BOSTONFED BANCORP INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 2003


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from to

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		(I.R.S. Employer
incorporation or organization)		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 x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No o

Number of shares of common stock, par value $.01 per share, outstanding as of October 31, 2003: 4,477,996.

TABLE OF CONTENTS


		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
	Item 2. MANAGEMENTS’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
	Item 4. CONTROLS AND PROCEDURES
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
EXHIBIT INDEX
SIGNATURES
Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.0 Section 906 Certification of CEO & CFO

BOSTONFED BANCORP INC.
FORM 10-Q

INDEX


			Page
Part I - FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 (unaudited)	2
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)	3
		Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2003 (unaudited)	4-5
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (unaudited)	6-7
		Notes to Unaudited Consolidated Financial Statements	8-12
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-24
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24-26
	Item 4.	Controls and Procedures	26
Part II - OTHER INFORMATION
	Item 1.	Legal Proceedings	26
	Item 2.	Changes in Securities and Use of Proceeds	26
	Item 3.	Defaults Upon Senior Securities	26
	Item 4.	Submission of Matters to a Vote of Security Holders	26
	Item 5.	Other Information	26
	Item 6.	Exhibits and Reports on Form 8-K	26-27
	Signatures		28

In addition to historical information, this Form 10-Q may contain certain forward-looking statements, which are 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 applicable to the Company’s operations, the allowance for losses discussion, litigation, 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, prices and litigation. 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.

Except as may be required by applicable law and regulation, 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.

BOSTONFED BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
(In thousands except share data)
Unaudited


					September 30,			December 31,
					2003			2002

Assets
Cash and cash equivalents					$	64,730		$	74,672
Investment securities available for sale (amortized cost of $106,980 at Sept. 30, 2003 and $112,056 at December 31, 2002)						108,179			112,888
Investment securities held to maturity (fair value of $2,656 at Sept. 30, 2003 and $2,576 at December 31, 2002)						2,525			2,524
Mortgage-backed securities available for sale (amortized cost of $77,656 at Sept. 30, 2003 and $113,550 at December 31, 2002)						77,379			114,515
Mortgage-backed securities held to maturity (fair value of $78,880 at Sept. 30, 2003 and $26,598 at December 31, 2002)						78,444			25,429
Loans held for sale						15,234			31,614
Loans, net of allowance for loan losses of $13,790 at Sept. 30, 2003 and $12,656 at December 31, 2002						1,189,233			1,071,356
Accrued interest receivable						6,067			6,470
Stock in FHLB of Boston and Federal Reserve Bank						27,485			24,552
Bank-owned life insurance						25,247			24,316
Premises and equipment, net						10,394			10,133
Goodwill						10,776			10,776
Real estate owned						3,994			0
Other assets						14,845			16,367

				Total assets	$	1,634,532		$	1,525,612

Liabilities and Stockholders’ Equity
Liabilities:
	Deposit accounts				$	960,728		$	960,278
	Federal Home Loan Bank advances and other Borrowings					535,894			426,560
	Corporation-obligated mandatorily redeemable capital securities					32,000			32,000
	Advance payments by borrowers for taxes and insurance					2,842			2,317
	Other liabilities					10,324			11,484

		Total liabilities				1,541,788			1,432,639

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 (4,461,396 and 4,425,348 shares outstanding at Sept. 30, 2003 and December 31, 2002, respectively)				66			66
		Additional paid-in capital				69,837			69,281
		Retained earnings				63,496			64,242
		Accumulated other comprehensive income				562			1,096
			Less: Treasury stock, at cost (2,128,221 shares and 2,164,269 shares at Sept. 30, 2003 and December 31, 2002, respectively)			(41,217	)		(41,698	)
			Less: Unearned Stock-Based Incentive Plan			0			(14	)

		Total stockholders’ equity				92,744			92,973

				Total liabilities and stockholders’ equity	$	1,634,532		$	1,525,612

See accompanying condensed notes to unaudited consolidated financial statements.

BOSTONFED BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations
(In thousands, except share data)
Unaudited


			Three Months Ended						Nine Months Ended

			9/30/2003			9/30/2002			9/30/2003			9/30/2002

Interest income:
	Loans		$	15,995		$	18,541		$	48,429		$	55,729
	Mortgage-backed securities			1,362			2,234			4,496			6,301
	Investment securities			997			1,030			3,235			3,021

		Total interest income		18,354			21,805			56,160			65,051

Interest expense:
	Deposit accounts			4,465			5,709			14,355			16,937
	Borrowed funds			4,244			5,538			12,950			17,105
	Corporation-obligated mandatorily redeemable capital securities distributions			881			881			2,642			2,642

		Total interest expense		9,590			12,128			29,947			36,684

Net interest income				8,764			9,677			26,213			28,367
Provision for loan losses				450			350			2,900			850

Net interest income after provision for loan losses				8,314			9,327			23,313			27,517
Non-interest income:
	Deposit service fees			972			789			2,728			2,194
	Loan processing and servicing fees			(341	)		(1,368	)		(2,869	)		(1,877	)
	Gain on sale of loans			2,958			2,994			8,779			8,593
	Income from bank-owned life insurance			304			313			931			916
	Gain on sale of investments			0			61			7			361
	Other			440			327			1,243			1,153

		Total non-interest income		4,333			3,116			10,819			11,340

Non-interest expense:
	Compensation and benefits			6,106			6,218			17,935			17,843
	Occupancy and equipment			1,228			1,222			3,684			3,652
	Data processing			526			478			1,520			1,476
	Advertising expense			481			365			1,140			862
	Federal deposit insurance premiums			40			39			128			125
	Impairment of goodwill			0			7,000			0			7,000
	Legal settlements			0			750			0			1,250
	Other			1,771			1,717			5,331			4,999

		Total non-interest expense		10,152			17,789			29,738			37,207

Income (loss) before income taxes				2,495			(5,346	)		4,394			1,650
Income tax expense (benefit)				1,055			(1,816	)		3,020			575

Net income (loss)			$	1,440		$	(3,530	)	$	1,374		$	1,075

Basic earnings (loss) per share			$	0.32		$	(0.80	)	$	0.31		$	0.24
Diluted earnings (loss) per share			$	0.31		$	(0.80	)	$	0.30		$	0.23
Basic weighted average shares Outstanding				4,437,073			4,422,131			4,409,349			4,413,438
Common stock equivalents due to dilutive effect of stock options				239,571			300,480			213,509			274,637
Diluted total weighted average shares outstanding				4,676,644			4,722,611			4,622,858			4,688,075

See accompanying condensed notes to unaudited consolidated financial statements.

BOSTONFED BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity
Nine Months Ended September 30, 2003
(In thousands, except share data)
Unaudited


															Unearned
												Accumulated			Stock-
			Additional									other			Based			Total
	Common		paid-in			Retained			Treasury			comprehensive			Incentive			stockholders’
	Stock		capital			earnings			stock			income			Plan			equity

Balance at December 31, 2002	$	66		69,281			64,242			(41,698	)		1,096			(14	)		92,973
Net loss		—		—			(1,598	)		—			—			—			(1,598	)
Change in net unrealized loss on investments available for sale (net of tax benefit of $543)		—		—			—			—			(850	)		—			(850	)

Total comprehensive income		—		—			—			—			—			—			(2,448	)
Cash dividends declared and paid ($0.16 per share)		—		—			(708	)		—			—			—			(708	)
Common stock repurchased (28,480 shares at an average price of $24.94 per share)		—		—			—			(610	)		—			—			(610	)
Stock options exercised, net of taxes		—		(94	)		—			361			—			—			267
Allocation relating to earned portion of Stock-Based Incentive Plan		—		—			—			—			—			6			6
Fair value of shares charged to expense for compensation plans		—		138			—			—			—			—			138

Balance at March 31, 2003	$	66		69,325			61,936			(41,947	)		246			(8	)		89,618

Net income		—		—			1,532			—			—			—			1,532
Change in net unrealized gain on investments available for sale (net of tax $492)		—		—			—			—			770			—			770

Total comprehensive income		—		—			—			—			—			—			2,302
Cash dividends declared and paid ($0.16 per share)		—		—			(701	)		—			—			—			(701	)
Common stock repurchased (15,000 shares at an average price of $22.92 per share)		—		—			—			(447	)		—			—			(447	)
Stock options exercised, net of taxes		—		(33	)		—			475			—			—			442
Allocation relating to earned portion of Stock-Based Incentive Plan		—		—			—			—			—			6			6
Fair value of shares charged to expense for compensation plans		—		304			—			—			—			—			304

Balance at June 30, 2003	$	66		69,596			62,767			(41,919	)		1,016			(2	)		91,524

See accompanying condensed notes to unaudited consolidated financial statements.


															Unearned
												Accumulated			Stock-
			Additional									other			Based			Total
	Common		paid-in			Retained			Treasury			comprehensive			Incentive			stockholders’
	stock		capital			earnings			stock			income			Plan			equity

Balance at June 30, 2003	$	66		69,596			62,767			(41,919	)		1,016			(2	)		91,524
Net income		—		—			1,440			—			—			—			1,440
Change in net unrealized loss on investments available for sale (net of tax benefit of $290)		—		—			—			—			(454	)		—			(454	)

Total comprehensive income		—		—			—			—			—			—			986
Cash dividends declared and paid ($0.16 per share)		—		—			(711	)		—			—			—			(711	)
Stock options exercised, net of taxes		—		(19	)		—			702			—			—			683
Allocation relating to earned portion of Stock-Based Incentive Plan		—		—			—			—			—			2			2
Fair value of shares charged to expense for compensation plans		—		260			—			—			—			—			260

Balance at Sept. 30, 2003	$	66		69,837			63,496			(41,217	)		562			—			92,744

See accompanying condensed notes to unaudited consolidated financial statements.

BOSTONFED BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(In thousands)


			For the Nine Months Ended
			September 30,
			2003			2002

Net cash flows from operating activities: net income			$	1,374		$	1,075
	Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation, amortization and accretion, net			2,192			8,406
	Earned SIP shares			14			36
	Appreciation in fair value of shares charged to expense for compensation plans			702			730
	Income from bank-owned life insurance			(931	)		(916	)
	Provision for loan losses			2,900			850
	Loans originated for sale			(572,759	)		(484,226	)
	Proceeds from sale of loans			597,918			489,391
	Gain on sale of loans			(8,779	)		(8,593	)
	Gain on sale of investment securities			(7	)		(361	)
	Loss on sale of real estate owned			65			—
	Decrease (increase) in accrued interest receivable			403			(532	)
	Decrease (increase) in prepaid expenses and other assets, net			837			(3,897	)
		(Decrease) increase in accrued expenses and other liabilities, net		(1,160	)		293

		Net cash provided by operating activities		22,769			2,256

Cash flows from investing activities:
	Proceeds from sale of investment securities available for sale			10,000			12,521
	Proceeds from maturities of investments securities held to maturity			—			25
	Proceeds from maturities of investment securities available for sale			5,000			2,003
	Purchase of investment securities available for sale			(12,710	)		(56,246	)
	Purchase of mortgage-backed securities available for sale			(81,977	)		(81,264	)
	Purchase of mortgage-backed securities held to maturity			(65,730	)		—
	Purchase of FHLB and Federal Reserve stock			(2,933	)		(344)
	Principal payments on mortgage-backed securities available for sale			117,093			67,335
	Principal payments on mortgage-backed securities held to maturity			12,706			11,376
	Principal payments on investment securities available for sale			2,609			1,135
	Increase in loans, net			(125,062	)		(48,856	)
	Purchases of premises and equipment			(1,483	)		(1,251	)
	Proceeds from sale of real estate owned			1,375			—
	Additional investment in real estate owned			(123	)		—

		Net cash used in investing activities		(141,235	)		(93,566	)

-Continued on next page-

BOSTONFED BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(In thousands)


			For the Nine Months Ended
			September 30,
			2003			2002

Cash flows from financing activities:
	Increase in deposit accounts			450			81,100
	Repayments of Federal Home Loan Bank advances			(471,875	)		(335,681	)
	Proceeds from Federal Home Loan Bank advances			581,209			335,356
	Cash dividends paid			(2,120	)		(2,109	)
	Common stock repurchased			(1,057	)		(4,149	)
	Options exercised, net of taxes			1,392			3,243
	Increase in advance payments by borrowers for taxes and insurance			525			187

		Net cash provided by financing activities		108,524			77,947

		Decrease in cash and cash equivalents		(9,942	)		(13,363	)
Cash and cash equivalents at beginning of period				74,672			95,927

Cash and cash equivalents at end of period			$	64,730		$	82,594

Supplemental disclosure of cash flow information:
Payments during the period for:
		Interest	$	30,455		$	36,804

		Taxes	$	3,494		$	3,336

See accompanying condensed notes to unaudited 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 September 30, 2003 and for the three- and nine-month periods ended September 30, 2003 and 2002 of BostonFed Bancorp, Inc., (“BostonFed” or the “Company”) and its wholly-owned subsidiaries, Boston Federal Savings Bank (“BFS”), Broadway National Bank (“BNB”), 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, 2002. BF Funding Corp., a former subsidiary of the Company, was dissolved during the third quarter of 2003.

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. In preparing the consolidated financial statements, the Company was required to make estimates and assumptions that affect the reported amounts of assets and liabilities for the unaudited consolidated statements of financial condition as of September 30, 2003 and December 31, 2002, and amounts of revenues and expenses in the consolidated statements of operations for the three and nine months ended September 30, 2003 and 2002. All significant inter-company accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. The results of operations for the three- and nine-month periods ended September 30, 2003 and 2002 are not necessarily indicative of the results that may be expected for the entire fiscal year.

NOTE 2: EMPLOYEE STOCK OPTION BENEFITS

The Company measures compensation cost for stock-based compensation plans using the intrinsic value based method of accounting. Intrinsic value is measured as the difference between the exercise price of options granted and the fair market value of the Company’s stock at the grant date. No stock-based employee compensation cost is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

Had the Company determined compensation expense consistent with the fair value approach, the Company’s net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below for the three- and nine-month periods ended September 30:


	Three months ended						Nine months ended
	September 30,						September 30,

	2003			2002			2003			2002

Net income (loss) as reported	$	1,440			(3,530	)		1,374			1,075
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect		(24	)		(27	)		(71	)		(119	)

Pro forma net income (loss)		1,416			(3,557	)		1,303			956

Basic earnings (loss) per share as reported		0.32			(0.80	)		0.31			0.24
Diluted earnings (loss) per share as reported		0.31			(0.80	)		0.30			0.23
Pro forma basic earnings (loss) per share		0.32			(0.80	)		0.30			0.22
Pro forma diluted earnings (loss) per share		0.30			(0.80	)		0.28			0.20

The Company uses the Black-Scholes option pricing model to determine the per share weighted average fair value of stock options granted. There were no stock options granted during the three- or nine-month periods ended September 30, 2003 and 2002.

NOTE 3: COMMITMENTS, CONTINGENCIES AND CONTRACTS

At September 30, 2003, the Company had commitments of $100.4 million to originate mortgage loans and $2.6 million to purchase loans from correspondent lenders. Of these $103 million commitments, $86.1 million were adjustable rate mortgage loans with interest rates ranging from 3.38% to 7.38% and $13.9 million were fixed rate mortgage loans with interest rates ranging from 4.00% to 8.75%. The Company also had commitments to sell $22.6 million of mortgage loans.

At September 30, 2003, the Company was servicing first mortgage loans of approximately $958.8 million, which are either partially or wholly-owned by others.

NOTE 4: LEGAL SETTLEMENTS

During the nine months ended September 30, 2002, the Company settled two lawsuits, which had been filed against two of its subsidiaries. The Company incurred a cost of approximately $1.3 million to settle the lawsuits during 2002.

NOTE 5: BUSINESS SEGMENTS

The Company’s wholly-owned bank subsidiaries, BFS and BNB (collectively “the Banks”), have been identified as reportable operating 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. BF Funding Corp., which was dissolved in the third quarter of 2003, 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 results of the Company, BF Funding Corp., through the date of dissolution, BFD Preferred Capital Trust I and BFD Preferred Capital Trust II comprise the “other” category.

The Company evaluates performance 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.

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 Sept. 30, 2003:
	Interest income	$	16,926			1,349			18,275			1,008			(929	)		18,354
	Interest expense		8,421			310			8,731			1,788			(929	)		9,590
	Provision for loan losses		450			0			450									450
	Non-interest income		3,927			406			4,333									4,333
	Non-interest expense		8,910			1,032			9,942			210						10,152
	Income tax expense (benefit)		1,243			148			1,391			(336	)					1,055
	Net income (loss)		1,829			265			2,094			(654	)					1,440
	Total assets		1,459,721			167,524			1,627,245			157,903			(150,616	)		1,634,532
Net interest margin			2.57	%		3.11	%		n.m.			n.m.			n.m.			2.39	%
Return on average assets			0.52	%		0.63	%		n.m.			n.m.			n.m.			0.37	%
Return on average equity			7.26	%		8.14	%		n.m.			n.m.			n.m.			6.18	%

At or for the three months ended Sept. 30, 2002:
	Interest income	$	19,707			2,016			21,723			1,051			(969	)		21,805
	Interest expense		10,851			458			11,309			1,788			(969	)		12,128
	Provision for loan losses		325			25			350									350
	Non-interest income		2,659			400			3,059			57						3,116
	Non-interest expense		16,347			1,229			17,576			213						17,789
	Income tax (benefit) expense		(1,745	)		234			(1,511	)		(305	)					(1,816	)
	Net (loss) income		(3,412	)		470			(2,942	)		(588	)					(3,530	)
	Total assets		1,377,724			174,298			1,552,022			162,079			(161,608	)		1,552,493
Net interest margin			2.79	%		4.30	%		n.m.			n.m.			n.m.			2.73	%
Return on average assets			(1.01	)%		1.10	%		n.m.			n.m.			n.m.			(0.92	)%
Return on average equity			(13.16	)%		14.25	%		n.m.			n.m.			n.m.			(14.07	)%

At or for the nine months ended Sept. 30, 2003:
	Interest income	$	51,321			4,578			55,899			3,084			(2,823	)		56,160
	Interest expense		26,386			1,019			27,405			5,365			(2,823	)		29,947
	Provision for loan losses		2,900			0			2,900									2,900
	Non-interest income		9,617			1,202			10,819									10,819
	Non-interest expense		25,767			3,347			29,114			624						29,738
	Income tax expense (benefit)		3,361			638			3,999			(979	)					3,020
	Net income (loss)		2,524			776			3,300			(1,926	)					1,374
	Total assets		1,459,721			167,524			1,627,245			157,903			(150,616	)		1,634,532
Net interest margin			2.62	%		3.53	%		n.m.			n.m.			n.m.			2.47	%
Return on average assets			0.25	%		0.62	%		n.m.			n.m.			n.m.			0.12	%
Return on average equity			3.35	%		7.92	%		n.m.			n.m.			n.m.			1.96	%

At or for the nine months ended Sept. 30, 2002:
	Interest income	$	58,789			6,017			64,806			3,201			(2,956	)		65,051
	Interest expense		32,866			1,409			34,275			5,365			(2,956	)		36,684
	Provision for loan losses		775			75			850									850
	Non-interest income		9,833			1,149			10,982			358						11,340
	Non-interest expense		32,304			4,199			36,503			704						37,207
	Income tax expense (benefit)		929			489			1,418			(843	)					575
	Net income (loss)		1,748			994			2,742			(1,667	)					1,075
	Total assets		1,377,724			174,298			1,552,022			162,079			(161,608	)		1,552,493
Net interest margin			2.83	%		4.27	%		n.m.			n.m.			n.m.			2.76	%
Return on average assets			.18	%		0.79	%		n.m.			n.m.			n.m.			0.10	%
Return on average equity			2.30	%		10.23	%		n.m.			n.m.			n.m.			1.46	%

n.m. = not meaningful

NOTE 6: RECENT ACCOUNTING PRONOUNCEMENTS

In December 2002, the Financial Accounting Standards Board (“FASB”) issued a Statement of Financial Accounting Standard, (“SFAS”) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Companies are permitted to eliminate a “ramp-up” effect that the SFAS No. 123, transition rule creates in the year of adoption. Companies can choose to elect a method that will provide for comparability amongst years reported. In addition, this Statement amends the disclosure requirement of Statement 123 to require prominent disclosures in both annual and interim financial statements about the fair value based method of accounting for stock-based employee compensation and the effect of the method used on reported results. See Note 2 — Employee Stock Option Benefits.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133, “Accounting for Derivative Instruments and Hedging Activities on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, resulting in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively. Implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The implementation of SFAS No. 149 did not have a material impact on the Company’s financial statements.

FASB issued Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of Accounting Research Bulletin No. 51.” FIN 46 establishes accounting guidance for consolidation of variable interest entities (“VIE”) that function to support the activities of the primary beneficiary. The primary beneficiary of a VIE entity is the entity that absorbs a majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship with a VIE. Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The Company adopted FIN No. 46 as of February 1, 2003 for all arrangements entered into after January 31, 2003 and will adopt as of December 31, 2003 for other arrangements entered into prior to January 31, 2003 per FASB Staff Position No. FIN 46-6. The Company does not believe the adoption of this interpretation will have a material impact on the Company's financial position or results of operations.

In its current form, FIN 46 may require the Company to deconsolidate its investment in Preferred Capital Trust I and II in future financial statements. The potential de-consolidation of subsidiary trusts of bank holding companies formed in connection with the issuance of trust preferred securities appears to be an unintended consequence of FIN 46. It is currently unknown if, or when, the Financial Accounting Standards Board will address this issue. In July 2003, the Board of Governors of the Federal Reserve issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier I capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve intends to review the regulatory implications of any accounting treatment changes and, if necessary or warranted, provide further appropriate guidance. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier I capital for regulatory capital purposes. [As of September 30, 2003, assuming the Company was not allowed to include the allowable portion of the $32.0 million in trust preferred securities issued by Preferred Capital Trust I and II in Tier I capital, the Company would still exceed the regulatory required minimums for capital adequacy purposes.] If the trust preferred securities were no longer allowed to be included in Tier I capital, the Company would also be permitted to redeem the capital securities, which bear interest at 11.295% and 10.875%, respectively, without penalty.

SFAS No. 150. “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” In May 2003, the FASB issued SFAS No. 150, which establishes standards for how certain financial instruments with characteristics of both liabilities and equity should be measured and classified. Certain financial instruments with characteristics of both liabilities and equity will be required to be classified as a liability. This statement is effective for financial instruments entered into or modified after May 31, 2003, and July 1, 2003 for all other financial instruments with the exception of existing mandatorily redeemable financial instruments issued by limited life entities which have been excluded from the scope of the statement. On November 7, 2003, the FASB issued a FASB Staff Position (“FSP”) FAS 150-3, “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” FSP FAS 150-3 indefinitely defers paragraph 9 of SFAS No. 150 for limited life entities. Paragraph 9 provides guidance or the measurement requirements for mandatorily redeemable financial instruments.< /FONT>

NOTE 7: ACQUISITION OF BRANCHES AND MERGER OF BROADWAY NATIONAL BANK

The Company’s subsidiary Boston Federal Savings Bank signed a Purchase and Assumption Agreement on July 8, 2003, with Encore Bank to acquire Encore Bank’s seven Boston area branches located in Belmont, Lexington, Needham, Newton, Sudbury, Wellesley and Woburn, Massachusetts. Boston Federal Savings Bank filed its Interagency Bank Merger Act Application for approval with the Office of Thrift Supervision (“OTS”) on August 7, 2003. Regulatory approval was received from the OTS on October 7, 2003, and the transaction was consummated on October 24, 2003.

The Company assumed deposits of approximately $321.6 million and paid a deposit premium of $4.2 million. The Company estimates that approximately $2.5 million will also be required to establish a certificate yield adjustment account for above market rate certificates of deposit (“CDs”). The certificate yield adjustment account will be amortized over the remaining terms of the CDs in order to effectively reduce the interest expense on these CDs to market interest for similar terms at the time of assumption. A core deposit intangible (“CDI”) of $5.0 million is the estimated value assigned to the deposits. The CDI will be amortized over the average remaining expected lives of the deposits acquired. Initially, a seven-year life is estimated and the Company will amortize the CDI using the sum-of-the-years method. Including the costs of the transaction, which approximated $400,000, the resulting goodwill is estimated to be approximately $2.1 million. Good will is no longer amortized, but is subject to impairment testing, at least on an annual basis.

As part of the transaction, the Company paid $6,875,000 for four locations that were previously owned by Encore Bank. The remaining three locations are leased properties.

On September 8, 2003, the Company submitted an application to the OTS requesting approval to merge its two subsidiary banks, with Boston Federal Savings Bank being the resultant institution. The Company expects, subject to regulatory approval, to complete the merger on or before the end of the year, although the data processing conversion of customer accounts into Boston Federal Savings Bank’s system may not be completed until early 2004. The merger will have no effect on the consolidated financial statement of the Company.

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

A. GENERAL

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. On October 24, 2003, the Company acquired seven (7) branch offices in the Boston area from Encore Bank.

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 14 other bank branch offices (including those acquired from Encore Bank in October, 2003) located in Arlington, Bedford, Belmont, Billerica, Boston, Lexington, Needham, Newton, Peabody, Sudbury, Wellesley (2) and Woburn (2), all of which are located in the greater Boston metropolitan area. BFS’ subsidiary, Forward Financial, moved its headquarters to Westborough, Massachusetts on October 1, 2003, from its previous location 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 5 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”).

Critical Accounting Policies

The Company’s critical accounting policies were detailed in the Company’s Annual Report for the year ended December 31, 2002, in the Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 of the Consolidated Financial Statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. The Company’s policies with respect to the methodologies used to determine the allowance for loan losses and asset impairment judgments, including the valuation of Originated Mortgage Servicing Rights (“OMSRs”) and the value of goodwill, are the Company’s most critical accounting policies because they are important to the presentation of the financial condition and results of operations of the Company and they involve a higher degree of complexity and require management to make difficult and subjective judgments, which often require assumption or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in the results of operations or financial condition. The appropriate, critical accounting policies and their application are reviewed quarterly by the Audit and Compliance Committee of the Board of Directors.

B. FINANCIAL CONDITION

Assets

Total assets at September 30, 2003 were $1.6 billion, compared to $1.5 billion at December 31, 2002, an increase of $108.9 million. Loans, net of allowance for loan losses increased by $117.9 million to $1.2 billion at September 30, 2003 from $1.1 billion at December 31, 2002 as the Company retained a larger portion of its loan production for portfolio purposes. Additionally, the Company securitized and retained a portion of its loan production in the form of mortgage-backed securities held to maturity, which increased by $53.0 million from $25.4 million at December 31, 2002 to $78.4 million at September 30, 2003. Somewhat offsetting these increases were lower balances in cash and cash equivalents, mortgage-backed securities available for sale and loans held for sale. Cash and cash equivalents declined by $9.9 million from a balance of $74.7 million at December 31, 2002 to $64.7 million at September 30, 2003 due primarily to a reduction in Federal Home Loan Bank (“FHLB”) Overnight Deposits. Mortgage-backed securities declined $37.1 million from a balance of $114.5 million at December 31, 2002, to a balance of $77.4 million at September 30, 2003, due to rapid prepayments of collateralized mortgage obligations (“CMOs”). Additionally, loans held for sale declined by $16.4 million from $31.6 million at December 31, 2002 to $15.2 million at September 30, 2003 as a lesser portion of loan production was earmarked for sale during the recent quarter.

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


			9/30/03			12/31/02

			In thousands (Unaudited)
Mortgage loans:
	Residential 1-4 family		$	814,185			684,277
	Multi-family			23,042			25,290
	Construction and land			119,083			129,469
	Commercial real estate			131,632			134,169

				1,087,942			973,205

Consumer and other loans:
	Home equity and improvement			111,195			94,855
	Secured by deposits			504			466
	Consumer			5,328			3,768
	Business			28,046			32,792

				145,073			131,881

		Total loans, gross		1,233,015			1,105,086

Allowance for loan losses				(13,790	)		(12,656	)
Construction loans in process				(35,605	)		(24,832	)
Net unearned premium on loans purchased				28			36
Deferred loan origination costs				5,585			3,722

		Loans, net	$	1,189,233			1,071,356

As noted in the above table, the allowance for loan losses amounted to $13.8 million at September 30, 2003. Management believes the allowance is adequate to absorb probable loan losses. The allowance for loan losses increased from $12.7 million at December 31, 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 evaluation of information currently available. 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 nine months ended September 30, 2003:


		In thousands
Balance at December 31, 2002		$	12,656
	Loss provision		2,900
	Recoveries		87
	Charge-offs		(1,853	)

Balance at September 30, 2003		$	13,790

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 information currently available to estimate inherent losses on its loans, future additions to the allowance may be necessary based on regulatory directives or future events, including changes in local, regional and national economic conditions, changes in local, regional and national real estate market and changes in market interest rates. Accordingly, the ultimate collectibility of a substantial portion of the Company’s loan portfolio is affected by such changes.

As part of the Company’s determination of the adequacy of the allowance for loan losses, the Company monitors its loan portfolio through its management Asset Classification Committee. The Committee classifies loans depending on risk of loss characteristics. The most severe classification before a charge-off or impairment is required is “sub-standard.” At September 30, 2003, the Company classified $26.8 million of loans ($26.2 million at BFS and $0.6 million at BNB) as sub-standard compared to $16.9 million ($16.0 million at BFS and $0.9 million at BNB) at December 31, 2002. The vast majority of the increase in sub-standard loans, and in turn the quarterly provision, was due to three loans (two land loans and one hotel loan) being downgraded to sub-standard from special mention. Non-performing assets at September 30, 2003, totaled $9.8 million or 0.60% of total assets, compared to $6.5 million, or 0.43% of total assets, at December 31, 2002. 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 September 30, 2003 was sufficient to provide for anticipated losses inherent in the loan portfolio.

The Company’s $13.8 million allowance for loan losses at September 30, 2003 represented 237% of non-performing loans or 1.13% of total loans, compared to $12.7 million at December 31, 2002, or 230% of non-performing loans and 1.13% of total loans. Management believes these coverage ratios are at prudent levels considering the levels of classified loans and the combined balance of construction and land, commercial real estate, multi-family, home equity and improvement, consumer and business loans. These combined total balances were approximately $418.3 million at September 30, 2003, and $420.3 million at December 31, 2002.

Non-performing loans were $5.8 million at September 30, 2003. 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 $384,000 and $701,000 for the nine-month periods ended September 30, 2003 and 2002, respectively. The amount of interest income that was recorded on these loans was $239,000 and $568,000 for the nine-month periods ended September 30, 2003 and 2002, respectively.

At September 30, 2003, there were seven loans with a net balance of $3.7 million, characterized as impaired. During the nine months ended September 30, 2003, the average recorded value of impaired loans was $7.59 million, $64,000 interest income was recognized and $180,000 of interest income would have been recognized under the loans’ original terms during the nine-months ended September 30, 2003. At December 31, 2002, there were eight loans characterized as impaired with a total balance of $8.4 million. During the nine months ended September 30, 2002, the average recorded value of impaired loans was $2.7 million, $367,000 interest income was recognized and $327,000 of interest income would have been recognized under the loans’ original terms.

At September 30, 2003, the Company had two properties in real estate owned (“REO”), with a total balance of $4.0 million. The REO was comprised of a land lot, acquired through foreclosure, in Westborough, Massachusetts and a commercial real estate property, acquired through a deed in lieu of foreclosure, in Woburn, Massachusetts. The Company is currently marketing both properties for sale. The Company had no REO at December 31, 2002.

Liabilities

Deposit accounts were $960.7 million on September 30, 2003, essentially unchanged form the $960.3 million balance at December 31, 2002. Wholesale-brokered certificates of deposit were $125.0 million at September 30, 2003, reflecting a decline of $7.7 million since December 31, 2002. The Company has not been as aggressive as some of its competition for deposits due to margin pressures and sufficient liquid assets.

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


				09/30/03		12/31/02

				In thousands (Unaudited)
NOW accounts					151,352		150,342
Regular and statement savings					225,397		218,133
Money market					65,507		62,530
Demand deposits and official checks					114,964		107,154

		Total non-certificate accounts			557,220		538,159

Certificate accounts:
	3 to 6 months				41,146		52,164
	1 to 3 years				228,941		246,636
	Greater than 3 years				84,450		75,987
	IRA/KEOGH				48,971		47,332

			Total certificate accounts		403,508		422,119

					960,728		960,278

Expected maturity of certificate accounts:
	Within one year				199,415		227,898
	One to two years				124,493		99,230
	Two to three years				45,473		53,250
	Over three years				34,127		41,741

			Total		403,508		422,119

Federal Home Loan Bank (“FHLB”) advances and other borrowings increased $109.3 million, to a balance of $535.9 million at September 30, 2003, from $426.6 million at December 31, 2002.

C. COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

GENERAL

During the quarter ended September 30, 2003, the Company earned $1.4 million, or $0.32 basic and $0.31 diluted earnings per share, compared to a net loss of $3.5 million or $0.80 basic and diluted loss per share for the third quarter of 2002. The loss incurred in the third quarter of 2002, was primarily the result of a $7.0 million

goodwill impairment charge, a $1.7 million originated mortgage servicing rights (“OMSR”) impairment charge and an expense of $750,000 to settle a lawsuit. Significant items affecting earnings for the third quarter of 2003 included the reversal of approximately $1.2 million of the $3.1 million valuation allowance for OMSRs.

For the nine months ended September 30, 2003, net income was $1.4 million, or $0.31 basic and $0.30 diluted earnings per share, compared to $1.1 million or $0.24 basic and $0.23 diluted earnings per share for the nine months ended September 30, 2002. The current year-to-date earnings were negatively impacted by the settlement with the Massachusetts Department of Revenue for $1.8 million for additional state taxes and interest applicable to the real estate investment trust (“REIT”), an incremental loan loss provision of $2.1 million, an $800,000 increase in OMSR impairment charges and continued margin erosion.

Earnings for the nine months ended September 30 2002, were impacted by the goodwill impairment charge, OMSR impairment charges and the settlement of two legal disputes.

For the three months ended September 30, 2003 and 2002, the annualized return on average stockholders’ equity was 6.18% and (14.07%), respectively. Comments regarding the components of net income are detailed in the following paragraphs.

Average Balances, Yields and Costs

The following table sets forth certain information relating to the Company for the three and nine months ended September 30, 2003 and 2002. The average yields and costs are derived by dividing income or expense by the average balance of interest earning assets or interest bearing liabilities, respectively, for the periods shown. The average balance data is derived from daily balances. The yields and costs include fees, premiums and discounts, which are considered adjustments to yields.

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


			2003								2002

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

			(Dollars in thousands)
For the quarter ended September 30:
Assets:
Interest-earning assets:
	Investment securities (1)		$	147,088		$	997		2.71	%	$	123,125		$	1,030		3.35	%
	Loans, net and loans held for sale (2)			1,163,428			15,995		5.50	%		1,139,154			18,541		6.51	%
	Mortgage-backed securities (3)			153,428			1,362		3.55	%		156,490			2,234		5.71	%

		Total interest-earning assets		1,463,944			18,354		5.01	%		1,418,769			21,805		6.15	%

Non interest-earning assets				102,081								109,926

		Total assets		1,566,025								1,528,695

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
	Money market deposit accounts			67,417			191		1.13	%		62,083			250		1.61	%
	Savings accounts			222,647			516		0.93	%		207,560			749		1.44	%
	Now accounts			151,610			50		0.13	%		140,887			113		0.32	%
	Certificate accounts			410,195			3,708		3.62	%		428,087			4,597		4.30	%

		Total		851,869			4,465		2.10	%		838,617			5,709		2.72	%
Borrowed funds (4)				477,083			4,244		3.56	%		449,177			5,538		4.93	%
Corporation-obligated mandatorily redeemable capital securities				32,000			881		11.01	%		32,000			881		11.01	%

		Total interest-bearing liabilities		1,360,952			9,590		2.82	%		1,319,794			12,128		3.68	%

Non interest-bearing liabilities				111,936								108,524

		Total liabilities		1,472,888								1,428,318

Stockholders’ equity				93,137								100,377

		Total liabilities and stockholders’ equity	$	1,566,025							$	1,528,695

Net interest rate spread (5)						$	8,764		2.19	%				$	9,677		2.47	%

Net interest margin (6)									2.39	%							2.73	%

Ratio of interest-earning assets to interest-bearing liabilities				107.57	%							107.50	%

(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 loan investor deposits held in escrow accounts with the Company related to the Company’s loan servicing, which, if such interest expense was excluded, would result in an average cost of borrowed funds of 3.50% and 4.92% for the three months ended September 30, 2003 and September 30, 2002, 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 Yield/Costs
(Unaudited)


			2003								2002

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

			(Dollars in thousands)
For the nine months ended September 30:
Assets:
Interest-earning assets:
	Investment securities (1)		$	155,947		$	3,235		2.77	%	$	121,648		$	3,021		3.31	%
	Loans, net and loans held for sale (2)			1,113,726			48,429		5.80	%		1,103,561			55,729		6.73	%
	Mortgage-backed securities (3)			143,618			4,496		4.17	%		146,048			6,301		5.75	%

		Total interest-earning assets		1,413,291			56,160		5.30	%		1,371,257			65,051		6.32	%

Non interest-earning assets				105,000								110,956

		Total assets		1,518,291								1,482,213

Liabilities and stockholders’ equity:
Interest-bearing liabilities:
	Money market deposit accounts			64,997			575		1.18	%		60,850			744		1.63	%
	Savings accounts			217,735			1,724		1.06	%		194,480			2,114		1.45	%
	Now accounts			147,712			206		0.19	%		138,786			337		0.32	%
	Certificate accounts			415,462			11,850		3.80	%		404,056			13,742		4.53	%

		Total		845,906			14,355		2.26	%		798,172			16,937		2.83	%
Borrowed funds (4)				436,187			12,950		3.96	%		444,768			17,105		5.13	%
Corporation-obligated mandatorily redeemable capital securities				32,000			2,642		11.01	%		32,000			2,642		11.01	%

		Total interest-bearing liabilities		1,314,093			29,947		3.04	%		1,274,940			36,684		3.83	%

Non interest-bearing liabilities				110,670								108,864

		Total liabilities		1,424,763								1,383,804

Stockholders’ equity				93,528								98,409

		Total liabilities and stockholders’ equity	$	1,518,291							$	1,482,213

Net interest rate spread (5)						$	26,213		2.26	%				$	28,367		2.49	%

Net interest margin (6)									2.47	%							2.76	%

Ratio of interest-earning assets to interest-bearing liabilities				107.55	%							107.55	%

(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 loan investor deposits held in escrow accounts with the Company related to the Company’s loan servicing, which, if such interest expense was excluded, would result in an average cost of borrowed funds of 3.92% and 5.10% for the nine months ended September 30, 2003 and September 30, 2002, 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.

Interest Income

Total interest income on interest-earning assets for the quarter ended September 30, 2003 declined by $3.5 million, or 16.1%, to $18.4 million, compared to the quarter ended September 30, 2002. The decrease in interest income was due to a 114 basis point decline in the average yield on interest earning assets, partially offset by the earnings on the $45.2 million increase in average interest-earning assets. The average yield on interest-earning assets declined to 5.01% for the three months ended September 30, 2003 from 6.15% for the three months ended September 30, 2002. For the nine months ended September 30, 2003, total interest income declined by $8.9 million, or 13.7%, to $56.2 million, compared to the $65.1 million interest income earned during the nine months ended September 30, 2002. Similar to the current quarter, the year-to-date interest income declined due to a 102 basis point decline in the average yield on interest earning assets, partially offset by the interest earned on higher average balances. 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 the past few years. Additionally, the proceeds received from the record levels of loan prepayments and matured investment securities have been re-invested at much lower interest rates due to the decline in market interest rates.

Interest income on loans, net, for the quarter ended September 30, 2003 declined by $2.5 million, or 13.5%, to $16.0 million compared to $18.5 million for the comparable quarter in 2002. The decrease in interest income from loans, net, for the current three-month period was due to the 101 basis point decline in the average yield, partially offset by an increase in the average balance of loans, net. The average yield on loans, net for the three months ended September 30, 2003 was 5.50%, compared to an average yield of 6.51% for the three months ended September 30, 2002. For the nine months ended September 30, 2003, interest income on loans, net, was $48.4 million, $7.3 million lower than the prior year comparable period. The yield on loans, net, declined by 93 basis points in the current nine-month period. Many adjustable-rate loans continue to reprice lower as the major repricing indexes remain at historic lows. The Company has continued investing in interest sensitive loans such as equity lines, commercial and construction, business and other short-term indexed loans and selling most of its fixed-rate longer term loans into the secondary market in order to better protect against the possibility of rising interest rates.

Interest on mortgage-backed securities for the quarter ended September 30, 2003 was $1.4 million, compared to $2.2 million for the quarter ended September 30, 2002. The decline was primarily due to a 216 basis point decline in the average yield. The average yield declined from 5.71% for the three months ended September 30, 2002, to 3.55% for the current three-month period. On a year-to-date basis, interest income on mortgage-backed securities declined from $6.3 million for the nine months ended September 30, 2002, to $4.5 million for the comparable period this year also due primarily to a 158 basis point decline in the average yield. The reduction in yield is a reflection of the low interest rate environment, which results in the reinvestment of amortization and prepayments into lower yielding similar investments.

Income from investment securities was $997,000 for the three months ended September 30, 2003, compared to $1.0 million for the prior year quarter. Although the income was essentially the same, the Company had substantially higher average balance of investment securities in the current year quarter. The average balance of investment securities increased to $147.1 million for the three months ended September 30, 2003, from an average balance of $123.1 million for the prior year quarter. While the average balance was substantially higher in the current quarter, the total yield earned on the average balance was negatively affected by a reduction in the average yield, which declined from 3.35% for the three months ended September 30, 2002, to 2.71% for the current quarter.

Income from investment securities was $3.2 million for the nine months ended September 30, 2003, which was a 6.7% increase compared to the $3.0 million for the nine months ended September 30, 2002. Similar to the current quarter, the impact on income from much higher average balances was partially offset by the 54 basis point decline in average yield in the current period, compared to the nine months ended September 30, 2002. The reduction in yield on investment securities is also reflective of the declines in market interest rates; including the historically low rates being paid on federal funds and Federal Home Loan Bank overnight deposits. 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.

Interest Expense

Total interest expense on interest-bearing liabilities for the quarter ended September 30, 2003 declined by $2.5 million, or 20.7%, to $9.6 million compared to $12.1 million for the quarter ended September 30, 2002. The decrease in interest expense for the current quarter was primarily due to a 86 basis point reduction in the average cost of interest bearing liabilities, which was partially offset by the interest expense applicable to a $41.2 million increase in the average balance of interest-bearing liabilities, which averaged $1.4 billion during the current quarter, compared to an average balance of $1.3 billion during the quarter ended September 30, 2002. The average cost of interest-bearing liabilities declined to 2.82% during the quarter ended September 30, 2003, compared to 3.68% for last year’s comparable quarter. For the nine months ended September 30, 2003, total interest expense was $29.9 million, a decline of $6.8 million compared to the $36.7 million interest expense for the nine months ended September 30, 2002. The cost of funds declined from 3.83% for the nine months ended September 30, 2002 to 3.04% for the current period. The Company’s cost of interest bearing liabilities has declined slower than overall market interest rates as competitive market conditions, the already low interest rates being paid on deposits and longer term FHLB advances have precluded more rapid declines in the interest paid on these interest-bearing liabilities.

Interest expense on deposit accounts was $4.5 million for the quarter ended September 30, 2003, a decrease of $1.2 million from the $5.7 million for the quarter ended September 30, 2002. Interest expense on deposit accounts declined due to a 62 basis point decrease in the average cost of deposits. For the three months ended September 30, 2003, the average cost of deposits was 2.10%, compared to 2.72% for the three months ended September 30, 2002. Average balances of deposit accounts of $851.9 million for the current quarter, were $13.3 million higher than the average of $838.6 for the quarter ended September 30, 2002. For the nine months ended September 30, 2003, interest expense on deposit accounts declined by $2.5 million to $14.4 million, compared to $16.9 million for the nine months ended September 30, 2002. The cost of deposits declined by 57 basis points during the current nine months to 2.26%, compared to 2.83% for the nine months ended September 30, 2002. A portion of the decline in interest expense caused by the lower cost of deposits was offset by higher average balances, which averaged $845.9 million during the nine months ended September 30, 2003, compared to $798.2 million for the prior year period.

Interest expense on borrowed funds was $4.2 million for the three months ended September 30, 2003, compared to $5.5 million for the three months ended September 30, 2002. Borrowed funds increased to an average balance of $477.1 million during the current quarter from an average of $449.2 million for the prior year quarter. The average cost of borrowed funds declined to 3.56% for the three months ended September 30, 2003, a decline of 137 basis points, compared to the 4.93% cost of borrowed funds for the three months ended September 30, 2002. Similar results were attained on a year-to-date basis as interest expense on borrowed funds declined to $13.0 million for the nine months ended September 30, 2003 from $17.1 million for the prior year comparable period. The cost of borrowed funds declined from 5.13% during the nine months ended September 30, 2002 to 3.96% in the current year period, a decline of 117 basis points. These declines were the result of a continuation of the low interest rate environment allowing the Company to renew previous higher rate, long-term FHLB advances at current lower rates.

Net Interest Income

Net interest income for the three months ended September 30, 2003 was $8.8 million, compared to $9.7 million for the third quarter of 2002, despite higher average interest-earning assets. The lowest interest rates in decades have precipitated high levels of loan prepayments, which combined with reinvestment in lower yielding loans and investment securities, as well as diminishing opportunities to continue lowering core deposit interest rates, have caused a decrease in the net interest margin. The net interest margin declined from 2.73% for the quarter ended September 30, 2002 to 2.39% in the current quarter. On a linked-quarter basis (June 30, 2003), the net interest margin declined by six basis points. For the nine months ended September 30, 2003, the net interest income was $26.2 million, a decline of $2.2 million from the $28.4 million for the nine months ended September 30, 2002. This decline was caused by a 29 basis point decrease in the net interest margin, which declined to 2.47% during the current period, compared to 2.76% for the prior year nine-month period. The above-mentioned issues also affected

the net interest margin for the nine months ended September 30, 2003. Additionally, increases in non-performing loans have placed pressure on the net interest margin.

Provision for Loan Losses

The provision for loan losses was $450,000 for the three months ended September 30, 2003, compared to $350,000 for the comparable quarter last year. For the nine months ended September 30, 2003, the provision for loan losses was $2.9 million, compared to $850,000 for the comparable period last year. The increase in the provision was necessary due to a charge-off of $1.6 million during the second quarter of 2003. Additionally, the Company has provided higher loan loss provisions due to an increased level of non-performing loans and the higher balances invested in commercial real estate loans, business loans and other higher yielding/higher risk loans. At September 30, 2003, the Company’s non-performing assets totaled $9.8 million, or 0.60% of total assets, compared to the December 31, 2002 balance of $6.5 million, or 0.43% of total assets. See Item 2, Section B. FINANCIAL CONDITION for further discussion on the Company’s methodology for providing for loan losses.

Non-Interest Income

Total non-interest income increased to $4.3 million for the quarter ended September 30, 2003, compared to $3.1 million for the quarter ended September 30, 2002, due primarily to improvement in the loan processing and servicing fees. Loan processing and servicing fees were a negative $341,000 for the quarter ended September 30, 2003, compared to a negative $1.4 million for the comparable quarter in the prior year. Higher mortgage interest rates at September 30, 2003, compared to June 30, 2003, caused estimated mortgage pre-payment speeds to decline during the current quarter, thereby allowing the Company to recover approximately $1.2 million of its $3.1 million valuation allowance on its OMSRs. On a year to date basis, loan processing and servicing fees were a negative $2.9 million, compared to a negative $1.9 million for last year to date. The primary reason for the decrease was due to OMSR impairment charges (net of adjustment to valuation allowance), totaling $3.6 million during the nine months ended September 30, 2003, and $2.8 million for the prior year comparable period. The OMSR valuation allowance was $1.9 million at September 30, 2003. With the most recent adjustment, the OMSR balance of $6.0 million, net of valuation allowance, represents approximately 63 basis points of the $958.8 million of loans serviced for others.

Gain on sale of loans amounted to $3.0 million for the quarters ended September 30, 2003 and 2002. On a year to date basis, gain on sale of loans was $8.8 million, compared to $8.6 million for the nine months ended September 30, 2002. The continued strong levels of gain on sale of loans resulted from the high volumes of one- to four-family 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 $1.0 million for the quarters ended September 30, 2003 and 2002. On a year-to-date basis gain on sale of manufactured housing loans was $2.9 million, compared to $3.3 million for the nine months ended September 30, 2002. These volumes reflect the continuing recessionary levels of activity in the manufactured housing market.

Deposit service fees increased to $972,000 in the current quarter, compared to $789,000 in the quarter ended September 30, 2002. On a year-to-date basis, deposit service fees were $2.7 million, compared to the prior year-to-date total of $2.2 million. The increase was primarily due to increases in fees and higher levels of deposit account services activity.

Non-Interest Expense

Total non-interest expense was $10.2 million for the quarter ended September 30, 2003, compared to $17.8 million for the prior year comparable quarter. Non-interest expenses were higher in the prior year quarter due primarily to the $7.0 million goodwill impairment and $750,000 legal settlement. For the nine months ended September 30, 2003, total non-interest expense was $29.7 million, compared to $37.2 million for the prior year to date due to primarily the same issues that impacted the third quarter of 2002. The total non-interest expense for the

nine months ended September 30, 2002 was also impacted by a $500,000 legal settlement at the Company’s BNB subsidiary during the first quarter of 2002.

Compensation and benefits were $112,000 lower in the current quarter than the prior year third quarter as the Company is not accruing a portion of the short-term incentive plan (“STIP”) due to the level of current earnings, which would preclude the payout of a substantial portion of the plan. On a year to date basis, compensation is $92,000 higher in the nine months ended September 30, 2003, despite the non-accrual of a portion of the STIP mentioned above, primarily due to the expense incurred for the Company’s defined benefits pension plan (“pension plan”). The pension plan expense for the current year to date period was $940,000, compared to $200,000 for the three and nine months ended September 30, 2002. Prior to July 1, 2002, the pension plan’s sponsor had been in an over-funded status. Advertising expense increased to $481,000 in the current quarter from $365,000 in the prior year comparable quarter due to the rollout of a more focused branding program for the Company’s subsidiary, BFS. Year to date, advertising expense totaled $1.1 million, compared to $862,000 for the nine months ended September 30, 2002. The increase was also due to the recent expenditures for the branding program.

Income Tax Expense

Income tax expense for the quarter ended September 30, 2003, was $1.1 million, for an effective tax rate of 42.3%, compared to a tax benefit of $1.8 million, or an effective tax benefit of 34.0% for the quarter ending September 30, 2002. Income tax expense for the nine months ended September 30, 2003 was $3.0 million, for an effective tax rate of 68.7% due primarily to the REIT settlement for current and retroactive income taxes with the Mass. DOR in June of this year. Excluding the effects of the REIT settlement, the effective tax rate for the nine months ended September 30, 2003, was 41.4%. Income tax expense was $575,000, for an effective tax rate of 34.8% for the nine months ended September 30, 2002.

D. 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 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 September 30, 2003, BFS and BNB had $12.2 million of dividends that could be paid to the Company without regulatory approval. 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. Additionally, the Company had $7.3 million of securities available for sale and $2.0 million cash or cash equivalents at September 30, 2003.

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 and Banks’ 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:


	09/30/03		12/31/02

	(In Thousands)
Cash and cash equivalents	$	64,730	$	74,672
Investment securities available for sale		108,179		112,888
Mortgage-backed securities available for sale		77,379		114,515
Loans held for sale		15,234		31,614

Total liquid assets	$	265,522	$	333,689

These amounts represent 16.2% and 21.9% of the Company’s total assets at September 30, 2003 and December 31, 2002, 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 September 30, 2003, the Banks had $535.9 million in advances outstanding from the FHLB and had, with existing collateral, an additional $108.5 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. A portion of the FHLB advances at September 30, 2003, were of short duration as the Company anticipated repaying these particular advances with a portion of the proceeds received upon the assumption of the savings deposits from the Encore Bank branch acquisition.

At September 30, 2003, the Banks had commitments to originate loans and unused outstanding lines of credit totaling $302.9 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 September 30, 2003, totaled $199.4 million.

At September 30, 2003, the consolidated stockholders’ equity to total assets ratio was 5.7%. As of September 30, 2003, 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 12.4%, 11.0% and 7.2%, respectively. BFS’s tier 1 (core) capital, total risk-based, capital, tier 1 risk-based and tangible equity capital ratios were 6.4%, 11.1%, 9.8% and 6.4%, respectively. BNB’s total risk-based capital, tier 1 risk-based capital and leverage capital ratios were 14.0%, 12.8% and 5.9%, respectively.

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.

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; or shorter-term collateralized mortgage obligations (“CMOs”); and (4) attempting to reduce the overall interest rate sensitivity of liabilities by emphasizing longer-term deposits and utilizing longer-term FHLB advances to reduce reliance on 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 reprice loans and investing cash flows from maturing assets 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 that 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 September 30, 2003, the Company’s one-year gap was a positive 4.3% of total assets, compared to a positive 10.7% of total assets at December 31, 2002.

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, 2002 for a detail of the GAP and NPV tables. There have been no material changes in the net portfolio value since December 31, 2002.

Item 4. CONTROLS AND PROCEDURES

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2003, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

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.*

31.1		Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer

32.0		Section 1350 Certifications

* 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, filed with the Commission on July 21, 1995, as amended (Registration No. 333-94860).

** Incorporated herein by reference into this document from Exhibit 3.2 to the Annual Report on Form 10-K filed with the Commission on March 31, 2003 (File No. 001-13936).

(b) Reports on Form 8-K filed with the Securities and Exchange Commission

On July 11,2003, the Company furnished a Form 8-K to file a press release announcing that BFSB had signed a definitive agreement to purchase from Encore Bank seven (7) branch offices located in Belmont, Lexington, Needham, Newton, Sudbury, Wellesley and Woburn, Massachusetts.

On July 18, 2003, the Company furnished a Form 8-K to file a press release announcing its financial results for the quarter ended June 30, 2003.

On July 28, 2003, the Company furnished a Form 8-K to file a press release announcing that its “June 30, 2003 Investor Presentation” is available on its website and that Messrs. Holland and Simas will be speaking at the 4^th Annual KBW Conference at 9:10 a.m. on July 30, 2003, being held in New York City.

EXHIBIT INDEX


(31.1)	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	Page

(31.2)	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	Page

(32.0)	Section 1350 Certifications	Page

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: November 14, 2003	By: /s/	David F. Holland

		David F. Holland
	President and Chief Executive Officer

Date: November 14, 2003	By: /s/	John A. Simas

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

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