained earnings				67,917			64,702




	Accumulated other comprehensive income				712			105




		Less: Treasury stock, at cost (2,166,694 shares and 2,138,964 shares at June 30, 2002 and December 31, 2001, respectively at cost)			(39,345	)		(39,158	)




		Less: Unallocated ESOP shares			(529	)		(529	)




		Less: Unearned Stock-Based Incentive Plan			(31	)		(57	)

			Total stockholders’ equity		97,563			93,388

Total liabilities and stockholders’ equity				$	1,519,441		$	1,470,866

See accompanying condensed notes to consolidated financial statements.

BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars In Thousands, except per share amount)


				Three Months Ended						Six Months Ended

				6/30/02			6/30/01			6/30/02			6/30/01

				(Unaudited)						(Unaudited)
Interest income:




	Loans			$	18,673		$	20,570		$	37,188		$	41,460




	Mortgage-backed securities				2,181			1,754			4,067			3,040




	Investment securities				1,009			1,623			1,991			3,313

			Total interest income		21,863			23,947			43,246			47,813

Interest expense:




	Deposit accounts				5,411			7,883			11,228			16,107




	Borrowed funds				5,807			5,868			11,567			11,282




	Corporation obligated mandatorily redeemable capital securities distributions				881			881			1,761			1,761

			Total interest expense		12,099			14,632			24,556			29,150

Net interest income					9,764			9,315			18,690			18,663




Provision for loan losses					250			208			500			420

	Net interest income after provision				9,514			9,107			18,190			18,243




Non-interest income:




	Deposit service fees				768			608			1,405			1,182




	Loan processing and servicing fees				(198	)		(16	)		(509	)		114




	Gain on sale of loans				2,731			3,112			5,599			4,731




	Income from bank owned life insurance				306			315			603			621




	Gain on sale of investments				60			0			300			215




	Other				429			480			826			836

			Total non-interest income		4,096			4,499			8,224			7,699

Non-interest expense:




	Compensation and benefits				5,836			5,200			11,625			10,652




	Occupancy and equipment				1,244			1,224			2,430			2,316




	Data processing				465			402			920			841




	Advertising expense				264			282			497			502




	Federal deposit insurance premiums				46			41			86			85




	Real estate operations				0			4			0			7




	Amortization of goodwill				0			355			0			709




	Legal Settlement				0			0			500			0




	Other				1,832			2,112			3,360			3,734

		Total non-interest expense			9,687			9,620			19,418			18,846

Income before income taxes					3,923			3,986			6,996			7,096




Income tax expense					1,340			1,477			2,391			2,577

Net income				$	2,583		$	2,509		$	4,605		$	4,519

Basic earnings per share				$	0.58		$	0.56		$	1.04		$	1.01




Diluted earnings per share				$	0.55		$	0.54		$	0.98		$	0.96




Basic weighted average shares outstanding					4,420,057			4,423,879			4,409,091			4,460,856




Common stock equivalents due to dilutive effect of stock options					306,631			251,724			279,609			240,923




Diluted total weighted average shares outstanding					4,726,688			4,675,603			4,688,700			4,701,779

See accompanying condensed notes to consolidated financial statements.

BOSTONFED BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity
Six Months Ended June 30, 2002
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)


												Accumulated						Unearned
												other						Stock-
			Additional									Comprehensive			Unallocated			Based			Total
	Common		paid-in			Retained			Treasury			income			ESOP			Incentive			stockholders'
	stock		capital			earnings			Stock			(loss)			shares			Plan			equity

Balance at December 31, 2001	$	66		68,259			64,702			(39,158	)		105			(529	)		(57	)		93,388




Net income		- -		- -			2,022			- -			- -			- -			- -			2,022




Change in net unrealized gain/(loss) on investments available for sale net of tax benefit of $284)		- -		- -			- -			- -			(445	)		- -			- -			(445	)

Total comprehensive income		- -		- -			- -			- -			- -			- -			- -			1,577




Cash dividends declared and paid ($0.15 per share)		- -		- -			(672	)		- -			- -			- -			- -			(672	)




Common Stock repurchased (25,750 shares at an average price of $24.32 per share)		- -		- -			- -			(626	)		- -			- -			- -			(626	)




Stock options exercised		- -		456			- -			430			- -			- -			- -			886




Allocation relating to earned portion of Stock-Based Incentive Plan		- -		- -			- -			- -			- -			- -			14			14




Appreciation in fair value of shares charged to expense for compensation plans		- -		199			- -			- -			- -			- -			- -			199

Balance at March 31, 2002	$	66		68,914			66,052			(39,354	)		(340	)		(529	)		(43	)		94,766

Net income		- -		- -			2,583			- -			- -			- -			- -			2,583




Change in net unrealized gain/(loss) on investments available for sale (net of tax of $672)		- -		- -			- -			- -			1,052			- -			- -			1,052

Total comprehensive income		- -		- -			- -			- -			- -			- -			- -			3,635




Cash dividends declared and paid ($0.16 per share)		- -		- -			(718	)		- -			- -			- -			- -			(718	)




Common Stock repurchased (60,080 shares at an average price of $28.63 per share)		- -		- -			- -			(1,711	)		- -			- -			- -			(1,711	)




Stock options exercised		- -		(396	)		- -			1,720			- -			- -			- -			1,324




Allocation relating to earned portion of Stock-Based Incentive Plan		- -		- -			- -			- -			- -			- -			12			12




Appreciation in fair value of shares charged to expense for compensation plans		- -		255			- -			- -			- -			- -			- -			255

Balance at June 30, 2002	$	66		68,773			67,917			(39,345	)		712			(529	)		(31	)		97,563

See accompanying condensed notes to consolidated financial statements.

BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)


			For the Six Months Ended
			June 30,

			2002			2001

			(Unaudited)
Net cash flows from operating activities:




	Net income		$	4,605		$	4,519




	Adjustments to reconcile net income to net cash provided by (used in) operating activities:




	Depreciation, amortization and accretion, net			932			1,259




	Earned SIP shares			26			54




	Appreciation in fair value of shares charged to expense for compensation plans			454			327




	Income from bank owned life insurance			(603	)		(621	)




	Provision for loan losses			500			420




	Loans originated for sale			(286,972	)		(246,923	)




	Proceeds from sale of loans			302,791			233,306




	Gain on sale of loans			(5,599	)		(4,731	)




	Gain on sale of investment securities			(300	)		(215	)




	Gain on sale of premises			—			(217	)




	Increase in accrued interest receivable			(932	)		(22	)




	Increase in prepaid expenses and other assets, net			(2,727	)		(1,056	)




	Increase (decrease)in accrued expenses and other liabilities, net			511			(803	)

		Net cash provided by (used in) operating activities		12,686			(14,703	)

Cash flows from investing activities:




	Proceeds from sale of investment securities available for sale			1,036			3,113




	Proceeds from maturities of investment securities held to maturity			—			1,500




	Proceeds from maturities of investment securities available for sale			2,003			24,400




	Purchase of investment securities available for sale			(20,223	)		(25,981	)




	Purchase of mortgage-backed securities available for sale			(76,898	)		(77,453	)




	Purchase of FHLB and Federal Reserve Stock			—			(1,707	)




	Principal payments on mortgage-backed securities available for sale			36,569			4,883




	Principal payments on mortgage-backed securities held to maturity			7,990			6,099




	Principal payments on investment securities available for sale			894			339




	Increase in loans, net			(46,798	)		(28,344	)




	Purchases of premises and equipment			(1,097	)		(931	)




	Proceeds from sale of real estate owned			—			147




	Proceeds from sale of premises			—			790




	Additional investment in real estate owned			—			(2	)

		Net cash used in investing activities		(96,524	)		(93,147	)

- Continued on next page -

BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)


					For the Six Months Ended
					June 30,

					2002			2001

					(Unaudited)
Cash flows from financing activities:




	Increase in deposit accounts					31,057			16,149




	Repayments of Federal Home Loan Bank advances					(205,552	)		(259,977	)




	Proceeds from Federal Home Loan Bank advances					218,429			343,048




	Cash dividends paid					(1,390	)		(1,288	)




	Common stock repurchased					(2,337	)		(4,188	)




	Options exercised, net of taxes					2,210			364




	Decrease in advance payments by borrowers for taxes and insurance					(433	)		(274	)

				Net cash provided by financing activities		41,984			93,834

				Decrease in cash and cash equivalents		(41,854	)		(14,016	)




Cash and cash equivalents at beginning of period						95,957			50,675

Cash and cash equivalents at end of period					$	54,103		$	36,659

Supplemental disclosure of cash flow information:




		Payments during the period for:




			Interest		$	24,735		$	28,987

			Taxes		$	2,332		$	2,376

See accompanying condensed notes to consolidated financial statements.

BOSTONFED BANCORP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1: BASIS OF PRESENTATION

The unaudited consolidated financial statements as of June 30, 2002 and for the three- and six-month periods ended June 30, 2002 and 2001 of BostonFed Bancorp, Inc., (“BostonFed” or the “Company”) and its wholly-owned subsidiaries, Boston Federal Savings Bank (“BFS”), Broadway National Bank (“BNB”), BF Funding Corp., BFD Preferred Capital Trust I and BFD Preferred Capital Trust II presented herein, should be read in conjunction with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2001.

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring accruals necessary for a fair presentation, have been included. The results of operations for the three- and six-month periods ended June 30, 2002 and 2001 are not necessarily indicative of the results that may be expected for the entire fiscal year.

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The Company adopted the provisions of SFAS No. 142 effective January 1, 2002. In connection with SFAS No. 142’s transitional goodwill impairment evaluation, the Statement required the Company to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption. As of January 1, 2002, the Company performed the required transition impairment test of goodwill and determined that no impairment adjustment was required as of the date of adoption. Goodwill of a reporting unit shall be tested for impairment at least on an annual basis and between annual tests if considered necessary. The impairment evaluation requires the Company to identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an indication exists that the reporting unit goodwill may be impaired and the Company must perform the second step of the impairment test. In the second step, the Company must compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. The difference between the implied fair value and the carrying value of the goodwill is the amount of the impairment. At June 30, 2002, the Company had $17.8 million of goodwill on its balance sheet and recorded no amortization of goodwill during the quarter. The adoption of this Statement increased basic and diluted earnings per share by approximately $.05 and $.10 for the three- and six-months ended June 30, 2002, respectively.

The Company also maintains an additional intangible asset, Originated Mortgage Servicing Rights (“OMSR”), which represent the present value of future loan servicing fees, net of expected costs to service, based on certain assumptions. During the quarter ended June 30, 2002, the Company added $1.5 million, with an expected weighted average life of 5.77 years, to the OMSR. The balance of OMSR at June 30, 2002 was $8.0 million with an expected weighted average life of 5.07 years.

NOTE 2: COMMITMENTS, CONTINGENCIES AND CONTRACTS

At June 30, 2002, the Company had commitments of $119.1 million to originate mortgage loans and $3.0 million to purchase loans from correspondent lenders. Of these $122.1 million commitments, $106 million were adjustable rate mortgage loans with interest rates ranging from 4.63% to 9.00% and $16.1 million were fixed rate mortgage loans with interest rates ranging from 5.75% to 9.00%. The Company also had commitments to sell $40.9 million of mortgage loans.

At June 30, 2002, the Company was servicing first mortgage loans of approximately $1.03 billion, which are either partially or wholly-owned by others.

The Commonwealth of Massachusetts’ Department of Revenue (“DOR”) sent Notices of Intent to Assess (“notices”) additional taxes and interest to each of the Company’s two Banks for the tax years ended December 31, 1999 and 2000. The notices stipulate that the additional taxes in the amounts of $1.5 million and interest of $242,000, relate to the denied claim of dividends received deduction pertaining to the Banks’ Real Estate Investment Trusts (“REITS”). The REITS paid an annual dividend to the Banks. The Company understands that many other banks operating in the Commonwealth of Massachusetts with similar REIT subsidiaries have also received similar notices from the DOR. Pursuant to the Commonwealth of Massachusetts Tax Code, as it relates to the dividends received deduction, the Banks excluded 95% of the dividends that they received from the REITS when the tax returns were prepared. The DOR has challenged this deduction, arguing that such distributions are not considered dividends for purposes of th e Internal Revenue Code and, as such, cannot be deducted for state tax purposes. The Banks believe that their tax treatment of the dividends is valid under Massachusetts’s law. The Banks intend to file a dispute of the DOR findings and appeal the DOR’s proposed assessments. Accordingly, the Banks intend to continue their current accounting practice of estimating their tax provision under the assumption that their dividend deductions for prior periods are valid, and they anticipate claiming the dividends received deduction when they file their December 31, 2001 excise tax return. Adhering to the DOR’s contention, the Company could potentially be assessed an additional $2.2 million of state taxes through June 30, 2002, not including interest or federal tax benefits.

NOTE 3: LEGAL SETTLEMENT

During the quarter ended March 31, 2002, the Company settled a lawsuit, which had been filed against its subsidiary, Broadway National Bank. The Company incurred a cost of $500,000 during the first quarter to settle the lawsuit, resulting in a reduction in earnings per share of approximately $.07 during the first quarter. Excluding the impact of this settlement, diluted earnings per share for the six-months ended June 30, 2002 would have been $1.05 per share.

NOTE 4: BUSINESS SEGMENTS

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

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

Each Bank is managed separately. BNB is managed by a President and CEO, who reports directly to the Company’s CEO and BNB’s Board of Directors. BFS is managed by a CEO, who is also the Company’s CEO, and reports directly to BFS’ and the Company’s Board of Directors.

The following table sets forth certain information about and the reconciliation of reported net income for each of the reportable segments.


					(Dollars In Thousands)
								TOTAL
								REPORTABLE								CONSOLIDATED
		BFS			BNB			SEGMENTS		OTHER			ELIMINATIONS			TOTALS

At or for the three-months ended June 30, 2002:




	Interest income	$	19,780			2,000			21,780		1,068			(985	)		21,863




	Interest expense		10,843			452			11,295		1,789			(985	)		12,099




	Provision for loan losses		225			25			250								250




	Non-interest income		3,632			403			4,035		61						4,096




	Non-interest expense		8,152			1,248			9,400		287						9,687




	Income tax expense		1,429			226			1,655		(315	)					1,340




	Net income		2,763			452			3,215		(632	)					2,583




	Total assets		1,343,089			173,795			1,516,884		165,893			(163,336	)		1,519,441




Net interest margin			2.98	%		4.28	%		n.m.		n.m.			n.m.			2.88	%




Return on average assets			.85	%		1.07	%		n.m.		n.m.			n.m.			.70	%




Return on average equity			10.91	%		14.01	%		n.m.		n.m.			n.m.			10.50	%




At or for the three-months ended June 30, 2001:




	Interest income	$	21,449			2,417			23,866		1,218			(1,137	)		23,947




	Interest expense		13,293			688			13,981		1,788			(1,137	)		14,632




	Provision for loan losses		170			38			208								208




	Non-interest income		4,156			297			4,453		1			45			4,499




	Non-interest expense		8,056			1,189			9,245		330			45			9,620




	Income tax expense		1,489			284			1,773		(296	)					1,477




	Net income		2,597			515			3,112		(603	)					2,509




	Total assets		1,262,138			156,491			1,418,629		158,909			(151,771	)		1,425,767




Net interest margin			2.86	%		5.04	%		n.m.		n.m.			n.m.			2.90	%




Return on average assets			.85	%		1.32	%		n.m.		n.m.			n.m.			.72	%




Return on average equity			11.47	%		16.19	%		n.m.		n.m.			n.m.			10.88	%

n.m. = not meaningful


					(Dollars In Thousands)
								TOTAL
								REPORTABLE								CONSOLIDATED
		BFS			BNB			SEGMENTS		OTHER			ELIMINATIONS			TOTALS

At or for the six-months ended June 30, 2002:




	Interest income	$	39,082			4,001			43,083		2,150			(1,987	)		43,246




	Interest expense		22,015			951			22,966		3,577			(1,987	)		24,556




	Provision for loan losses		450			50			500								500




	Non-interest income		7,174			749			7,923		301						8,224




	Non-interest expense		15,957			2,970			18,927		491						19,418




	Income tax expense		2,674			255			2,929		(538	)					2,391




	Net income		5,160			524			5,684		(1,079	)					4,605




	Total assets		1,343,089			173,795			1,516,884		165,893			(163,336	)		1,519,441




Net interest margin			2.86	%		4.25	%		n.m.		n.m.			n.m.			2.77	%




Return on average assets			.80	%		.63	%		n.m.		n.m.			n.m.			.63	%




Return on average equity			10.30	%		8.17	%		n.m.		n.m.			n.m.			9.45	%




At or for the six-months ended June 30, 2001:




	Interest income	$	42,938			4,779			47,717		2,457			(2,361	)		47,813




	Interest expense		26,589			1,345			27,934		3,577			(2,361	)		29,150




	Provision for loan losses		345			75			420								420




	Non-interest income		6,911			573			7,484		215						7,699




	Non-interest expense		15,982			2,355			18,337		509						18,846




	Income tax expense		2,494			549			3,043		(466	)					2,577




	Net income		4,439			1,028			5,467		(948	)					4,519




	Total assets		1,262,138			156,491			1,418,629		158,909			(151,771	)		1,425,767




Net interest margin			2.92	%		5.15	%		n.m.		n.m.			n.m.			2.97	%




Return on average assets			.74	%		1.34	%		n.m.		n.m.			n.m.			.67	%




Return on average equity			9.92	%		16.07	%		n.m.		n.m.			n.m.			9.79	%

n.m. = not meaningful

BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)


For the quarter ended June 30:			2002								2001

								Average								Average
			Average					Yield/			Average					Yield/
			Balance			Interest		Cost			Balance			Interest		Cost

								(Dollars in thousands)
Assets:




Interest-earning assets:




	Investment securities (1)		$	120,350		$	1,009		3.35	%	$	100,737		$	1,623		6.44	%




	Loan, net and loans held for sale (2)			1,084,355			18,673		6.89	%		1,075,850			20,570		7.65	%




	Mortgage-backed securities (3)			149,677			2,181		5.83	%		108,016			1,754		6.50	%

		Total interest-earning assets		1,354,382			21,863		6.46	%		1,284,603			23,947		7.46	%

	Non-interest-earning assets			111,277								102,283

		Total assets	$	1,465,659							$	1,386,886

Liabilities and Stockholders’ Equity:




Interest-bearing Liabilities:




	Money market deposit accounts		$	61,390			253		1.65	%	$	54,159			372		2.75	%




	Savings accounts			192,173			696		1.45	%		171,712			1,005		2.34	%




	NOW accounts			140,769			115		0.33	%		128,441			199		0.62	%




	Certificate accounts			392,385			4,347		4.43	%		412,011			6,307		6.12	%

		Total		786,717			5,411		2.75	%		766,323			7,883		4.11	%




	Borrowed Funds (4)			445,590			5,807		5.21	%		403,950			5,868		5.81	%




	Corporation-obligated mandatorily redeemable capital securities			32,000			881		11.00	%		32,000			881		11.00	%

		Total interest-bearing liabilities		1,264,307			12,099		3.83	%		1,202,273			14,632		4.87	%

	Non-interest-bearing liabilities			102,933								92,401

		Total liabilities		1,367,240								1,294,674

	Stockholders’ equity			98,419								92,212

		Total liabilities and stockholders’ equity	$	1,465,659							$	1,386,886

	Net interest rate spread (5)					$	9,764		2.63	%				$	9,315		2.59	%

	Net interest margin (6)								2.88	%							2.90	%

Ratio of interest-earning assets to interest-bearing liabilities				107.12	%							106.85	%

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

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

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

(4) Interest paid on borrowed funds for the periods presented includes interest expense on FNMA deposits held in escrow accounts with the Company related to the Company’s FNMA servicing, which, if such interest expense was excluded, would result in an average cost of borrowed funds of 5.18% and 5.80% for the three months ended June 30, 2002 and June 30, 2001, respectively.

(5) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(6) Net interest margin represents net interest income as a percentage of average interest-earning assets.

BOSTONFED BANCORP, INC. AND SUBSIDIARIES
Average Balances and Yields / Costs
(Unaudited)


For the six months ended June 30:						2002								2001

								Average								Average
			Average					Yield/			Average					Yield/
			Balance			Interest		Cost			Balance			Interest		Cost

								(Dollars in thousands)
Assets:




Interest-earning assets:




	Investment securities (1)		$	120,909		$	1,991		3.29	%	$	100,114		$	3,313		6.62	%




	Loan, net and loans held for sale (2)			1,085,765			37,188		6.85	%		1,063,634			41,460		7.80	%




	Mortgage-backed securities (3)			140,827			4,067		5.78	%		93,254			3,040		6.52	%

		Total interest-earning assets		1,347,501			43,246		6.42	%		1,257,002			47,813		7.61	%

	Non-interest-earning assets			111,470								100,102

		Total assets	$	1,458,971							$	1,357,104

Liabilities and Stockholders’ Equity:




Interest-bearing Liabilities:




	Money market deposit accounts		$	60,233			494		1.64	%	$	54,554			760		2.79	%




	Savings accounts			187,940			1,365		1.45	%		170,321			2,278		2.67	%




	NOW accounts			137,735			224		0.33	%		126,302			434		0.69	%




	Certificate accounts			392,041			9,145		4.67	%		414,035			12,635		6.10	%

		Total		777,949			11,228		2.89	%		765,211			16,107		4.21	%




	Borrowed Funds (4)			442,564			11,567		5.23	%		380,067			11,282		5.94	%




	Corporation-obligated mandatorily redeemable capital securities			32,000			1,761		11.00	%		32,000			1,761		11.00	%

		Total interest-bearing liabilities		1,252,513			24,556		3.92	%		1,177,278			29,150		4.95	%

	Non-interest-bearing liabilities			109,033								87,501

		Total liabilities		1,361,546								1,264,779

	Stockholders’ equity			97,425								92,325

		Total liabilities and stockholders’ equity	$	1,458,971							$	1,357,104

	Net interest rate spread (5)					$	18,690		2.50	%				$	18,663		2.66	%

	Net interest margin (6)								2.77	%							2.97	%

Ratio of interest-earning assets to interest-bearing liabilities				107.58	%							106.77	%

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

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

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

(4) Interest paid on borrowed funds for the periods presented includes interest expense on FNMA deposits held in escrow accounts with the Company related to the Company’s FNMA servicing, which, if such interest expense was excluded, would result in an average cost of borrowed funds of 5.19% and 5.92% for the six months ended June 30, 2002 and June 30, 2001, respectively.

(5) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(6) Net interest margin represents net interest income as a percentage of average interest-earning assets.

Item 2. MANAGEMENTS’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

A. GENERAL

In addition to historical information, this 10-Q includes certain forward-looking statements based on current management expectations. Generally, verbs in the future tense and the words, “believe”, “expect”, “anticipate”, “intends”, “opinion”, “potential”, and similar expressions identify forward-looking statements. Examples of this forward-looking information can be found in, but are not limited to, the expected effects of accounting pronouncements, the allowance for losses discussion, subsequent events and any quantitative and qualitative disclosure about market risk. The Company’s actual results could differ materially from those management expectations. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company’s loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors and the effects of war or terrorist activities affecting the Company’s operations, markets, products, services and prices. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.

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

The Company, headquartered in Burlington, Massachusetts, was organized in 1995 under Delaware law as the holding company for BFS, in connection with the conversion of BFS from a mutual to a stock form of ownership. The Company later acquired BNB, a nationally-chartered commercial bank, as its wholly-owned subsidiary in February 1997. In December 1999, the Company acquired Diversified Ventures, Inc., d/b/a Forward Financial Company (“Forward Financial”) and Ellsmere Insurance Agency, Inc. (“Ellsmere”). Forward Financial operates as a subsidiary of BFS and Ellsmere has limited operations as a subsidiary of BNB.

The Company’s business has been conducted primarily through its wholly-owned subsidiaries of BFS and BNB (collectively, the “Banks”). BFS operates its administrative/bank branch office located in Burlington, Massachusetts and its eight other bank branch offices located in Arlington, Bedford, Billerica, Boston, Lexington, Peabody, Wellesley and Woburn, all of which are located in the greater Boston metropolitan area. BFS’ subsidiary, Forward Financial, maintains its headquarters in Northborough, Massachusetts and operates in approximately one-half the states of the nation. BNB operates two banking offices in Chelsea and Revere, both of which are also in the greater Boston metropolitan area. Through its subsidiaries, the Company attracts retail deposits from the general public and invests those deposits and other borrowed funds in loans, mortgage-backed securities, U.S. Government and federal agency securities and other securities. The Company originates mortgage loans for its investment portfolio and for sale and generally retains the servicing rights of loans it sells. Additionally, the Company originates chattel mortgage loans, substantially all of which are sold in the secondary market, servicing released. Loan sales are made from loans held in the Company’s portfolio designated as being held for sale or originated for sale during the period. The Company’s revenues are derived principally from interest on its loans, and to a lesser extent, interest and dividends on its investment and mortgage-backed securities, gains on sale of loans and service fees. The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, interest, maturities or sales of investments, Federal Home Loan Bank of Boston (“FHLB”) advances and proceeds from the sale of loans.

The Company’s results of operations are primarily dependent on net interest income, which is the difference between the income earned on its loan and investment portfolios and its cost of funds, consisting of the interest paid on deposits, borrowings and corporation obligated mandatorily redeemable capital securities distributions. (“trust preferred securities”) expense. Results of operations are also affected by the Company’s provision for loan losses, investment activities, gains or losses on sale of loans, fees and amortization or adjustments to originated mortgage servicing rights. The Company’s non-interest expense principally consists of compensation and benefits, occupancy and equipment expense, advertising, data processing expense, and other expenses. Results of operations of the Company are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities.

Each of the Banks is considered a business segment and accordingly, the Company has complied with the segment reporting requirement in Note 3 of this document and in discussion herein as appropriate. As a result of the acquisition of BNB, the Company became a bank holding company subject to regulation by the Federal Reserve Bank (“FRB”). BFS is regulated by the Office of Thrift Supervision (“OTS”) and BNB is regulated by the Office of the Comptroller of the Currency (“OCC”).

B. FINANCIAL CONDITION

Total assets at June 30, 2002 were $1.519 billion, compared to $1.471 billion at December 31, 2001, an increase of $48.6 million. Increased balances in investment securities available for sale, mortgage-backed securities available for sale and loans, net, more than offset decreases in cash and cash equivalents, mortgage-backed securities held to maturity and loans held for sale. Cash and cash equivalents declined to $54.1 million at June 30, 2002, from a balance of $96.0 million at December 31, 2001 as some of the liquidity was used to fund purchases of investment securities available for sale, which increased by $16.5 million to a balance of $79.8 million at June 30, 2002. A portion of the cash and cash equivalents was also used to fund increases in mortgage-backed securities available for sale, which increased to a balance of $136.2 million at June 30, 2002, compared to $94.9 million at December 31, 2001. The increase in investment securities available for sale was primarily due to net purchases of $9.2 million in corporate bonds and a $5.3 million increase in a mutual fund, which invests in short duration securities. Mortgage-backed securities available for sale increased primarily due to the Company’s purchase of collateralized mortgage obligations (“CMOs”). Loans, net increased by $46.3 million, to a balance of $1.102 billion at June 30, 2002, compared to a balance of $1.056 billion at December 31, 2001 as the Company retained a greater portion of the loans originated during the current quarter.

The Company’s loan portfolio was comprised of the following at:


			6/30/02			12/31/01

			(Unaudited)
Mortgage Loans:




	Residential 1-4 family		$	748,187		$	763,599




	Multi-family			21,552			25,904




	Construction and Land			125,858			99,337




	Commercial Real Estate			115,862			107,767

				1,011,459			996,607

Consumer and other loans:




	Home equity and improvement			85,028			66,539




	Secured by deposits			515			678




	Consumer			1,944			3,439




	Business			39,713			28,103

				127,200			98,759

		Total loans, gross		1,138,659			1,095,366

Allowance for loan losses				(13,041	)		(12,328	)




Construction loans in process				(27,038	)		(30,264	)




Net unearned discount on loans purchased				42			48




Deferred loan origination costs				3,474			2,976

		Loans, net		1,102,096			1,055,798

As noted in the above table, the allowance for loan losses amounted to $13.0 million at June 30, 2002. Management believes the allowance is adequate to absorb probable loan losses. The allowance for loan losses increased from $12.3 million at December 31, 2001 to $13.0 million at June 30, 2002 due to the year-to-date provision, net of charge-offs/recoveries. The Company believes that the allowance for loan losses is at a reasonable level based on its current evaluation. The Company maintains an allowance for losses that are inherent in the Company’s loan portfolio. The allowance for loan losses is established through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management determines that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. The following is a summary of activity in the allowance for loan losses during the six-months ended June 30, 2002:


Balance at December 31, 2001		$	12,328




	Loss provision		500




	Recoveries		235




	Charge-offs		(22	)




Balance at June 30, 2002		$	13,041

Management’s methodology to estimate loss exposure inherent in the portfolio includes an analysis of individual loans deemed to be impaired, reserve allocations for various loan types based on payment status or loss experience and an unallocated allowance that is maintained based on management’s assessment of many factors including trends in loan delinquencies and charge-offs, current economic conditions and their effect on borrowers’ ability to pay, underwriting standards by loan type, mix and balance of the portfolio, and the performance of individual loans in relation to contract terms. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance based on their judgments about information available to them at the time of their examination.

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

As part of the Company’s determination of the adequacy of the allowance for loan losses, the Company monitors its loan portfolio through its Asset Classification Committee. The Committee classifies loans depending on risk of loss characteristics. The most severe classification before a charge-off is required is “sub-standard.” At June 30, 2002, the Company classified $8.9 million of loans ($8.1 million at BFS and $832,000 at BNB) as sub-standard compared to $2.7 million ($1.8 million of BFS and $911,000 of BNB) at December 31, 2001. The vast majority of the increase in sub-standard loans was due to the transfer of three loans, which in the aggregate amounted to $4.0 million in one borrower relationship, from special mention to sub-standard. Non-performing assets at June 30, 2002, which include the three loans from the one borrower relationship classified as sub-standard above, amounted to $5.7 million or .38% of total assets, compared to $1.2 million, or .08% of total assets, at December 31, 2001. The Asset Classification Committee, which meets quarterly, determines the adequacy of the allowance for loan losses through ongoing analysis of historical loss experience, the composition of the loan portfolios, delinquency levels, underlying collateral values, cash flow values and state of the real estate economy. Utilizing these procedures, management believes that the allowance for loan losses at June 30, 2002 was sufficient to provide for anticipated losses inherent in the loan portfolio.

The Company’s allowance for loan losses at June 30, 2002 was $13.0 million, which represented 228% of non-performing loans or 1.15% of total loans, compared to $12.3 million at December 31, 2001, or 1,065% of non-performing loans and 1.13% of total loans. Management believes this 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, consumer and business loans. These combined total balances increased from approximately $331.1 million at December 31, 2001 to approximately $390.1 million at June 30, 2002.

The amount of interest income on non-performing loans that would have been recorded had these loans been current in accordance with their original terms, was $282,000 and $45,000 for the six-month periods ended June 30, 2002 and 2001, respectively. The amount of interest income that was recorded on these loans was $386,000 and $22,000 for the six-month periods ended June 30, 2002 and 2001, respectively.

At June 30, 2002, there were 4 loans characterized as impaired. During the six-months ended June 30, 2002, the average recorded value of impaired loans was $1.86 million, $365,000 interest income was recognized and $221,000 of interest income would have been recognized under the loans’ original terms during the six-months ended June 30, 2002.

At June 30, 2002 and at December 31, 2001, the Company had $0 and $31,000 in other repossessed assets, respectively.

Deposit accounts increased by $31.1 million, from $884.5 million at December 31, 2001 to $915.6 million at June 30, 2002 as deposit flows improved during the second quarter and more than offset the first quarter’s decline. Of the $31.1 million increase in deposits, $21.4 million was in wholesale-brokered deposits.

The following is a summary of deposit balances by type at:


				6/30/02		12/31/01

				(Unaudited)
	NOW			$	145,819	$	138,528




	Regular & Statement Savings				196,706		180,966




	Money Market				60,600		58,133




	Demand Deposits & Official Checks				108,942		110,776

		Total Non-certificate Accounts			512,067		488,403

Certificate Accounts:




	3 to 6 months				59,524		65,507




	1 to 3 years				222,134		233,275




	Greater than 3 years				75,210		53,701




	IRA/KEOGH				46,638		43,630

			Total Certificate Accounts		403,506		396,113

					915,573		884,516

Expected maturity of certificate accounts:




	Within one year				203,137		247,745




	One to two years				105,716		79,236




	Two to three years				60,836		38,611




	Over three years				33,817		30,521

					403,506		396,113

Federal Home Loan Bank advances and other borrowings increased by $12.9 million, to a balance of $461.9 million at June 30, 2002 from a balance of $449.0 million at December 31, 2002 in order to support asset growth.

C. LIQUIDITY AND CAPITAL RESOURCES

The primary source of cash flow for the Company is dividend payments from BFS and BNB, sales and maturities of investment securities and, to a lesser extent, earnings on deposits held by the Company. Dividend payments have primarily been used to fund stock repurchase programs, pay dividends to stockholders, interest on trust preferred securities and other operating expenses of the Company. The ability of BFS and BNB to pay dividends and other capital distributions to the Company is generally limited by OTS and OCC regulations, respectively. Additionally, the OTS and OCC may prohibit the payment of dividends that are otherwise permissible by regulation for safety and soundness reasons. As of June 30, 2002, BFS and BNB had $21.9 million of dividends that could be paid to the Company without regulatory approval and the Company had $6.3 million of securities available for sale and $9.1 million cash or cash equivalents. Any dividend by BFS or BNB beyond its current year net income combined with retained net income of the preceding two years would require notification to or approval of the OTS or the OCC. To the extent BFS or BNB were to apply for a dividend distribution to the Company in excess of the regulatory permitted dividend amounts, no assurances can be made such application would be approved by the regulatory authorities. The Banks’ primary sources of funds are deposits, (including brokered deposits), principal and interest payments on loans, sales of loans, sales or maturities of investments, mortgage-backed and related securities and borrowing from the FHLB. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Management has maintained adequate liquidity so that it may invest any excess liquidity in higher yielding interest-earning assets or use such funds to repay higher cost FHLB advances. Neither the OTS nor the OCC provide specific guidance for liquidity ratios for BFS and BNB, respectively, but do require the Banks to maintain reasonable and prudent liquidity levels. Management believes such levels are being maintained.

The Company’s and Bank’s most liquid assets are cash, overnight federal funds sold, and loans and investments available for sale. The levels of these assets are dependent on the Company’s operating, financing, lending and investing activities during any given period.

Liquid assets for the periods indicated, consisted of the following:


	June 30, 2002		December 31, 2001

	(In Thousands)
Cash and cash equivalents	$	54,103		95,957




Investment Securities available for sale		79,792		63,258




Mortgage-backed securities available for sale		136,166		94,922




Loans held for sale		14,392		24,612

Total liquid assets	$	284,453	$	278,749

These amounts represent 18.7% and 19.0% of the Company’s total assets at June 30, 2002 and December 31, 2001, respectively.

The Banks have other sources of liquidity if a need for additional funds arises, including FHLB advances, wholesale-brokered deposits and repurchase agreements (collateralized borrowings). At June 30, 2002, the Banks had $461.9 million in advances outstanding from the FHLB and had, with existing collateral, an additional $101.0 million in overall borrowing capacity from the FHLB. Borrowing capacity can also be further increased upon delivery of mortgage notes on non-owner occupied 1-4 family loans, multi-family and commercial loans. The Banks generally do not pay the highest deposit rates in their market and accordingly utilize alternative sources of funds such as FHLB advances and wholesale-brokered deposits to supplement cash flow needs.

At June 30, 2002, the Banks had commitments to originate loans and unused outstanding lines of credit totaling $291.8 million. The Banks anticipate that they will have sufficient funds available to meet their current loan origination commitments. Certificate accounts which are scheduled to mature in less than one year from June 30, 2002, totaled $203.1 million.

At June 30, 2002, the consolidated stockholders’ equity to total assets ratio was 6.4%. As of June 30, 2002, the Company, BFS and BNB exceeded all of their regulatory capital requirements. The Company’s consolidated total risk-based capital, tier 1 risk-based capital and tier 1 leverage capital ratios were 12.6%, 11.3% and 7.7%, respectively. BFS’s tier 1 (core) capital, total risk-based, capital, tier 1 risk-based and tangible equity capital ratios were 6.4%, 10.8%, 9.6% and 6.4%, respectively. BNB’s risk-based total capital, risk-based tier 1 capital and leverage capital ratios were 12.7%, 11.5% and 5.8%, respectively.

D. COMPARISON OF THREE- AND SIX-MONTHS ENDED JUNE 30, 2002 AND 2001

GENERAL

Earnings for the quarter ended June 30, 2002 were $2.6 million, or $.58 basic and $.55 diluted on an earnings per share basis, compared to earnings of $2.5 million, or $.56 basic and $.54 diluted earnings per share for the second quarter of 2001. The annualized return on average assets was .70% and the annualized return on average stockholders’ equity was 10.50% during the quarter ended June 30, 2002, compared to .72% and 10.88%, respectively, for the prior year quarter. Earnings for the six-months ended June 30, 2002 were $4.6 million, or $1.04 basic and $.98 diluted earnings per share, compared to $4.5 million, or $1.01 basic and $.96 diluted earnings per share for the six-months ended June 30, 2001. The Company’s annualized return on average assets was .63% and the annualized return on average stockholders’ equity was 9.45% during the six-months ended June 30, 2002, compared to .67% and 9.79%, respectively, for the six-months ended June 30, 2001 (annualized). Comments regarding the components of net income are detailed in the following paragraphs.

Interest Income

Total interest income on interest-earning assets for the quarter ended June 30, 2002 declined by $2.1 million, or 8.8%, to $21.9 million, compared to the quarter ended June 30, 2001. The decrease in interest income was due to a 100 basis point decline in the average yield on interest earning assets, partially offset by the earnings on the $69.8 million increase in interest-earning assets. The average yield on interest-earning assets declined to 6.46% for the three-months ended June 30, 2002 from 7.46% for the three-months ended June 30, 2001. Total interest income for the six-months ended June 30, 2002 was $43.2 million, a decrease of $4.6 million, or 9.6%, compared to the $47.8 million interest earned for the six-months ended June 30, 2001. The decline in interest income in the current period was caused by the 119 basis point drop in the average yield, partially offset by the $90.5 million increase in average interest earning assets. The reduced yields are due in part to the repricing of a portion of the Company’s adjustable-rate portfolio, based on much lower indexes resulting from the Federal Reserve induced decline in market interest rates during 2001.

Interest income on loans, net, for the quarter ended June 30, 2002 declined by $1.9 million, or 9.2%, to $18.7 million compared to $20.6 million for the comparable quarter in 2001. For the six-months ended June 30, 2002, interest income on loans, net, declined $4.3 million, or 10.4%, to $37.2 million, compared to $41.5 million for the six-months ended June 30, 2001. The decrease in interest income from loans, net, for the current six-month period was due to the 95 basis point decline in the average yield, partially offset by a $22.1 million increase in the average balance of loans, net. The average yield on loans, net for the six-months ended June 30, 2002 was 6.85%, compared to an average yield of 7.80% for the six-months ended June 30, 2001. Many loans continue to reprice lower as the major repricing indexes remain at historic lows.

Interest on mortgage-backed securities for the quarter ended June 30, 2002 increased to $2.2 million, compared to $1.8 million for the quarter ended June 30, 2001. The increase was due to growth of $41.7 million in average balances, partially offset by declines of 67 basis points in average yields. The average balance of mortgage-backed securities increased from $108.0 million for the quarter ended June 30, 2001 to an average of $149.7 million during the current quarter. For the six-months ended June 30, 2002, the average balance of mortgage-backed securities was $140.8 million, compared to an average balance of $93.3 million for the six-months ended June 30, 2001. The increase in average balances was primarily attributable to the acquisition of collateralized mortgage obligations (“CMO’s”). These investments were purchased as part of the Company’s effort to leverage the trust-preferred securities, which are classified as capital for regulatory purposes. Average yields declined from 6.52% for the six-months ended June 30, 2001, to 5.78% for the current six-month period.

Income from investment securities was $1.0 million for the three-months ended June 30, 2002, compared to $1.6 million for the prior year quarter. The average balance of investment securities increased to 120.4 million for the three-months ended June 30, 2002, compared to $100.7 million for the prior year quarter. The decline in income was caused by a reduction in the average yield, which declined from 6.44% for the three-months ended June 30, 2001 to 3.35% for the current quarter. The reduction in yields on investment securities is also reflective of the declines in market interest rates, especially the historically low rates being paid on federal funds and Federal Home Loan Bank overnight deposits. Although the average balance of investment securities increased by $20.8 million for the six-months ended June 30, 2002, compared to the six-months ended June 30, 2001, interest income declined from $3.3 million for the prior year period to $2.0 million for the current year period. Because the Company’s investment securities are generally of a shorter-term nature, the decline in market interest rates has had a significant impact on the overall yield of investment securities. The average yield of investment securities for the six-months ended June 30, 2002 was 3.29%, compared to 6.62% for the six-months ended June 30, 2001.

Interest Expense

Total interest expense on interest-bearing liabilities for the quarter ended June 30, 2002 declined by $2.5 million, or 17.1%, to $12.1 million compared to $14.6 million for the quarter ended June 30, 2001. The decrease in interest expense for the quarter ended June 30, 2002 was primarily due to a 104 basis point reduction in the average cost of interest bearing liabilities, offset somewhat by the interest cost applicable to a $62.0 million increase in the average balance of interest-bearing liabilities, which averaged $1.264 billion during the current quarter, compared to an average balance of $1.202 billion during the quarter ended June 30, 2001. The average cost of interest-bearing liabilities decreased to 3.83% during the quarter ended June 30, 2002, compared to 4.87% for last year’s comparable quarter. For the six-months ended June 30, 2002, interest expense on interest-bearing liabilities totaled $24.6 million, compared to $29.2 million for the six-months ended June 30, 2001, a decrease of $4.6 million, or 15.8%. The lower interest expense in the current period is due to the 103 basis point decline in the average cost of funds, which declined to 3.92% in the six-months ended June 30, 2002, compared to 4.95% in the prior year period. The Company’s cost of interest bearing liabilities has declined slower than overall market interest rates as market conditions, the already low interest rates being paid on deposits and call features on a portion of the FHLB advances have precluded further substantial declines in the interest paid on these accounts.

Interest expense on deposit accounts was $5.4 million for the quarter ended June 30, 2002, a decrease of $2.5 million from the $7.9 million for the quarter ended June 30, 2001. Interest expense on deposit accounts declined due to a 136 basis point decrease in the average cost of deposits. For the three-months ended June 30, 2002, the average cost of deposits was 2.75%, compared to 4.11% for the three-months ended June 30, 2001. Average balances of deposit accounts, at $786.7 million, were $20.4 million higher during the quarter ended June 30, 2002, compared to average balances of $766.3 million for the prior year quarter. For the six-months ended June 30, 2002, interest expense on deposit accounts was $11.2 million, compared to $16.1 million for the prior year period, a decrease of $4.9 million. The decrease is attributable to a 132 basis point decline in the average cost of deposit accounts in the six-months ended June 30, 2002, compared to the prior year period.

Interest expense on borrowed funds was $5.8 million and $11.6 million for the three- and six-months ended June 30, 2002, compared to $5.9 million and $11.3 million for the three-and six-months ended June 30, 2001. Borrowed funds increased to an average of $445.6 million during the three-months ended June 30, 2002 from an average of $404.0 million for the prior year quarter. The added expense of the higher average balance was essentially offset by a 60 basis point decline in the average cost, which declined to 5.21% in the current quarter from 5.81% in the prior year quarter. The average balance of borrowed funds was $442.6 million in the six-months ended June 30, 2002, an increase of $62.5 million compared to an average balance of $380.1 million for the six-months ended June 30, 2001. The average cost of borrowed funds was 5.23% for the six-months ended June 30, 2002, a decline of 71 basis points compared to the 5.94% cost of borrowed funds for the six-months ended June 30, 2001.

Net Interest Income

Net interest income for the three-months ended June 30, 2002 and 2001 was $9.8 million and $9.3 million, respectively. The Company was able to expand its net interest income through leveraging, despite a two basis point decrease in the net interest margin. The net interest margin for the quarter ended June 30, 2002 was 2.88%, compared to 2.90% for the prior year’s second quarter. Approximately 11 basis points of the 2.88% net interest margin in the current quarter was the result of collecting approximately $350,000 of current and past-due interest for nine months on impaired loans of $4.0 million with one borrower relationship. The net interest rate spread increased from 2.59% for the quarter ended June 30, 2001, to 2.63% for the current quarter. For the six-months ended June 30, 2002 and 2001, net interest income was $18.7 million. The net interest margin in the current period averaged 2.77%, compared to 2.97% for the six-months ended June 30, 2001. The Company has experienced net interest margin pressure due to the effects of declining asset yields, which exceeded the Company’s ability to reduce liability costs during the historic reductions in market interest rates. While market interest rates appear to have stabilized, the Company cannot predict when interest rates will rise to more normal levels and whether such increases will result in higher net interest margins.

Provision for Loan Losses

The Company’s provision for loan losses was $250,000 for the quarter ended June 30, 2002, compared to $208,000 for the comparable quarter last year. For the six-months ended June 30, 2002 and 2001 the provision for loan losses amounted to $500,000 and $420,000, respectively. See section B Financial Condition for further discussion on the Company’s methodology for providing for loan losses.

Non-Interest Income

Total non-interest income declined to $4.1 million for the quarter ended June 30, 2002, compared to $4.5 million for the quarter ended June 30, 2001 due primarily to lower gain on sale of loans. Gain on sale of loans amounted to $2.7 million for the quarter ended June 30, 2002, compared to $3.1 million for the quarter ended June 30, 2001. On a year-to-date basis, total non-interest income increased to $8.2 million from $7.7 million for the six-months ended June 30, 2001. The current year-to-date increase is primarily due to higher gain on sale of loans, which amounted to $5.6 million for the six-months ended June 30, 2002, compared to $4.7 million for the six-months ended June 30, 2001. The increased gain on sale of loans resulted from a continuation of high volumes of mortgage loan sales, made possible by the volume of lending activity in the current low interest rate environment. Included in the above gain on sale of loans were gains on sale of manufactured housing loans, which amounted to $2.4 million for the six-months ended June 30, 2002, compared to $2.9 million for the six-months ended June 30, 2001. Deposit service fees increased from $608,000 in the quarter ended June 30, 2001, to $768,000 in the current quarter. On a year-to-date basis, deposit service fees amounted to $1.4 million, compared to $1.2 million for the six-months ended June 30, 2001. The increase was primarily due to increases in fees and higher levels of deposit account services activity. Loan processing and servicing fees were a negative $198,000 for the quarter ended June 30, 2002 compared to a negative $16,000 for the quarter ended June 30, 2001. For the six-months ended June 30, 2002, loan processing and servicing fees were a negative $509,000, compared to income of $114,000 for the six-months ended June 30, 2001. The declines were due to larger adjustments for the impairment of originated mortgage servicing rights (“OMSR”) in the current periods. The adjustments to the OMSR were necessary due to the higher than expected levels of prepayments during the current periods for loans previously sold, with servicing retained by the Company.

Non-Interest Expense

Total non-interest expense was $9.7 million for the quarter ended June 30, 2002 compared $9.6 million for the quarter ended June 30, 2001 as increases in compensation and benefits were offset by decreases in other expenses and the elimination of amortization of goodwill. On a year-to-date basis, total non-interest expense was $19.4 million, compared to $18.8 million for the six-months ended June 30, 2001. Compensation and benefits increased by $973,000 for the six-months ended June 30, 2002 compared to the prior year period due primarily to increased sales incentives as a result of near record mortgage loan volume and normal annual increases in salaries. Other non-interest expense declined to $3.4 million in the current six-month period, compared to $3.7 million for the six-months ended June 30, 2001 as the prior year period included higher outside professional expenses. The current year-to-date period includes a $500,000 legal settlement expense incurred as a result of the Company’s subsidiary BNB, agreeing with a mediator’s recommendation in settling a lawsuit. There was no goodwill amortization during the current quarter and year-to-date periods in accordance with Financial Accounting Standard No. 142. Amortization of goodwill amounted to $355,000 and $709,000 during the quarter and six-months ended June 30, 2001.

Income Tax Expense

Income tax expense for the six-months ended June 30, 2002 was $2.4 million, for an effective tax rate of 34.2%. For the six-months ended June 30, 2001, income tax expense amounted to $2.6 million, for an effective tax rate of 36.3%. The lower effective tax rate in the current period is due to a lower state tax provision.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

One of the principal market risks affecting the Company is interest rate risk. The objective of the Company’s interest rate risk management function is to evaluate the interest rate risk included in certain balance sheet accounts, determine the level of risk appropriate given the Company’s business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with Board of Directors’ approved guidelines. Through such management, the Company seeks to reduce the vulnerability of its operations to changes in interest rates. The Company monitors its interest rate risk as such risk relates to its operating strategies. The Company’s Board of Directors has established a management Asset/Liability Committee that is responsible for reviewing the Company’s asset/ liability policies and interest rate risk position. The Committee reports trends and interest rate risk position to the Board of Directors on a quarterly basis. The extent of the movement of interest rates is an uncertainty that could have a negative impact on the earnings of the Company.

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

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

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

At June 30, 2002, the Company’s one year gap was a positive 7.4% of total assets, compared to a positive 6.8% of total assets at December 31, 2001.

The Company’s interest rate sensitivity is also monitored by management through the use of a model which internally generates estimates of the change in net portfolio value (“NPV”) over a range of interest rate change scenarios. NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario.

As in the case with the gap analysis, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV model used assumes that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV measurements and net interest income models provide an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company’s net interest income and will differ from actual results. See the Company’s Form 10-K for the year ended December 31, 2001 for a detail of the GAP and NPV tables. There have been no material changes in the net portfolio value since December 31, 2001.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Except as described below, the Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial position, the annual results of operations, or liquidity of the Company.

An action is pending against Forward Financial, in the United States District Court for the Northern District of New York. It was filed by a bank, in New York state court, served on December 1, 2000, and removed to federal court. The bank alleges, among other things, that Forward Financial breached a written agreement between the parties. Forward Financial denies the allegations and has counterclaimed for monies due from the bank. Forward Financial has significant defenses, which it is pursuing vigorously. The litigation is presently in the discovery stage. Because of the numerous uncertainties that surround the litigation, management and legal counsel are unable to estimate the amount of loss, if any, that the Company may incur with respect to this litigation. Consequently, no loss provision has been recorded. The parties are now actively engaged in settlement negotiations.

Item 2. Changes in Securities and Use of Proceeds

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

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

(A) The Annual Meeting of Stockholders of the Corporation was held on April 30, 2002.

(B) Directors elected at Annual Meeting and Continuing in Office:

(1) Election of Directors to a three-year term


Nominee	Total Votes For		Total Votes Withheld
David P. Conley		3,569,314		42,061




Richard J. Fahey		3,567,606		43,769




Kija Kim		3,568,056		43,319

(2) Continuing Directors


	Year Term Expires
Patricia M. Flynn, Ph.D		2003




W. Russell Scott		2003




Catherine Friend White		2003




Gene J. DeFeudis		2004




David F. Holland		2004




Joanna T. Lau		2004

Selection of Independent Auditors


Votes For	Votes Against		Abstentions
3,577,975		32,269		1,131

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits


			3.1			Restated Certificate of Incorporation*









			3.2			Amended and Restated Bylaws as of February 23, 2000**









			4.0			Stock Certificate of BostonFed Bancorp, Inc.*









			99.1			Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

In connection with the Quarterly Report of BostonFed Bancorp, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I David F. Holland, Chief Executive Officer of the company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.


		S/ David F. Holland Chief Executive Officer August 14, 2002


99.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

In connection with the Quarterly Report of BostonFed Bancorp, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John A. Simas, Chief Financial Officer of the company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:


		S/ John A. Simas Chief Financial Officer August 14, 2002

• Incorporated herein by reference into this document from Exhibits 3.1 and 4.0 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

• Incorporated herein by reference into this document from Exhibit 3.2 to the Annual Report on Form 10-K filed on March 29, 2002.

(b) Reports on Form 8-k

None

SIGNATURES

Pursuant to the requirements 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. (Registrant)









Date: August 14, 2002		By: /s/ David F. Holland

		David F. Holland President and Chief Executive Officer









Date: August 14, 2002		By: /s/ John A. Simas

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

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

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

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

(4)		Interest paid on borrowed funds for the periods presented includes interest expense on FNMA deposits held in escrow accounts with the Company related to the Company’s FNMA servicing, which, if such interest expense was excluded, would result in an average cost of borrowed funds of 5.18% and 5.80% for the three months ended June 30, 2002 and June 30, 2001, respectively.

(5)		Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(6)		Net interest margin represents net interest income as a percentage of average interest-earning assets.

1.		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.